International firms in Romania don’t just face a weakened economy, they also face stiff competition from a host of major domestic rivals. Legal Business analyses a market in flux
Entering a new jurisdiction is never easy. On top of the start-up costs, the need to establish a strong team of local lawyers and a solid client base, there is also the tricky matter of timing. It can take up to two or three years of planning before you are finally able to put that new city onto your law firm’s website. By which time, the market that so attracted you in the first place might have altered drastically.
In 2006, Romania must have seemed like a sure thing to law firms seeking new markets. It had entered Nato in 2004, and on 1 January 2007 was set to join the European Union. Its GDP growth rate was 7.9%, a figure that peaked at 9.4% in 2008, according to The World Bank. It had several industries left to privatise, as well as ailing infrastructure crying out for foreign investment. It also serves as a hub for south-eastern Europe and the Balkans. Among the EU’s new eastern European entrants, Romania’s population of 22 million put it second only to Poland in terms of size. And Poland’s legal market was already saturated with international law firms, whereas Romania was relatively untouched.
So, when Allen & Overy, DLA Piper, Garrigues and White & Case all considered entering the Romanian market, it wasn’t a matter of why, but when. Unfortunately for them, foresight doesn’t boast the same crystal clear, 20/20 vision that hindsight offers. At the time, 2008 probably seemed like as good a year as any to set up shop. The global economy had other ideas, however, as did Romania’s precipitous 7.2% drop in GDP in 2009. Real estate, which had been such a driver for much of the legal market, was the worst hit. To add to the challenge of starting up in a downwardly mobile economy, the new international arrivals also have to contend with an entrenched domestic legal market whose leading firms definitely shouldn’t be underestimated.
Manning the defences
For most transactional lawyers practising in Romania, be they at domestic or international firms, the short-term prospects remain fairly bleak. ‘The market is definitely depressed right now in Romania,’ says Ion Nestor, co-managing partner at one of Romania’s oldest and largest firms, Nestor Nestor Diculescu Kingston Petersen (NNDKP). ‘The economy suffered a lot last year and continues to suffer this year. Everyone was expecting 2009 to be the worst, but experienced people are predicting that 2010 will be even worse. We saw a decrease in average activity last year, which will further decrease this year.’
‘It has been a grim year and a half,’ adds Christopher Berlew, managing partner of Salans’ Bucharest office, which has been in the market since 1997. ‘The recession hit Romania late. 2009 was definitely a deep recession year for Romania, and one of the worst within the EU other than the Baltics. There is no optimistic prognosis for this year.’
The economic signs are that things will get worse before they get better. ‘We still have decreases in GDP every quarter, so for the moment things don’t look very bright,’ says Catalin Baiculescu, co-managing partner at one of Romania’s largest firms, Mu5sat & Asocia5tii. ‘That doesn’t come as a surprise as the crisis in Romania came late.’
A series of belt-tightening measures from the government, including a 25% reduction in public sector salaries and a 15% cut in pensions, has emphasised the problems that the country faces and the hard decisions that have had to be made to reign in its 5.9% budget deficit.
The consensus within the market is that the local firms have been able to adapt more easily to the adverse conditions. The nature of much of their work is less transactional, and their structure is more flexible. Plus, the one area that is truly booming, litigation, is traditionally where they have been much stronger than their international rivals.
‘Within the current economic and financial crisis, there is no doubt that the entire legal landscape has faced significant challenges,’ says 5Stefan Damian, deputy managing partner at the leading Romanian law firm ,Tuca Zbârcea & Asocia5tii. ‘Both foreign and domestic law firms were forced to adapt to the new context. By comparison, I would say that local independent law firms have been more flexible and proactive than the international outfits in adopting and implementing a comprehensive strategy that would help them weather the crisis efficiently.’
‘Domestic firms originally had very strong litigation departments,’ says Markus Piuk, a partner in Schönherr’s 56-lawyer Bucharest office. ‘That helped them in the crisis. We had to build a litigation team, whereas they already had it. They can also be more flexible on the cost structure than international firms.’
