With Portugal’s recession expected to continue for at least another two years, the country’s law firms have no option but to go abroad. LB assesses whether their international strategies are paying dividends
As any schoolboy will tell you, Portugal has a proud tradition as one of Europe’s foremost explorers. The era of Henry the Navigator and Vasco da Gama was a golden age of European discovery, in which a tiny nation spread its tentacles throughout the world and, for a period, became one of its greatest powers. Nearly 600 years later, Portugal’s lawyers are continuing in the same vein. Their adventures might be much more prosaic, but the impetus that drives them – namely the limitations of their domestic market – is the same.Global domination is by no means on the cards, but the international networks that some Portuguese firms boast, such as Miranda Correia Amendoeira & Associados (Miranda Law Firm), are far greater than many of their rivals in the UK and elsewhere. The pattern of expansion follows the path of their famous forebears into former colonies and Portuguese-speaking nations, of which Angola, Brazil and Mozambique are the most important. Offices in Macau and China are also springing up to benefit from Chinese investment into Africa, while increased trade with EU countries such as Poland and Romania has led to offices in Eastern Europe as well. For those that are already well positioned, with clients coming from or entering these markets, the severe downturn that Portugal is suffering has had a much more reduced impact on their finances.
‘We have a very big international practice so we are far less exposed to the downturn,’ says Rui Amendoeira, Miranda Law Firm’s managing partner. ‘Even though the Portuguese side of the practice has diminished that isn’t too significant to the firm. Africa, particularly the Portuguese-speaking countries, is the largest for us. There is no comparison. The language and legal system are very similar to Portugal. This is where we have a competitive advantage.’ Miranda Law Firm is widely seen as being one of the pioneers in terms of international expansion, and it now has offices throughout Africa, as well as Asia, Brazil and the US. In the latter three instances, these are primarily there to service clients with interests in Africa and Portugal. This has since extended to opening offices in former French colonies such as Gabon and Congo, driven in part by the energy and natural resources clients it has already advised throughout Lusophone Africa. Miranda Law Firm’s strategy of entering Portuguese-speaking nations is one that many firms have since emulated. Since Brazil and Angola are the fourth and fifth largest recipients of Portuguese outbound investment, respectively receiving E653m and E226m in 2010 (which was significantly down from previous years), it is hardly surprising that this approach is proving popular.
‘With Portuguese companies investing abroad law firms have been able to internationalise their practices.’
Martim Anahory, Serra Lopes
‘I think it is an essential strategy,’ says Pedro Guimarães a partner at FCB&A – F. Castelo Branco & Associados, which has an office in Angola. ‘It is already a profitable office for us. That isn’t really the point of it to become quickly profitable. We felt that Portugal, despite the current problems, is still a very small economy. We have to start looking towards markets where we might play a difference as Portuguese lawyers.’
Follow the money
‘Legal activity is a mirror of the overall market,’ explains Martim Anahory, a partner at Serra Lopes, Cortes Martins & Associados. ‘With many of the Portuguese companies investing in foreign countries – and some of the biggest Portuguese companies already have more than 50% of their revenues coming from abroad – law firms have been able to internationalise their practices, namely in the EU and the former Portuguese African colonies.’
‘What companies want is to be less and less dependent on the Portuguese market as it is going to have to restructure itself and it isn’t going to grow in the next few years,’ says Pedro Rebelo de Sousa, senior partner at SRS Advogados. ‘Companies will want over 50% of their revenues coming from countries other than Portugal.’
For the most part, the work that has taken most firms in an international direction has come from Portuguese clients, many of which have tended to favour Portuguese-speaking countries. ‘We are helping a lot of Portuguese companies go international,’ says João Caiado Guerreiro, a partner at Franco Caiado Guerreiro & Associados, which has an Angolan office. ‘There is an understanding that we aren’t going to have a decent economy for the next ten years. If they don’t go abroad they will be in trouble. If you look at it Portugal is in relative trouble because we don’t have growth, but the Portuguese-speaking world has never had it so good. Our Brazilian and African desks are full of work. Technology enables us to do things now that we wouldn’t have been able to do some years ago.’
