‘There was a significant and much welcome upward trend in dealmaking from June 2020 up to the end of last year,’ reflects James Scicluna, co-founder of WH Partners. ‘On the M&A side of things, there’s just been one thing after another.’
Data from the European Commission (EC) would suggest that Malta enjoyed a 2021 characterised by rejuvenation. Having sustained a Covid-induced reduction of 8.3% in 2020, GDP jumped by 9.4% last year, well ahead of the global growth of 5.7% recorded by the World Bank.
In part, this reflects the trends seen in the global market in the latter half of last year, but Malta’s government also deserves credit. The Labour administration, led by prime minister Robert Abela, has taken a proactive approach to combating coronavirus, drawing plaudits internationally. It oversaw an ambitious vaccination regime that meant the country became one of the first to vaccinate 70% of the population, widely held to be the so-called ‘herd immunity’ benchmark. Unsurprisingly, the party retained its majority in the recent general election in March.
Given the economic growth the region has experienced in recent times, it is no surprise that the M&A market has flourished. Malta’s economy is based on welcoming international companies, and this has continued in the aftermath of the pandemic. As a result, the major work for firms on the ground typically involves being instructed as local counsel on cross-border transactions.
Michael Psaila, managing partner of Mamo TCV, says: ‘In line with the global trend there’s been a significant uptick in M&A activity, which has resulted in our corporate and M&A team working flat out on a number of transactions. M&A in financial services has been particularly busy and we have seen a lot of consolidation in that area.’
‘Anything that has exposure to the cost of production and therefore, the cost of energy, is now becoming an issue.’
James Scicluna, WH Partners
However, the outlook for the rest of 2022 is more mixed. EC forecasts expect economic growth to slow to 4.2%, which, though still impressive, emphasises the anomalous nature of the previous year. Inflation is also expected to rise from 0.7% to 4.5%, reflecting Malta’s position as a jurisdiction as vulnerable as any other to changes in the geopolitical landscape.
‘Anything that has exposure to the cost of production and therefore, the cost of energy, is now becoming an issue,’ confirms Scicluna. ‘For some industries, it’s a bloodbath.’
The impact of the war in Ukraine, combined with the removal of Covid support structures, means that the market is bracing itself for more instructions from clients in distress. ‘We expect to see more insolvency and restructuring work,’ predicts Psaila.
A dangerous game
Despite its modest size, Malta has long been able to maintain a presence in the international market. A favourable tax regime and immigration rules have meant that international companies are often enticed to the region as a way to gain access to the EU internal market.
As much as the country’s economic model has brought it prosperity, it has not been an unbridled success. Issues of economic corruption and money laundering have dogged the jurisdiction in recent years. The gambling sector, a thriving part of the economy after Malta became the first EU member state to regulate online betting in 2004, has frequently been at the centre of the storm.
The controversy came to a head in June 2021, when the Financial Action Task Force (FATF) included Malta on a list of countries that would be subject to increased scrutiny in relation to its anti-money laundering procedures. Unofficially known as the grey list, the news was met with widespread concern that the intense monitoring would hamper the conducting of business.
Given the robust economic performance in recent months, it is clear that the development has not hamstrung the market too much, and most remain bullish in their outlook on the market. But that is not to say the impact has not been felt. ‘There are side effects,’ admits Fenech & Fenech managing partner Nicolai Vella Falzon. ‘It’s affecting clients in the sense that at times they are subjected to added levels of diligence, eg, when opening bank accounts or applying to operate in a regulated space.’
Despite the difficulties, there is reason to believe that the tide is beginning to turn. In a review carried out in February 2022, the FATF concluded in an initial assessment that Malta has substantially completed the action plan instigated by the government to address it money laundering issues, but that an onsite assessment was required to confirm. This was carried out in April, with the results yet to be announced. Should the outcome be a positive one, the country could find itself off the grey list in a matter of weeks.