Even at domestic firms, the main impetus has been on shoring up the litigation departments, which has resulted in a considerable amount of movement within the market. On 1 April, the firm Popovici Ni5tu & Asocia5tii merged with the well-regarded litigation boutique Danescu & Asocia5tii. More recently, Mu5sat & Asocia5tii looks set to lose its deputy senior partner and chief litigator, Ion Dragne, who is to set up his own boutique firm.
Popovici Ni5tu managing partner Florian Ni5tu is unequivocal about the approach that firms such as his must take. ‘As early as 2008, I characterised the current state of mind in just one phrase, which I believe reflects today’s thinking well: “We will work more for less,”’ he says. ‘It became obvious to us at that time, and on this basis we have decided to add more resources and projects.’
Despite beefing up in areas such as litigation and restructuring, the market has, unsurprisingly, had to deal with a big drop in billing rates. The average partner at the leading domestic firms was typically billing E300 an hour when the going was good. This has since dropped by at least 30% to around E200 an hour. A fact that has inevitably had an impact on firms’ revenues.
According to revenue figures published in the Romanian financial newspaper, Ziarul Financiar, turnover for six of the firms in the top ten has dropped (see box, ‘Towers of strength’, left). For NNDKP this represented a 6% dip in revenues. Despite the fall, Nestor considers this to be ‘an extremely good result’. When compared with their UK counterparts, the achievement of the very largest Romanian firms is even more remarkable, and illustrates what their international rivals have to compete with. Calculated at June exchange rates, ,Tuca Zbârcea & Asocia5tii’s turnover in 2009 was £18.9m, just £2.1m off the bottom firm in 2009’s Legal Business 100. More impressively, that puts ,Tuca’s revenues per lawyer for 2009 at £198,947, which is better than seven UK firms in the table’s top half (Hammonds, Beachcroft, Halliwells, Mills & Reeve, Dundas & Wilson, Berrymans Lace Mawer and McGrigors).
Kings of the castle
The fact that the domestic firms enjoy such a strong position, in terms of work volume and market reputation, can be ascribed to the historic development of the modern Romanian legal market, which came into existence in 1989, following the collapse of communism. For much of the 1990s, the domestic firms were allowed to develop at their own pace, with little competition from abroad, unlike in the Czech Republic, Hungary and Poland where the international firms were quick to establish offices. The lack of competition meant that they also got the best referral work and managed to keep billing rates high, particularly compared with domestic firms in neighbouring jurisdictions.
‘The Romanian firms set up a long time ago,’ Nestor says. ‘In February we celebrated 20 years of existence, which is the maximum you can have here. Until 2000, we enjoyed a relatively good position because Romania was slow in starting to open up to the Western world. The international firms weren’t tempted in the 1990s to come and set up offices like they did in Prague and Budapest. That gave us ten years to consolidate our firms and structures.’
This commitment to structure is something that Nestor believes will ultimately give NNDKP its long-term institutional stability. It is something that his partners have bought into, even if it means they have to take a hit in the short term. ‘The partners are ready and consciously taking a blow to their pockets in order to keep the machine up and running,’ says Nestor, who remains committed to depressed areas like real estate. ‘We didn’t have to restructure our practices. Some of the practices are in the red and we are monitoring them closely, but we still finance them because we believe they have a future.’
‘Most of the leading local Romanian firms are quite Western in their approach,’ says Bryan Jardine, managing partner of Wolf Theiss’s Bucharest office. ‘This includes their partnership and management structure. When the Magic Circle firms didn’t have a local presence, they worked with the local law firms with which they felt most comfortable. As a result, there was a lot of training on the job for the local lawyers and law firms. If you look at the templates or drafts of these firms, they are often modelled on ones they would have seen or developed during their time working as local counsel for these international firms.’
Castles in Spain: The Iberian Connection
When it comes to the central and eastern European (CEE) legal market, the main foreign incursions have either come from the US and UK, or from jurisdictions with natural geographic and economic ties to the region, such as Germany, Austria, and to a lesser extent France. Since the expansion of the EU, however, increased interest has come from law firms in other corners of Europe, most notably Spain and Portugal.
Spanish firm Garrigues opened an office in Warsaw in January 2007 and entered the Romanian market the following year. Similarly, Portugal’s Raposo Bernardo & Associados also has a Warsaw office and established itself in Bucharest in 2009.