‘Most companies will have anticipated this in their business plans and are searching for opportunities elsewhere,’ adds Manuel Santos Vítor, co-managing partner of PLMJ. ‘Everyone is looking for opportunities in international markets. We’re following our clients where they go.’ While PLMJ’s strategy reflects the direct need that Portuguese clients have abroad, perhaps more important is the added value that Portuguese law firms can provide to Portuguese, and most crucially non-Portuguese, clients that have interests in Africa. It is for exactly this reason that PLMJ entered into a partnership with Dacheng Law Offices, one of China’s largest law firms, a relationship that involves one PLMJ senior associate working permanently out of Dacheng’s Beijing office. ‘Of course if there are outbound opportunities from Portugal into China we will try and follow them,’ says Santos Vítor. ‘But the target there is very much the opportunity to follow Chinese investment into Africa. As a result of the IMF there will also be some very interesting opportunities in Portugal.’
Another Portuguese firm to have entered into China is CCA Advogados, which opened an office in Shanghai in November 2010. ‘Portuguese companies and law firms are looking for new markets,’ says CCA partner Domingos Cruz. ‘The golden triangle of Brazil, Africa and Portugal is very appealing to companies and law firms, which have been steadily working their way into those markets. That shift has been steadily growing. We have taken a different approach, to follow the money. We believe there is a huge opportunity in Asia and we were the first Portuguese law firm in Shanghai.’
No El Dorado
Despite interest in Asia, of all the foreign destinations it is Angola that has generated the most excitement. Having emerged from a horrific civil war, its vast natural resources, particularly oil, have attracted huge investment from abroad. This has contributed to a GDP growth rate that hovered at around 20% between 2005 and 2007. This has since dropped to an estimated 6% for 2010, but compared to its former colonial master Portugal, whose GDP growth has barely breached 2% since the turn of the millennium, it isn’t hard to see the attraction for lawyers. Already though, there are concerns that many firms are too late to the party.
‘I believe it is possible that international operations will contribute positively to balance any breach of internal work for law firms that already have a relatively consolidated position internationally speaking,’ says Nelson Raposo Bernardo, managing partner of Raposo Bernardo. ‘But for companies only now taking the first steps to approach the markets to where it is natural to internationalise, such as the five Lusophone African countries, especially Angola and Mozambique, or to Brazil, it can be tricky to find possible solutions to internal problems. These countries have a high living cost, particularly Angola, and despite the good relations with Portugal it always takes some time to be able to build in a foreign country and make it profitable.’
‘Most of these countries are heavy with bureaucracy, and corruption is an issue so things can go wrong.’
Claudia Santos Cruz, AVM Advogados
‘We often say it isn’t El Dorado,’ adds Claudia Santos Cruz, a partner at AVM Advogados, a firm of Angolan origin that has since moved the opposite direction into Portugal and also has an office in Mozambique. ‘Working in those markets is difficult. Most of these countries are heavy with bureaucracy, and corruption is an issue so things can go wrong if you aren’t experienced. Angola is becoming flooded.’
One of the practical challenges that law firms face is attracting the right talent. Most firms either establish a presence with a small office on the ground or through an alliance with a local Angolan firm. Whichever approach they take, for the lawyers to be registered at the Angolan Bar they need to be Angolan nationals.
‘Human resources is our biggest issue,’ says Santos Cruz. ‘You need to find people who are willing and don’t have a family. Luanda isn’t a place to raise a family. We look for people who have mobility. Dual nationality is another criteria. I was born in Mozambique and can register with the Mozambique Bar, which is a huge advantage. There are all these issues with trying to accommodate the personal lives of our lawyers and our business needs. The Portuguese firms are never quite prepared to ask one of their senior partners to go out and live there. The problem is that you need someone out there locally and they’re never able to make that sacrifice.’
