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Law Firms Are Rushing Headlong Into a Recession

The world is teetering on the edge of a global recession.

The latest projections from the International Monetary Fund are that global economic growth will have dropped sharply by the end of 2022 and will fall further in 2023.

Hardest hit will be advanced economies where law firms are largest, particularly the U.S., U.K. and the Eurozone. Even developing economies such as China, Brazil, Mexico and South Africa look set for painful times as inflation continues to rise, forcing governments to increase interest rates despite high levels of debt, while at the same time supply chains for energy and food look fragile.

Much of this change in sentiment is already being felt at commercial law firms where the timing could not be worse, following a year-long pay war amid the fight for junior talent.

A half-year analysis of the largest U.S.-based firms by Citi found a significant drop in demand slashed their revenue growth to 5% in the first half of the year, down from 14.6% the year before. And yet expenses have increased by 14.7%, largely thanks to compensation expenses rising a whopping 17.5%.

It means law firms are rushing full speed into the recession. It is tough to see what those highly-paid transactional lawyers will be up to if deal activity remains as quiet as it has been so far this year. M&A is down 23% year-on-year. Equity capital markets is even worse. Global equity market issuance is down 68%—its slowest period since 2005.

Short of increasing their market share, law firms have no control over this drop in activity. They just have to seize on the opportunities that do arise.

In Australia, the largest firms tell our local correspondent Christopher Niesche they are anticipating an economic downturn but are hoping to benefit from a rise in commercial disputes and distressed asset sales as well as more energy transition mandates.

The country’s top firms are also gearing up for a different kind of transactional work: M&A that involves technologies such as blockchain, DeFi and Web3.

Distressed sectors, such as football clubs, are also providing more work to top firms in Europe. Anne Bagamery wrote about the latest such deals across the continent.

But none of these areas feels quite as exciting as private capital fundraising, which continues to be extremely busy, and lucrative, for Big Law. John O’Neil, head of Kirkland & Ellis’s investment funds group, believes the amount of capital raising could even exceed a record-breaking 2021.

While it might feel counter-intuitive for private equity to be raising money at a time when transactional activity is falling, it makes total sense. Funds are raised to invest over five years or so, meaning the current market environment is almost irrelevant. A distressed market is a good time to buy assets too. And for investors, private equity probably offers a better chance of strong returns than the public markets at the moment, so they are throwing money in that direction.

As Simpson Thacher & Bartlett’s investments funds practice head Michael Wolitzer points out, there are also some non-cyclical funds, such as infrastructure, that are proving popular. Presumably debt would be another.

All of which explains why Kirkland continues to aggressively hire in this space. In June, we wrote about how Kirkland was messing up the U.K. funds market for everyone else by consistently hiring rivals’ future practice leaders.

And in the space of two days last week Kirkland hired partners from both Ashurst and Bryan Cave Leighton Paisner in London. Both work in real estate and infrastructure fundraising, areas that the likes of KKR and Blackstone say are proving particularly popular.

Kirkland clearly doesn’t feel like it is time to be cautious. Brave? Yes. Foolhardy? No.

And yet, unfortunately for the wider legal industry, alternative investment funds is a practice area that has been more or less cornered by a relatively small number of firms. For everyone else, the coming year should not inspire anything like the same amount of confidence.

Indian Identity

India's flag
Flag of India / Credit: taya.passion/Adobe Stock

Last week marked an important date for India. The country celebrated 75 years since becoming an independent state after British rule.

In the legal industry, one of its oldest and prominent law firms is also marking a new era of rule. Luthra and Luthra Law Offices hit the headlines in 2020 when the firm’s founding partner, Rajiv Luthra expelled former senior partner Mohit Saraf over arguments around the firm’s lack of equity sharing.

In Jessica Seah’s excellent feature, she explores the story of what has happened since then, involving court battles, scandal and mass exits. Notably, Rajiv Luthra says he has given away 25% of his coveted equity as of July last year, and the intention is to bring that ownership down further, to 30% or 35%.

Meanwhile, international firms continue to look for ways to tap into India’s increasingly important but tightly guarded legal market. Last week, Allen & Overy announced it had hired Harsh Pais from Indian firm Trilegal to lead its India corporate practice, which comprises over 100 lawyers across several offices.

A&O’s co-head of global corporate David Broadley said: “As the world’s second fastest growing major economy, in the last three years India has attracted $159 billion of inbound investment. As a market of increasing focus for clients, India is an important part of our global strategy.”

Further afield, lawyers with South Asian heritage working in the U.K. helped to mark South Asian Heritage Month by talking about their personal experiences with Varsha Patel. Reed Smith partners Nathan Menon and Nav Sahota previously felt they couldn’t even discuss the challenges they faced, despite the sector ramping up D&I efforts.

They tell their stories of how they battled racism to succeed in law in the hope that younger South Asian lawyers can now feel comfortable and confident being their authentic selves in the workplace.

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