The traffic has not been all one way. When the Romanian firm ,Tuca Zbârcea & Asocia5tii chose to open an associated office abroad, it chose Spain, through its tie up with the Spanish consultancy Fúster García-Berdoy, which was founded by Jaime Fúster, former managing partner with Garrigues in CEE, and Pablo García-Berdoy, Spain’s former Romanian ambassador.
According to 5Stefan Damian, deputy managing partner at ,Tuca, there were a number of compelling reasons behind the move. ‘We actually meant it as a local hub in helping Iberian investors do business in Romania, by acting as a point of contact for clients active internationally while also providing first-hand facts and information about key regulations and standards in Romania,’ he says. ‘Nonetheless, our partnerships with consulting firm Fúster García-Berdoy offered us the perfect ingredients to open a representative office in Madrid.’ Damian adds: ‘Spain has been one of the most dynamic investors in Romania for the past few years. In absolute figures, trade balance between Spain and Romania reached approximately E1.4bn in October 2009. Also, in April 2009, Spain ranked 8th among foreign capital investors in terms of the invested capital in Romania.’
‘When we talk about Romania, we must understand the existing strong institutional links between that country with both Portugal and Spain,’ says Iuliana Voroniuc, one of Raposo Bernardo’s Bucharest-based lawyers. ‘The other relevant element is the excellent flow of Portuguese and Spanish investment in Romania. Indeed, there are about 200 Portuguese companies and 500 Spanish ones in Romania. Part of our strategy is to accompany Iberian companies in their investments abroad, on site and with our own team of lawyers.’
With clients such as the Spanish bank “la Caixa” and the construction giant FCC investing in Romania, the prospect of a new office in Bucharest was also an attractive one for Garrigues. Much of this external investment has been prompted by the poor economic situation within Spain itself. ‘Spain being in a deep crisis as well, the only alternative for the domestic Spanish companies is to expand abroad to compensate for the limits of their own market,’ says Mihai Mares, Garrigues’ Bucharest managing partner. ‘This is a strategy I have heard a lot of companies consider. For Garrigues it was a client-driven decision to help clients in the real estate, construction, energy and infrastructure sectors. Now we are expanding and working with local companies as well as other multinationals.’
Beyond the links between Romania and the Iberian peninsula, neither Garrigues nor Raposo Bernardo is losing sight of the bigger regional picture. ‘The opening of an office in another country is motivated by cross-border links with all our offices, not only with the country itself,’ Voroniuc says.
In the case of NNDKP, its westernised credentials were clear from the start. It was founded by Ion and Manuela Nestor along with two Harvard graduates from the US, Andrew Kingston and Patricia Peterson, who remain of counsel at the firm and who both worked at US firms before moving to Romania.
‘You had some very good and switched on lawyers who were allowed to dominate the market,’ says Charles Vernon, a former Squire, Sanders & Dempsey and Taylor Joynson Garrett (now Taylor Wessing) lawyer who has since established his own firm, Vernon David, in Bucharest and Moldova. ‘It’s tough to compete with them if you’re a foreign law firm.’
‘With regard to the professional skills, we believe that the local firms made great progress and can deliver quality legal advice on a par with, if not better than, the international firms here,’ says Peter Buzescu, managing partner of Buzescu Ca. ‘I’m a member of the New York Bar. All the members of the firm speak excellent English. In many instances we see other international firms across the table with their Romanian trainees who are smart but don’t have the depth of experience, both in terms of local and international expertise. More clients come to realise that professionally they don’t have a problem working with local counsel at more competitive fees.’
Even the international firms concede that there is no room for complacency. ‘The biggest competitors are the local firms,’ says Marian Dinu, DLA Piper’s Romanian managing partner, who moved from Linklaters’ now defunct Bucharest office in 2008. ‘They are much bigger anyway. They are probably two to three times the size of the international firms. In Romania, clients do not tend to be so particular as to say an international firm is necessarily better. We have to demonstrate in our daily work that we do justify the perception we have of being a better quality firm.’