The nature of the market has also changed over the years, requiring a much more hands on approach. António Payan Martins, a partner at Rui Pena, Arnaut & Associados, recalls a time when, as a Linklaters lawyer, the Angola-based transactions were a lot more straightforward.
‘The only things that the transactions had to do with Angola was that Sonangol [Angola’s national oil company] was involved,’ he says ‘Nothing else related to Angola. Things have now changed because of the peace process and the slow evolution of the market. So you have to be more hands on and interact with the local banks and authorities and you need to have the capacity to do it.’
Reverse flow
Among Portuguese-speaking nations, the other clear leader is Brazil, but as a jurisdiction this poses even more problems for Portuguese law firms, not least because the legal market is already incredibly well developed.
‘Brazil and Africa are very different animals,’ says Payan Martins. ‘Brazil is a very sophisticated market. Brazilian law has evolved very far from Portuguese law, and has been heavily influenced by the US, as well as the big immigrant communities from Italy and Germany. They have followed a separate path from the Portuguese one. It is a market that Portuguese firms will not penetrate easily. Clearly the feeling is that Portuguese firms will have to team up with Brazilian firms to try and capture the Brazilian outbound investment in Europe and Africa, and Brazil is the second largest investor in Angola. I don’t see big opportunities for Portuguese firms to capture the work in Brazil directly. They will be able to support their clients and provide added value in some areas but they will have to interact with a Brazilian firm.’
Payan Martins continues: ‘For me Brazil is strategic and important but I look at it more as a big investor in Angola and Africa where we can capture a role, rather than their global investments.’
‘In Latin America it is a much more developed market,’ agrees Amendoeira. ‘We have an office in Brazil, which is mostly there to be close to Brazilian clients for their overseas investments, likewise in Houston.’
Aside from representing Brazilian clients on their investments into Africa, the other area where the Portuguese firms feel they can have an edge is Brazilian investments into Portugal and elsewhere in Europe. The importance of this was acutely illustrated in 2010, when Brazilian investment into Portugal reached E1.94bn, whereas investment the other way was E653m. The only other time that this flow of investment was reversed was in 2003, but given Brazil’s current economic strength, most are expecting it to be an increasingly common occurrence. At the corporate level this switch in strength was also seen in 2010 when the Brazilian steel manufacturer Companhia Siderúrgica Nacional made a E3.86bn hostile takeover bid for the Portuguese cement producer Cimpor. The bid was ultimately rejected, but the implications were there for all to see. Other companies such as the Brazilian aeroplane manufacturer Embraer have invested in Portugal, and used it as a hub for entry into the European market. In Embraer’s case this involved the E148m development of two aircraft component construction plants in Portugal.
Remarkably, Angolan investment into Portugal has also been on the increase, having risen from E1.2m in 2000 to E45m in 2010 (having peaked at E116m in 2009). The most recent example came in January 2011, when Sonangol acquired a controlling interest in the Portuguese engineering company COBA, the first time it has taken a controlling position in a big Portuguese company. Most of these investments come through Sonangol – or other state entities – which has also built up interests in Portugal’s main private bank Millennium bcp. The Angolan oil company also has a 45% stake in Amorim Energia, which itself owns a third of the Portuguese oil company Galp Energia.
‘There is a natural tendency to start in Portugal,’ says Santos Cruz. ‘Angolans have money but have little credibility nationally. Angolans coming here and investing big stakes is a move to get this credibility.’
Despite this increase in inbound investment into Portugal from its former African colonies, most are realistic about how much work it will actually bring. ‘You see a lot of Angolan money coming in,’ says Pedro Pinto, founding partner of Pedro Pinto, Bessa Monteiro, Reis, Branco & Associados (pbbr). ‘When I look at that phenomenon, from Brazil it will be a consistent trend, but from Angola I would wait and see.’
