Last year saw activity in the legal sector continue at pace, with demand for both individual partners and team moves remaining high in all markets, including London and Paris. Now that we have entered 2023, the legal sector will undoubtedly face some key challenges: a broad economic slowdown and changing client demand, with attendant pressure on profits per equity partner (PEP).
Lessons from 2008
The year ahead threatens widespread economic uncertainty, and firms will be considering how they can best prepare for a possible recession. Many will likely turn to their 2008 global financial crash (GFC) playbook, principally to remind themselves of what not to do. After all, whereas the GFC was rooted in a systemic failure, the economic conditions firms find themselves facing in 2023 are distinguishable.
This proactive approach will be essential. Firms which were slow to respond to the 2008 crash suffered due to their delayed reactions. Moreover, many firms were then equally slow to come out of containment mode, stalling growth and ultimately causing the sector to bleed for longer than needed.
Confidence in the market remains much higher. In 2023, firms will be approaching economic turbulence with more robust strategies and looking to capitalise on shifting market demand. For example, it appears that there are significant amounts of money waiting to be deployed by the private equity funds. Equally, the public markets have had a ‘time-out’ called; the general sense we are getting is that Q3 2023 will see more (relatively) favourable economic conditions, facilitating increased activity in both the public and private M&A markets, principally driven by a drop in interest rates coupled with the easing of inflation. There will be, potentially, volatility in the markets, but with strong leadership, smart hiring and some managed risk-taking, law firms which have positioned themselves competitively over the last five to ten years—predominantly US law firms—will come out swinging.
Meanwhile in Paris, the market has increased in demand in new practice areas. Along with the traditional need for growth in corporate M&A (mainly the mid-cap market) and private equity, there is an expanded demand for restructuring as well as litigation, arbitration and white-collar crime which we do not see diminishing this year.
The influence of inflation
As is typically the case, 2022 saw the UK and European markets following trends in the US economy, and activity in the London and Paris markets was heavily influenced by US inflation. This is something we can expect to continue in 2023.
Lower levels of volatility for US interest rates, as well as sustained confidence in the strong performance of the New York market, will provide welcome assurances for US firms in London.
Corporate in demand in Paris
The expected downturn in the global economic outlook has yet to be reflected with our clients’ workflow in Paris. Corporate departments of the leading international firms remain busy, especially at those firms who focus on midmarket deals. Although it is not known how long this will last, there remains a steady level of optimism.
Many of the more senior corporate lawyers in Paris have a multidisciplinary background which can include areas such as litigation. This allows them to expertly advise clients on contentious matters until such time as they are able to increase their specialist litigation offering by way of lateral hiring.
Trimming the sails
Whereas the outlook for the year ahead is far from bleak for law firms, growth strategies will naturally need to respond to the wider economy. The frenzied activity of the past will likely not be sustainable, so while firms will not be calling into port, they may be looking to trim the sails.
For partners, this could usher in a welcome period of greater stability. Firms will likely look to cut down their largest cost base, which has been building out their associate benches. Associates have enjoyed a greater sense of bargaining power as the war for talent raged, which has created a degree of cultural friction and some frustration for senior lawyers. While firms have been progressive in adopting new workplace cultures driven by post-pandemic expectations, particularly among younger lawyers, partners will look forward to feeling more settled as growth becomes more strategic and markets become calmer in the year ahead.
If the old adage that ‘the only mistake in life is a lesson not learnt’ is to be believed, then the inevitable challenges in the year ahead
could well prove an opportunity for the legal sector. Now is the time to put past experience to use, drawing on hindsight to approach 2023 with strategic foresight. While the market may not roar this year, we can still expect a steady buzz.