Building on Solid Ground: The New Regionals
In the past five years, the legal market in central and eastern Europe (CEE) has seen the emergence of a new type of regional law firm. While each individual jurisdiction has its share of leading independent domestic firms, and the region as a whole is peppered with the office networks of major internationals, the regional firm, which isn’t driven by one obvious centre, falls somewhere in-between. Of those with offices in Romania, the two most high-profile are Kinstellar and bpv Grigorescu, which were formed out of the respective ashes of Linklaters’ CEE network and Germany’s Haarmann Hemmelrath, which disbanded in 2006. As well as doing standalone work, both provide a strong regional referral alternative for those firms that aren’t on the ground but would like some consistent cross-border advice.
Each firm has taken a different approach. bpv Legal is the CMS-like umbrella name for an alliance that includes offices in Brussels, Bucharest, Budapest, Prague and Vienna, and within which bpv Grigorescu is the Romanian arm.
‘The alliance was in retrospect a very good decision because we keep our independence in the local jurisdictions, in terms of organisation and financing, but we profit from the advantages of a larger group,’ says bpv Grigorescu managing partner, Catalin Grigorescu. ‘We pitch together and share our know-how. bpv provides the appearance of a homogeneous group without the disadvantages of what some of the international firms have, such as centralised billing rates.’
Kinstellar has opted for a more integrated approach. ‘We had the luxury at the time of the spin-off to design our own law firm on the foundations of what had already been established,’ says Kinstellar’s Romania office head, Dan Torsher. ‘We took a lot of time to sit back and see how to set it out. We adopted a structure of a single integrated partnership, so all the partners are fully integrated financially and professionally. It is a lockstep partnership and is managed at a regional level. The practice groups are all cross-jurisdictional.’
Kinstellar’s launch in Serbia in March this year suggests that the firm has ambitious expansion plans for south-eastern Europe. In June they added another office to their network through an alliance with a local firm in Turkey.
Both law firms are still relatively new, so it remains to be seen how successful they will become. They could end up falling awkwardly between two stools, with the domestic independents being the preferred option for referrals, while the international networks such as CMS, DLA Piper, Baker & McKenzie and White & Case mop up the stand-alone mid-market work. They also face stiff competition from the Austrian firms such as Schönherr and Wolf Theiss, which have always had a geographical advantage over the region. It is telling that Schönherr’s Bucharest managing partner Markus Piuk sees his firm as a CEE firm rather than an Austrian one.
‘We are historically an Austrian firm,’ he says. ‘But about three years ago certain rethinking took place and we decided not to think too much on the Austrian market any more. Austrian clients account for about 25% of our overall client base. This means we aren’t overly reliant on Austria, which is fortunate.’
Regardless of recent departures from CEE, such as Linklaters and Freshfields Bruckhaus Deringer, competition for a regional footprint remains fierce.
Foreign invasion
Of the international firms that have established strong practices, CMS Cameron McKenna is undoubtedly the market leader. Its position was strengthened in 2006 through its takeover of the central and eastern European firm Hayhurst Robinson, whose Hungarian, Bulgarian and Serbian offices also now fall under the CMS umbrella. A similar regional presence is what underpins the success of firms such as Salans, France’s Gide Loyrette Nouel and the Austrian firms Schönherr and Wolf Theiss. (For a more detailed view of the regional market, see the box, ‘Building on solid ground’, page 84.) Of the Magic Circle firms, only Clifford Chance has a fully integrated presence, since the association it formed with Badea & Asocia5tii in 2006 became a full-blown merger in spring 2009. The make-up of the international firms that have operated in the market has, however, always been something of a movable feast. The fact that few firms have properly set down their roots for a significant period of time has hampered their ability to dominate the market.
‘I originally came to Romania in 1997 and the market has radically changed since then,’ Vernon says. ‘When I came, Taylor Joynson Garrett was one of the big firms in town. The players from 1997 to now are all different. Linklaters has come and gone in that time. They came and were the masters of the universe for a while. With Linklaters gone, Cameron McKenna has taken the mantle.’
‘About 80% of our clientele are German-speaking companies. From the German perspective, Bucharest has ceased to be the city that attracts.’ Ioana Hategan, Hategan Law Office
All of these firms, particularly Clifford Chance, will crop up on the major cross-border transactions and project financings, and this line of work typically sets them apart from the domestic firms during a boom.
