As Germany faced the prospect of its first two-year recession since the early 2000s, the legal market grappled with an intricate web of challenges and opportunities in 2023. With the country’s GDP contracting by 0.3%, the impact of increased energy costs, inflation, higher interest rates, and falling industry demand did not go unnoticed. However, despite the economic downturn, the German legal sector remained a robust force within the EU, and independent firms proved once again their ability to adapt to an ever-changing geopolitical and legal landscape marked by adversity.
Germany’s leading independent law firms continued to record revenue growth in 2023, fuelled by volatility across sectors and an increasingly intricate regulatory landscape. ‘Clients are experiencing substantial pressure in today’s market, especially during times of economic uncertainty, which means they are constantly assessing the horizon’, says Luther’s managing partner Elizabeth Lepique. ‘In connection with the energy transition and the decarbonisation of the German economy, the growth in revenue is largely attributable to a growing number of client mandates.’ In a year marked by economic turbulence, Luther emerged as a persistent standout performer, securing energy mandates from prestigious clients such as E.ON and EnBW.
The continued market uncertainty materialised in some sectors more visibly than others, as Lepique reports: ‘Compared to 2022, M&A and banking and finance dropped down, especially in the real estate business, due to inflation and higher interest rates.’ By mid-2023, commercial property deals hit a five-year low and prices, as well as the number of transactions, continued to decline until the end of the year. The M&A landscape remained similarly bleak, with the cumulative transaction value at its lowest since 2015.
Despite this, M&A practices remain a key driver of profit within firms, and Germany continues to lead European tables in this regard. As Alexander Ritvay, co-managing partner at Noerr explains: ‘This is due to the role played by Germany as the strongest economy in Europe and the continued large number of attractive takeover targets in the German market.’ The firm continued to cement its position as one of the leading independent firms in the country with its involvement in a number of high-profile transactions, including Nippon Steel’s $14bn acquisition of US Steel.
Ritvay emphasises that Noerr’s strong M&A and corporate business as well as its restructuring practice play crucial roles in propelling the firm forward. ‘Financial and balance-sheet restructurings are very busy,’ he adds.
The stock markets also saw limited activity in 2023, making the €2.5bn IPO of Thyssenkrupp hydrogen production company Nucera the standout event of the year at the Frankfurt stock exchange. Not surprisingly, energy deals took centre stage, aligning with a combined focus on geopolitical tensions in Ukraine and the Middle East with pressing global issues such as climate change and decarbonisation.
Historically heavily reliant on Russian gas supplies, Germany continued its path towards energy independence and security, investing in import capacities for LNG and reaching a 55% share of electricity generated from renewables in 2023. Adding to the workload created in light of the energy transition, business exits from the Russian market kept German firms occupied. Most notably, Noerr advised Mercedes-Benz on its divestiture from Russia through an acquisition by AVTODOM Group.
Another area of growth is the legal tech market, which was further fuelled in 2023 by the popularity of AI-driven applications such as ChatGPT. The increased accessibility of these systems serves to reduce thresholds for market entry and intensifies competition within the sector, closing the gap between resource-heavy firms and boutiques. ‘Even smaller firms are now making their way into legal tech, and competition increases,’ remarks Lepique.
ChatGPT and other AI technologies are expected to play a pivotal role in reshaping how legal professionals interact with information and clients, and the ability to employ these systems at a similar scale to large international players will be an important factor for independent firms to remain competitive in the years to come. Ritvay agrees, stating that ‘AI is now the hot topic and will have an impact on the business models and services of law firms and their delivery.’
‘The market landscape is constantly shifting. Clients expect law firms to have a forward-looking perspective.’ Elizabeth Lepique, Luther
As Germany continued to weather uncertainties in 2023, the legal market proved its ability to adapt to geopolitical shifts, economic downturns, and technological advancements. On the topic of what might be expected of firms in the year to come, Lepique states: ‘No-one has all the answers, the market landscape is constantly shifting, and clients don’t expect law firms to provide all the answers at once. But what they do expect is that law firms have a forward-looking perspective.’
This is also the stance Noerr is taking in its view of changing client demands, especially in the face of rapid technological developments: ‘It’s a learning curve for everyone now,’ Ritvay says.
How will German independents fare in 2024? As challenges persist, the road ahead for the country’s legal market remains uncertain, but its adaptability of the last few years has proven greater than some might have expected. The combination of legal expertise with technological advancements and a strategic focus on pivotal sectors are sure to position German law firms to navigate increasingly tumultuous waters and emerge resilient in the years to come. LB