Research Trends and Conclusions: Capital Markets 2010
Tom Barnes -
When we conducted the research for the last year’s edition, the lawyers we spoke to around the world were unanimous in their opinion that difficult times lay ahead, and indeed in many cases had already arrived. Levels of activity in the sector were sure to drop, the only remaining uncertainty related to how low. A year later and a clearer picture of these straitened times has now emerged, and the expert practitioners in the sector have had to adapt, as some markets have dried up.
But while there is now more room for optimism about the practice area’s short-term prospects, there is still much uncertainty about the future and the timescale for the eventual return to prosperity. The leading lawyers we select, and the firms they represent, continue to navigate a course through the storm, trying to find a strategy that will ensure a strong position in the much changed marketplace that will ultimately emerge.
We Live in Interesting Times
An analysis of the markets in recent months paints a varied picture. According to Thomson Reuters, equity capital markets activity totalled $314.5 billion globally during the first half of 2010, a drop of seven per cent from the equivalent period the year before. Follow-ons registered their slowest start to the year since 2005, but at the same time IPOs, recorded the strongest opening half year since 2007 with global volumes reaching $93.9 billion. The story on the debt side is even more mixed. Overall debt capital markets activity fell 23 per cent to $2.6 trillion compared with the first half of 2009, but at the same time the volume of corporate high yield debt broke all records in reaching $130.7 billion and securitisations saw double-digit percentage gains. Government guarantee programmes – so vital to continued activity – began to slow, raising $23.3 billion in the second quarter of 2010, the lowest figure for government guaranteed debt since programmes began in 2008.
“People understand that IPOs do not happen overnight,” said one lawyer we spoke to, “and we were saved in the early part of 2009 because of the huge number of IPO deals that were already in the pipeline.” Indeed, some lawyers reported record levels of work even as it became clear to all that clouds were gathering and the storm was about to break. However, later on in the year and into 2010 deals dried up, and the nature of the practice of law in this area changed. Some saw activity in their area of speciality drop away alarmingly – there were no rights issues from companies listed on the London Stock Exchange during the first three months of 2010, the first such quarter since the start of the credit crunch – and many lawyers we spoke to reported that the corporate finance work they were called on to perform was “essentially defensive”, focused on balance-sheet management. As the recession deepened, very large equity offerings dropped away, and later work in relation to government funding schemes began to diminish, it was no longer possible to identify the world’s best capital markets lawyers through their presence on the largest deals, but rather they were becoming defined by the work they did for their clients ‘under the radar’ and on deals that did not ultimately come to fruition. Where possible, many lawyers shifted the emphasis of their practices into areas now required by their existing clients, such as restructuring. The widely expressed hope was for higher levels of activity in the later stages of 2010, but with half of the year gone the picture remains confused as the sector continues to be affected by regulatory changes and ongoing market uncertainty.
There are positive signs. According to Thomson Reuters data, proceeds from new issues in the first half of 2010 increased more than sevenfold from the same period in 2009, but remained significantly below 2007 levels. The recovery seems to be taking root, but its speed is difficult to gauge. While there is the evidence of larger deals returning – demonstrated by July’s $19 billion IPO of Agricultural Bank of China, which could grow to be the largest in history – there is also evidence that market volatility and events such as Europe’s debt crisis is scaring investors away from smaller, less liquid IPOs. In the US, our sources cited government banking reforms as another factor mitigating against bank financing and activity in general, at least in the short term as banks come to terms with more burdensome capital requirements. Longer term the picture is brighter, with the promise of companies taken under government control in the downturn being floated (General Motors is thought to be moving towards an IPO that could raise $20 billion), but the timescale is impossible to predict with any certainty.