‘In cases where high-end financial instruments are used, and you aren’t finding a lot of this in Romania these days, or in the case of multi-jurisdictional transactions, the international firms have an obvious advantage over us,’ concedes Damian at ,Tuca.
‘It is definitely becoming increasingly difficult for the domestic firms to attract two or three really big transactions a year,’ says Piuk at Schönherr, ‘simply because there is more competition and you are at a disadvantage if you only operate in one market.’
Yet even here the line has started to blur, as Cameron McKenna’s CEE senior international manager and former Bucharest managing partner, Todd Robinson, readily admits. ‘The local competition often start with the day-to-day stuff and then end up getting the transactional stuff too. So they are competing with us and are good for that.’
Gatecrashers
The fact that a new batch of international firms arrived in 2008 isn’t something that the domestic firms feel threatened by. The only exception is when a firm that has previously been a strong source of referrals decides to open an office, which has been an issue recently for those firms that benefited from relationships with White & Case and DLA Piper. Most, however, believe that the biggest threat to their market share is the emergence of smaller, younger practices that have spun out from the larger domestic and international firms.
The biggest one to emerge in recent years has been ,Tuca Zbârcea & Asocia5tii, which formed in 2005 after name partner Florentin ,Tuca took a team of lawyers from Mu5sat & Asocia5tii. If there is a Magic Circle of Romanian firms then ,Tuca would be in it, alongside Mu5sat and NNDKP. Of the domestic firms, Mu5sat is certainly the one to have endured the most spin offs, including Vilau & Mitel in 2002, Popovici Ni5tu & Asocia5tii in 2003 and the likely departure of deputy senior partner Dragne in 2010.
At press time, Dragne’s future at Mu5sat was the hot topic within the Romanian legal market. Regardless of the outcome, it is something that Mu5sat’s Baiculescu says the firm can handle. ‘No imminent departures from our firm are scheduled,’ he says. ‘Any partner might have their own plans, but they aren’t the way they were recently reflected in the Romanian press. The names mentioned in the press will continue to be our colleagues at least until the end of 2010, and they might decide not to change this status after all. Nonetheless, should a departure happen in the future, this would certainly not be the most dramatic trial that our firm has had. We have dealt with more difficult situations in the past and we have proved we can cope with such challenges.’
NNDKP has also had its fair share of splinter firms, most recently in 2008, when a team of lawyers left to form PeliFilip.
Nestor is philosophical about the difficulty involved in holding onto such talent. ‘That is one of the challenges. We recognise that good lawyers will always look for the best for themselves. Sometimes it’s simply the fact that a person wants to be given the opportunity to do something on their own, to be able to prove themselves, and that is not something you can counter.’
The negative impact is of course on fees, where the new firms inevitably exert a downward pressure. ‘Once the competition started to erupt from the smaller firms, they wanted to achieve in one or two years what their rivals did in 15 years, so they started to lower their fees,’ Nestor adds. ‘Most of them are doing well. The reason is that they were set up by good lawyers who learned a lot in their previous positions and were capable of entering into competition with their former employers the next day. The only thing that makes the difference is the brand. Also, they don’t have the capability to handle several major projects at the same time.’
The remnants of Linklaters’ market-leading practice have also gone on to make an indelible impression on the market both before and after the Magic Circle firm extricated itself from eastern Europe in 2008. A move that, given the current economic malaise in the region, could be perceived as particularly astute, in the short term at least. Linklaters’ alumni include Dinu and a team of 14 lawyers at DLA Piper, as well as Todd Shollenbarger, who initially became White & Case’s local managing partner and helped the firm launch its office in early 2008, before leaving to join the private equity house, Nobel Equity Partners. Coincidentally, the Salans corporate partner, Lucian Bondoc, who was recruited to replace him is also ex-Linklaters, as are a good portion of the senior partners at Allen & Overy and Clifford Chance’s respective Bucharest offices, as well as Adrian Bulboaca at the up-and-coming domestic firm Bulboaca & Asocia5tii. However, the majority of Linklaters’ CEE network, including its Slovakia, Hungary and Czech Republic offices, went on to form independent regional firm Kinstellar. For Dan Torsher, managing partner of the firm’s Bucharest office, the attraction of establishing a firm like Kinstellar was obvious and also reflects the difficulties faced by up-and-coming lawyers at international firms. (For more details on Kinstellar’s regional organisation, see the box on page 84.)
