Watch law firms, not banks, to judge the City’s deep freeze

The question in the legal market is increasingly not whether you have a beehive, but how long you might have to enjoy it.

A red hot market had encouraged the City’s law firms to sign up to premises with yoga studies, nail bars or beehives (to increase urban biodiversity apparently). This was considered crucial in triumphing in a talent war as well as extricating reluctant lawyers from their home offices. An abrupt shift in sentiment means those perks are still being laid on even as retrenchment begins. The deals market, you see, has decidedly lost its buzz.

Global deal volumes dropped by a third in the second half of last year compared with the first, the largest swing in the period since the start of the Refinitiv data in 1980. That was, in part, down to a collapse in private equity transactions as funding dried up. The acquisitions and listings that keep investment banks and corporate law departments humming remain thin on the ground: so far this year dealmaking is down by three-quarters on the start of 2022. Financing, when it returns, will be more costly.

There is some hopeful talk about “green shoots” or old ideas being dusted off as the economic air clears. The UK mood has improved since the destructive chaos of the mini-Budget, a low bar; the IMF could upgrade its global economic forecasts (from cataclysmic to simply miserable perhaps). But confidence in the pipeline took a blow when Goldman Sachs this month launched its biggest cost-cutting exercise since the financial crisis: “It makes everyone else think it’s going to be terrible,” said one senior lawyer.

The investment banks’ willingness to slash jobs when the deals dry up is well established. Goldman, in particular, with its cyclical business, moves fast: it said this week that fourth-quarter profits dropped by two-thirds.

Law firms may be the better guide to whether this deals freeze is becoming an arctic winter. Firms, even those dependent on transactional work, tend to have a better balance of revenues than banks.

Restructuring, litigation or employment picks up in a downturn; people can be redeployed. Lawyers also have a longer tail of work after the cycle turns, as deals struck months ago get pushed through regulatory hoops and across the line. And culturally, although the US firms reputedly take a tougher line than the UK elite, there remains an aversion to cutting heads: people still talk about who cut first after the dotcom bust and financial crisis, say recruiters. So far, the redundancy announcements have been in the US, at firms with big technology businesses to prune.

For now, the City strategy is to wait and see. Natural attrition, tougher performance reviews, possibly even four-day weeks can stave off cuts, in the hope the market picks up. But the frenzied poaching and bidding up of salaries in recent years won’t help: “We’re coming off a huge high,” says Freddie Lawson, recruiter at Fox Rodney. “It was: ‘can you tie your shoelaces? OK, you’ve got a job’.”

Staff turnover at law firms spiked in 2021, according to Thomson Reuters, as a hiring spree by some US firms pushed up salaries for junior lawyers: top dollar for newly qualified lawyers is more than £170,000, according to website Legal Cheek, while the UK’s (less profitable) prestige firms range from about £107,000 to £125,000. Meanwhile, the loosening of lockstep — where traditionally a partner’s share of profits depended solely on seniority, rather than personal performance — has “weakened the glue that binds partners to firms more than ever”, notes Tony Williams, former Clifford Chance managing partner and consultant.

The result is that firms went into this downturn with costs elevated by the recruitment war, something Allen & Overy and Clifford Chance both highlighted in their recently-published report for the year to April 2022. Meanwhile, the new flightiness of senior lawyers is a challenge if profits per partner drop sharply, particularly as there are still American firms with holes to fill.

Law firms, unlike some banks, may be able to manage through the slump. But the odds are stacked against them: this downturn could sting sooner than in the past.

helen.thomas@ft.com
@helentbiz