Comment: Global London – Has the City reached the end of its curious post-Lehman boom?

Will this year’s Global London report chronicle the high watermark for the Square Mile as a global hub for foreign law firms? The possibility has to be considered with the article 50 notice about to be delivered as I type these words, representing the biggest threat to London’s position since the 1990s’ run-up to the launch of the euro.

As it stands, foreign advisers continued to aggressively invest in London through 2016. The number of London-based lawyers employed at the 50 largest foreign firms, now numbers 6,033, an increase of 22% over the last two years despite a generally subdued UK legal services market.

The elimination of King & Wood Mallesons (KWM) from our tables this year understates the growth through the last 12 months but in underlying terms, headcount probably grew at least 4% even allowing for the re-allocation of legacy SJ Berwin lawyers to US rivals. Given the KWM implosion, it was unsurprisingly a record year for partner recruitment, with nearly 200 laterals within the group. The overall pace of growth, however, slowed somewhat on 2015.

The largest ten foreign law firms between them now employ nearly 3,000 lawyers and the largest, White & Case, is rapidly closing in on the 500-lawyer mark. It has now become common for US firms to generate more than $100m in revenue in London and the top ten largest firms in London make up on average four new partners a year, reflecting the maturity of their local practices.

It has been 15 years since Legal Business‘ first Global London report. That period has been divided into two distinct eras. The first, through the 2000s, saw US firms generally focusing on generalist transactional work, with London a part of a wider push across multiple European hubs. Ironically, as London boomed ahead of the banking crisis, it was not a successful period, as US firms struggled to gain traction. Post-Lehman, US firms increasingly tilted towards a number of defined specialisms and clients, notably in private equity, funds, leveraged finance, arbitration, disputes and white-collar crime, and concentrated their efforts on London rather than mainland Europe.

Phase two, buoyed also by currency movements, the march of US sponsors and the relative strength of the US economy, has been far more successful and City rivals have struggled ever since to form a coherent response to the increased competitive threat. Even as the banking giants in London were weakened, the City itself only strengthened its relative position as a global hub. In essence, the tides since the banking crisis have flowed consistently and decisively towards US law firms at the expense of City rivals.

Possibly the most telling statistic in our report is the number of non-UK lawyers in London, which largely reflects the ranks of US lawyers in London handling securities work for European clients. In 2013 there were 673 foreign-qualified lawyers across the top 50. By 2017 that figure had rocketed 88% to hit 1,268, far outpacing the growth of their English-qualified ranks. That is an ominous development for City players, who are now rushing to break lockstep to hire brand names in deal finance.

Bear in mind that major UK law firms basically operate one of two overlapping approaches. The first is to focus on corporate legal teams and general counsel. The second is to target the c-suite and bankers. Both involve working with those spending someone else’s money. The Achilles’ heel of this approach is that it is far less effective at syncing with sponsors, funds and investors where you are advising those with skin in the game. Partners geared up to this approach – the sponsor-facing lawyer being one manifestation – are generally more comfortable at US law firms.

And with respect to White & Case – and the firm has confounded expectations over the last five years – when an outfit that has struggled to establish itself even in its Wall Street heartlands starts directly challenging the Magic Circle in its own backyard, you know something is going on.

The big question is whether Brexit will now alter the direction of these tides and, if so, who will benefit? Other cities must surely benefit to some extent – among them Frankfurt and Paris. I suspect Dublin may do better than most thanks to language, proximity, cultural similarity between UK and Irish lawyers and US links.

US law firms will still remain wary of throwing too much investment at continental hubs – with the exception of private equity – without seeing clear evidence that business is moving across the channel. Profit dilution is still the overriding consideration.

By the same token, English law will be very hard to displace, not least because the Rubicon was crossed a long time ago in terms of deploying it outside the UK.

The march of New York-qualified lawyers in financing work in both Europe and London looks likely to continue, even though there has been something of a comeback of English law in deal finance in the last two years as leveraged loans have flexed to match US terms.

Working out where this lands is a thankless task. Many of the orthodoxies for organising economies and governments in Western nations have been challenged in the last two years. But London still has many entrenched advantages and huge scope to reinvent itself. And foreign advisers will be an increasingly key part of that re-invention.

alex.novarese@legalease.co.uk

Read more in: ‘Swoop to conquer – a turbulent year for US firms in London but no retreat