‘We were able to attract really good people at Linklaters, but the one institutional constraint we had was very strict limits on our ability to promote,’ Torsher says. ‘To get a promotion was really difficult in a firm where that is a global process with very strict gatekeeping. So the young, talented, ambitious guys get to the point where they can see the writing on the wall and go off and do their own thing.’
Ultimately, the creation of Kinstellar served both sides equally well. Linklaters pulled out of a market it no longer felt was suitably profitable, while Kinstellar built upon the foundations of what already existed. The firm remains on good terms with Linklaters and is regularly referred work, while it also benefits from access to other UK-based City firms. ‘One of the benefits of our spin-off is that we are no longer perceived as a competitor by a firm in London that doesn’t have an office here,’ Torsher says.
Uphill struggle
Nevertheless, as with the four new international firms that entered the Romanian market in 2008, the timing was unfortunate. ‘When we decided in April of 2008 to spin the firm off, nobody had an inkling that the crisis would be hitting us,’ Torsher adds. ‘In some people’s view it wasn’t the best time to be launching the business. In one way it turned out to be fortuitous timing as it allowed us to focus on our internal resources when setting up the firm.’
‘The timing was possibly not ideal,’ concedes Dinu when reflecting on DLA’s 2008 opening. ‘Although it probably wasn’t too bad. If everything is booming, you don’t have time to see how to structure your business. Having started after Lehman collapsed, we had more time to think about which clients we wanted to target and why.’
Torsher and Dinu’s very similar glass-half-full perspective is understandable. Kinstellar already had a strong structure in place, while DLA’s international strategy is well known and its long-term commitment to south-east Europe was underscored by its even more recent expansion into Turkey, where it aligned itself with YükselKarkinKüçük in February this year. DLA also benefits from a solid client base of Austrian investors (helped in part by a strong Vienna office), who have generally remained more active in Romania than other international clients, a fact that has also aided Schönherr and Wolf Theiss. By recruiting a team of well-established lawyers, including Dinu, out of Linklaters, DLA also ensured that its new office, like Kinstellar, didn’t need much time to get going.
‘We exceeded the budget we had set for ourselves in the first year,’ Dinu adds. ‘There were initially 14 of us who came from Linklaters, and we have grown since then to 21 lawyers.’
Conversely, White & Case, which took a more organic approach to growing its nascent Bucharest practice, has had a more wobbly start, reflected in part by the departure of Shollenbarger. In April, however, White & Case did offset the loss by recruiting corporate partner Lucian Bondoc from Salans’ Bucharest office. Of the other new entrants, Allen & Overy’s strategy of forming an exclusive association with the local firm Radu Taracila Padurari Retevoescu means that its actual financial investment and exposure to the Romanian market isn’t going to be on a par with DLA and White & Case. Garrigues, on the other hand, is backed up by the surprisingly strong economic ties that Romania has with Spain and Portugal. A fact confirmed by the even more recent arrival of the Portuguese firm Raposo Bernardo & Associados in 2009.
‘The bpv alliance was a very good decision because we keep our independence in the local jurisdictions.’ Catalin Grigorescu, bpv Grigorescu
Those Iberian legal ties don’t just go one way. In December 2009, ,Tuca Zbârcea & Asocia5tii made the bold move of opening a representative office in Madrid, which operates in association with a local consultancy firm Fúster García-Berdoy, made up of Spain’s former Romanian ambassador Pablo García-Berdoy and former Garrigues CEE managing partner Jaime Fúster (see box, ‘Castles in Spain’, page 82).
The likelihood of other Romanian firms following ,Tuca’s lead abroad is slim. Conversely, the likelihood of other international firms entering the Romanian market now is equally low. ‘I believe that we will not witness any new entries of international law firms into the market, as there are no favourable economic circumstances to encourage such movement,’ says Damian at ,Tuca. ‘More so, it will be of no surprise if Linklaters’ decision to exit the Romanian legal market is followed by similar decisions from other international and regional firms.’
