For the past few weeks, the Hildebrandt Institute Blog has been taking a closer look at certain emerging markets and their impact on the global legal industry. Previously, we looked at the market indicators driving law firms to Brazil and the increasing significance of Asia in law firm growth strategies. Today, we focus in on one of Asia’s hottest markets, Hong Kong. Stay tuned next week when we turn our attention to Turkey.
Continuing a trend that began in 2005 with Skadden Arps, a number of elite U.S. firms that had previously been practicing only U.S. law in their Hong Kong offices, have recently launched local Hong Kong law practices. In the past two years, the list of AmLaw 100 firms adding Hong Kong practices has included Cleary Gottlieb, Davis Polk, Milbank Tweed, Shearman & Sterling, Simpson Thacher, Sullivan & Cromwell and Weil Gotshal. In August, Kirkland & Ellis announced that it was hiring seven partners to launch a full-service Asia transactional and Hong Kong law practice, followed by an announcement last week that two corporate partners will be joining Gibson Dunn’s Hong Kong office, as the firm ramps up to offer a local law capability there.
The move of many of these firms into local Hong Kong law practices reflects the continuing development of the Chinese economy and also recognizes the importance of Hong Kong as a major capital markets venue. While advising on U.S. securities law had been lucrative in the past, firms have feared losing work to competitors that could provide dual capabilities. A local practice can be particularly advantageous to firms competing for IPO work where competition can be fierce, especially for offerings which are targeting U.S. institutional investors. Many U.S. firms saw clients turning to U.K. or Hong Kong firms for “one-stop shopping” in order to provide the necessary Hong Kong law advice on IPO matters.
“US firms were missing out on work by not doing Hong Kong law,” Davis Polk’s [Paul] Chow [corporate partner in Hong Kong] observes. “For instance, US law firms tend to write the prospectuses for an IPO and undertake US law work, but would have to hand the Hong Kong law aspect over to a UK or Hong Kong practice. Once the company had listed it would more often turn to the Hong Kong practice for further work, so the relationship would be lost [for the US firm].”
Asian issuers have accounted for 65% of global proceeds from IPOs over the last five years, according to Ernst & Young. And while acknowledging that third quarter 2011 activity fell worldwide in both number and deal value from the second quarter, Asia continues to dominate IPO activity, accounting for 57% of the 284 deals and valued at $28.5 billion. China tops the region with 90 deals which raised $11.4 billion, accounting for one-third of the offerings. And the trend going forward remains positive.
“Asia will continue to lead global IPO activity as domestic and foreign IPO pipeline builds,” Keith Pogson, a managing partner at Ernst and Young said in a [recent] report. “As soon as the market stabilizes, we will start seeing a big wave of IPOs, as there is currently a record amount of about 3,000 companies in the pipeline globally.”
What this means for law firms in the region is plenty of work and a war for talent. Many of the U.S. firms entering the local market have done so by bringing on prominent lateral hires from other international, in particular U.K., law firms which have long dominated the market. While this heavy recruitment is expected to slow, some commentators feel that a “major shift” in the Hong Kong legal market is underway, with the dominance of the U.K. magic circle firms no longer assured. However, in terms of size, the leading U.K. firms in the jurisdiction are still much bigger than their American counterparts. Robert Sawhney, a Hong Kong-based legal consultant at SRC Associates recently noted, “[i]n terms of pure lawyer numbers the US firms still have a much smaller presence than the UK firms’, hiring only one or two partners who can practise local law.”
While the market is clearly more competitive now, it is also clear that there is still plenty of deal work to go around. But the difference now is that no one type of firm has a monopoly on offering Hong Kong legal advice. As Peter Charlton, Clifford Chance’s Asia head says, “It’s probably the most level playing field in the world now. It’s all about experience, what you can do, and price.”
Next week, the Hildebrandt Institute and West LegalEdcenter will host a panel discussion as part of the 16th Annual Law Firm Leaders Forum, on competitive opportunities for law firms in emerging markets in Asia and South America. You can learn more about the forum here.
Posted by Marianne Purzycki