A common theme that emerged in our conversations with lawyers around the world is the growing importance of Asian markets, particularly in East Asia. This is not a new development, or indeed limited to this field of law, but the importance to international law firms of a presence and capability in the region is becoming ever clearer. The majority of the leading firms in this book have a presence in China, Hong Kong or Singapore and are looking to secure a slice of the work that is coming out of the region. While Europe continues to toil and the US takes tentative steps towards recovery, six of the 10 largest IPOs in the first half of 2010 have come from Asia. “Our firm’s Asia practice has been as busy over the last 12 months as any practice group worldwide in the last 10 years,” said one source, and another lawyer based in the region said his problems stemmed not from finding enough work to do – as was mentioned in other jurisdictions – but in maintaining the necessary level of skilled associates to meet the unprecedented workload his firm is facing. Commentators cited the lessons learned from the region’s 1997 financial crisis as one of the reasons why it is currently prospering, and while there were certain caveats expressed the general consensus is for high levels of work to continue.
Going Forward
Looking to the future elsewhere, the sheer range of differing views we received from our sources clearly demonstrates the volatility of the markets, which is stalling the momentum of the recovery. “We are paying the price for our optimism,” said one lawyer we spoke to. The widely held belief at the start of the crash that it would be resolved in two years has now turned to disappointment and uncertainty as the structural problems in the world’s financial systems take longer to fix. The general view expressed to researchers is that debt and equity markets should see a steady improvement, provided that there are no further sharp shocks to the system, such as another sovereign debt crisis like Greece’s. The unforeseen effects of government regulation are another cause for concern. The role that ‘overly complicated’ financial products were widely perceived to have played in the downturn has resulted in new waves of regulation from governments across the world. President Obama signed the Dodd-Frank Act into law in July and many sources expect it to have as large an impact on the sector’s leading law firms as it will on the banks themselves, as external counsel – particularly those expert in derivatives and securitisation – are called on to advise their clients on the new legislation’s potential effects. With draft legislation around the world some years from completion, there is the promise of long-term work for capital markets lawyers, but before the impact of these laws is understood the uncertainty that plagues the markets looks set to continue.
What Does This Mean for Law Firms?
In the face of such unprecedented events, lawyers and their firms face a struggle to adapt to the present and future demands of clients. The lesson for law firms across the board over the past two years has been that flexibility is the key to success, and even to mere survival. Individual lawyers’ flexibility in skills needs to be matched by their law firms, as they rebalance the practice group’s focus choosing between restructuring, high-yield work, IPOs or mergers and acquisitions. Many lawyers in this sector, as well as their colleagues in banking and other similar practices, have been doing restructuring work and will continue to do so for some time to come.
Capital markets can be a difficult practice area for law firms. For several years in the run-up to 2009 the area was incredibly busy and profitable, with huge sums of funds being raised on the markets. Many firms saw the opportunities and moved to expand into the area through lateral hires, new international offices and high levels of recruitment – often with some success. However, as the work has dropped away sharply, those without a long track-record in this area – and the attendant and levels of expertise and recognition – are struggling. Some of the work can be highly commoditised, leaving those firms that specialised in the area vulnerable to new trends in the outsourcing of such work, or when it dries up altogether.
At the same time, the deals that are being done are larger and more complex, and require the sophisticated legal analysis that is only available from the leading firms, who are broadening the scope of their services, across more general corporate advisory work and into areas such as research and development. International law firms remain well placed to provide cross-border market intelligence, and the clients we canvassed are finding that while the demands they make of external counsel are increasingly sophisticated, these demands are being met with even higher levels of service. Clients also reported – and in many cases had initiated – a more sophisticated approach to fees, looking to embrace alternative fee structures and moving away from billable hours.
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When we asked lawyers for their predictions on what the future held for the last edition, many identified the last quarter of 2009 as a turning point when the practice area as a whole would see its fortunes improve. As we move towards the end of 2010 the picture has developed, but perhaps not cleared. There is optimism driven by the activity from Asia counterbalanced by the ongoing uncertainty brought on by the Eurozone debt crisis and the worry that further shocks lurk round the corner. While at the highest levels there are still some very large deals being done, and some lawyers are working on big-ticket deals and billing at high levels, others are feeling the pinch and many must adapt to survive. The innovation, creativity and quality of the world’s leading lawyers has been much in evidence in the last two years, in some ways even more so than in the boom times that preceded them, and they will continue to be needed in the months to come.