‘The biggest competitors are local firms. In Romania clients do not tend to say an international firm is necessarily better.’ Marian Dinu, DLA Piper
For those firms still on the ground, it is all about the need to add value and take advantage of those areas that remain busy, such as litigation, restructuring, energy and employment law. For NNDKP this has meant building up a tax practice to take on the Big Four and establishing a network of offices within Romania itself. ‘We are trying to strengthen our position internally,’ Nestor says, pointing to the firm’s offices in Bra5sov, Craiova and Timi5soara. ‘We still have in mind another three offices to completely cover the country. Romania is a big country with relatively poor infrastructure. If I have a client in another city, it is quite difficult to service them in Bucharest.’
Despite the fact that the Romanian economy has typically been centred around Bucharest, smaller local firms with internationally experienced lawyers have taken the opportunity to establish strong practices, particularly in Transylvania, in western Romania. One such firm is Hategan Law Office in Timi5soara, Romania’s second city, which benefits from its relative proximity to western Europe. ‘About 80% of our clientele are German-speaking companies, from Austria, Germany and Switzerland,’ says name partner Ioana Hategan, whose firm has a particularly large client base in the automotive sector. ‘These investors didn’t come in on the short term or to speculate. From the German perspective, Bucharest has ceased to be the city that attracts all eyes. Step-by-step, the foreign investors have realised that Romania is much bigger and that other regions have more potential.’
Hategan adds: ‘Timi5soara is the city closest to the western border of Romania. We have the Hungarian highway within about 100km. If the foreign investors prefer to come to Romania by car, they can drive from Vienna in about four hours. Bucharest is unreachable by car.’
Blue skies ahead
Despite the massive cloud that currently hangs over the economy, it is ironically Romania’s poor infrastructure that ultimately makes the country an attractive long-term prospect for international law firms. As and when the economy finally picks up, and no one is expecting much for 2010, the prospect of major infrastructure projects, and the influx of international investment that they entail, is an enticing one. Much of this depends on how the Romanian government manages the situation, and whether it decides to attract investment through further privatisations. The state-run railway network, CFR, and parts of the domestic energy sector, such as Petrom and Transelectrica, remain attractive assets that could bring in much-needed foreign capital.
‘The way the government reacts is essential,’ says Dragos Vilau, senior partner at Vilau & Mitel. ‘If the government takes the swift and expected measures to revive the business it will be okay, otherwise I’ll be concerned. There are still a lot of state-owned companies that need to be privatised and this is a good moment.’
In the meantime, there is a sense that the market is slowly starting to pick up. ‘I believe that things will start moving in 2011,’ says Popovici Ni5tu & Asocia5tii’s Nitu. ‘Law firms are now seeing a marked growth in debt-restructuring work and there are suggestions of fresh investment into some areas of the economy. Together with the strong interest in wind farm projects and the development of new nuclear facilities, this spells a growth period for the economy, and in turn the legal market.’
Aside from dispute resolution, Cameron McKenna’s Robinson identifies infrastructure, energy and construction as the key areas for the firm going forward. Private equity is another area where an increased interest in the emerging markets is starting to be felt in Bucharest. ‘That is being driven off valuations,’ Robinson says. ‘People don’t know where the bottom is, although we’re seeing signs that this is being met. A lot of our private equity clients have entered back into the market. Our acquisition finance lawyers have been retained on more transactions in the past two months than all of last year. That is for the rest of the region as well. There is a lot of capital out there sitting in these funds. Emerging markets are coming back rapidly for investors who think they can create value.’
Vilau adds: ‘We have significant investment funds looking at the market. Now is a buyer’s market; there are opportunities. If you know how to turn the crisis into an opportunity you will be a winner.’
For the international firms with offices in Romania, particularly the new arrivals, the key question will be how they do turn the crisis into an opportunity. There are certainly few miracle answers, beyond the hope that a long-term commitment should eventually pay dividends. And the fundamentals suggest that it probably will. Whether they are willing to suffer the short-term pain is another matter entirely, particularly when up against a domestic market that is far better positioned to absorb such blows. LB