Nevertheless, until a concrete conclusion is reached, uncertainty in the market remains. Reforms to the corporate tax regime are expected in the near future and, given the extent to which Malta’s economy relies on its hospitality to international business, players in the market have reason for concern. Falzon observes: ‘There is a lot of pressure on Malta to improve transparency and anti-money laundering screening in the wake of the grey listing. However, much has been done already and it is expected that Malta will come off the grey list in a relatively short time. Meanwhile, changes to Malta’s corporate tax system have been announced but there is no detail yet so we are waiting for developments to assess whether or how this will impact the financial services industry we operate in.’
Tussling for talent
International law firms have yet to gain a foothold on the island, with the market still dominated by a small number of local firms which do the bulk of the complex, international work in the region. ‘When it comes to the larger transactions, we still tend to meet the same firms on the other side of the table,’ acknowledges Falzon. ‘It’s Camilleri Preziosi, it’s Ganado Advocates, it’s Mamo TCV.’
Other firms such as WH Partners have developed reputations in less traditional areas such as gaming or fintech. Some of these are beginning to develop more sophisticated corporate offerings as their clients grow into maturity and require more diverse advice.
In a country as small as Malta, a strain on human resources is almost inevitable. An unemployment rate of just 3.1% speaks to the common observation that there simply isn’t the talent available to build out practices as many would like. The difficulty is made more acute by a convention in the market that dictates senior lawyers do not move between the leading firms. In Scicluna’s words: ‘Good associates tend not to move very much and if they do they go in-house.’
Indeed, it is clients that pose a greater threat to firms from a recruitment perspective. As much as domestic firms can emphasise the variety of work and career development potential on offer within a traditional firm, the reality is they simply cannot compete with the salaries being offered by their multinational clients.
‘Recruitment and talent retention is a very serious challenge,’ agrees Falzon. ‘Employment costs are rising rapidly and our top talent is subject to external pressures with competitive offers for employment being thrown at them regularly. As a result we have had to move away from a strict annual review policy to more regular salary reviews in certain cases.
‘We are coming to terms with the fact that the profitability of the business may take a hit, and that is a reality many industries are facing.’
Nicolai Vella Falzon, Fenech & Fenech
‘I believe that the market will stabilise eventually but meanwhile we are coming to terms with the fact that the profitability of the business may take a hit, and that is a reality many industries are facing.’
Given the shortage of talent available to the larger firms, and the vast number of boutique practices, it is perhaps surprising that there has not been more consolidation in the market. Outside of the larger firms, there is a wealth of small practices or independent practitioners. The majority of these advise on local work, but a minority have niche expertise in areas such as insurance, shipping or litigation.
‘Ten years ago, I would have said [consolidation] is inevitable. But today, I see the progress is so slow that I don’t predict that,’ laments Scicluna. ‘In a way, it disappoints me because I hoped that the market would evolve in line with how it has evolved in larger European cities, but it’s been much slower than that.’
To make matters worse, competition is not just coming from corporate clients. All of the Big Four accountancy firms have offices in the country and are increasingly muscling in on work traditionally handled by law firms. Falzon notes: ‘The Big Four accountancy firms have taken up the bulk of tax advisory work. We are one of the few firms that still has a tax department.’
Part of the issue is that the legal profession does not have the legislative framework afforded in many jurisdictions, meaning that the domain of law firms is not protected. Scicluna says: ‘There’s a very noticeable absence of hard law, which applies across the board to our profession. The rules which exist are historic and far off what you’d expect of a modern society and the modern legal profession.’
Fortunately for firms, there have been recent moves to address the issue, as Falzon explains: ‘There was recently a Lawyers Act drawn up, which was intended to regulate the services that can be provided exclusively by warranted lawyers and licensed or registered law firms and that initiative was also driven by a need to address the issue of increasing legal services being offered by other professional services organisations such as the Big Four. The draft Act has since been sidelined but other legal amendments are being proposed to address this issue in part.’
The long-term effectiveness of these efforts is yet to be seen, but the traditional players in the market will feel that they have contended with numerous difficulties in recent years while maintaining an impressive output. Notwithstanding further reversals on the horizon, there is no reason why this resilience should not continue. LB