Even with Brazil, some feel that in the long term its economic success might take its banks and companies to more cash-rich centres such as the UK. ‘Clearly the Angolan outbound investment is a very interesting flow,’ adds Payan Martins. ‘They are making strategic investments in Portugal and using it as a hub for investments into Europe. The problem there is that the number of players is very limited. In respect of Brazil, I have a more mitigated view. In the beginning of the Lula [Luiz Inácio Lula da Silva, Brazilian president between 2003 and 2011] presidency there was clearly a view to use Portugal as a hub, and the freezone of Madeira has traditionally been used as a hub for big Brazilian companies to structure their investment. My feeling is that Brazilian banks will move to other platforms for their global investment, especially now that they have liquidity and cash. They will use London for that purpose more than Lisbon. The big Brazilian companies will follow that trend.’
The old guard
While the investment flows to and from countries such as Angola and Brazil are eyecatching, it shouldn’t be forgotten that Portugal’s main trading partners are in the EU, notably Spain, Germany, France, the UK, Netherlands and Italy. Other Eastern European countries, such as Poland, where the largest supermarket chain Jerónimo Martins is in fact Portuguese, also present potentially more stable long-term opportunities. Conversely, in the short term, countries like Angola and Mozambique might present swift opportunities for growth, but few would bet their house on the fact that they will remain stable forever.
‘It has worked in the short term but it is a very risky strategy,’ says Rebelo de Sousa. ‘If you look at Portugal, it might be a sovereign risk, but the risks you are running in some of these other jurisdictions are even higher.’ Rebelo de Sousa’s firm SRS Advogados has particularly strong links with the UK, since it was the former outpost of Simmons & Simmons, and remains in alliance with the firm since its departure from the Portuguese market in 2009. One of the firm’s partners is the former Simmons Lisbon managing partner, William Smithson, who has helped establish a significant outsourcing practice, which is a key sector within the wider Portuguese economy.
‘Portuguese companies and law firms are looking for new markets. The golden triangle is very appealing.’
Domingos Cruz, CCA Advogados
The dominant presence of the main Spanish firms, Uría Menéndez, Garrigues and Cuatrecasas, Gonçalves Pereira is also testament to the importance of Portugal’s Iberian neighbour. The economy in Spain might have troubles of its own, but the country still accounted for some E4.8bn of foreign direct investment in 2010 and remains Portugal’s largest trading partner by a considerable distance. Any suggestion that Spain might follow Portugal down the bailout route is quickly dismissed. ‘I don’t think there is any concern in that respect,’ says Duarte Garin, Uría Menéndez’s Portugal managing partner. ‘At a certain point a few months ago everyone thought that Spain was next. Fortunately Portugal could stay out of the bailout for a period long enough for Spain to get its act together. There is no concern in Portugal that Spain will follow next.’
Inbound opportunities
The main message that partners want to get across is that regardless of where the international links come from, they are essential for future growth, particularly for the younger firms on the market. ‘More than half of our turnover is from international work,’ says Guimarães. ‘We were set up in 1989 when all of the big domestic players had already chosen their lawyers. So when we were set up we catered for the international investor. We stayed with our traditional clients and the focus of our work has been international investors wanting to set up subsidiaries or do business in Portugal.’
This is of increasing importance now, especially given the impending round of privatisations that is about to take place following the EU and IMF bailout, as well as the relatively low cost of corporate assets in Portugal. In the same way that young Portuguese firms such as FCB&A capitalised on foreign investors in the late 1980s and early 1990s, many have taken the view that a new breed of potential long-term clients are about to enter the market. Though these won’t necessarily all come from Europe.
‘What we are going to see is that you are going to have international investors, but unlike the privatisation process in the 1990s where the key players were European, perhaps now the key players will come from outside of Europe,’ says Payan Martins. ‘Those firms that can capture the funds from the Gulf countries, the Asian players, the Chinese investors, or eventually the Brazilian and Angolan investors, clearly are the ones that will be the most successful. It will be interesting times. The IMF intervention represents the close of a cycle and the beginning of a new one.’ LB