Is the crisis over? Yes, say some lawyers who point to an increase in foreign investment in Spain and more M&A activity as evidence of an economy in recovery. Indeed, it is true that more money is being ploughed into Spain – for example, statistics show that Spain´s retail investment market grew almost three-fold in 2013.
But this is only half the story. Some analysts argue that Spain is witnessing a “jobless recovery”. That is, though the economy may be improving, the unemployment rate remains high – the fact that unemployment in Spain stands at 27 percent (and as high as 55 percent among young people) suggests that this analysis is correct. So where does all this leave Madrid´s law firms?
Deal volume is on the rise, and for the big ticket transactions, clients are still willing to pay significant fees. Meanwhile, as activity increases, firms are showing an increasing willingness to promote more lawyers to partner level, whereas in the past, with the economic outlook more uncertain, some firms had kept partner promotions to a minimum.
However, while fees for major deals may be holding up, an increasing amount of work is becoming commoditised, with the result that some instructions only generate around a quarter of the amount of money they may have brought in a few years ago. Spanish firms are facing increased competition from the major auditing firms as well as the Anglo-Saxon law firms, with some managing partners of the belief that with foreign investment increasing in Spain, UK and US firms have an advantage when it comes to winning instructions.
Pedro Pérez-Llorca, managing partner of Pérez-Llorca, says lawyers are “no longer operating in a crisis market”. He adds: “If you work in an area where there is investment, you can do well, there´s a lot of volume and a lot of deals to be done.” However, he adds that the legal fees are not always as high as law firms would like.
According to Manuel Martín, managing partner at Gómez-Acebo & Pombo, while there continues to be pressure on fees for commoditised work, fees for high value work are holding up. But as one managing partner points out, the problem is that there are some huge firms in the Madrid market that are struggling because they have lawyers who are under-occupied, and therefore such firms are left with no choice but to take commoditised work.
The managing partner adds that an increasing amount of work that previously was not commoditised is now becoming so – this includes capital markets, M&A and financing work. The source says that fees for some work in these areas have dropped a massive 75 percent in the last few years.
Litigation is the foundation on which many law firm´s practices are built, according one market source, with most top firms, depending on this area of practice for around 50 percent of their revenues. “Everyone talks about deals and transactions, but litigation is always very important – you often don´t hear about it because much of it is confidential.”
AC&G Asesores Legales partner Guillermo Gastón de Iriarte says it is important to make note of the implementation of court fees, which are part of a “very ambitious programme of Justice Reform conducted by the Spanish Government”. He adds: “Since court fees increase litigation costs, there has been clear reduction in litigation proceedings – for example, there has been a decrease of 9.2 percent in the civil jurisdiction – legal business is affected not just because of the reduction of general litigation but because prospective litigation clients will put even more pressure on their lawyers when it comes to the fees in view of the increased costs they will have to pay.”
However, Osborne Clarke´s Madrid managing partner, Rafael Montejo, says his firm is resisting any temptation to cut fees. “Despite the strong pressure on the market to lower fees, we have decided to focus on top level advice and offer a high quality specialised service rather than a low price,” he says. “This has had a good acceptance in the market.”
International firms have advantage
Diego Lozano, co-head of the corporate and commercial department at Ramón Y Cajal, says lawyers have fared well compared to many businesses. “None of us have suffered like our clients,” he says. “There´s a lot of M&A work that is internationally driven and, in this sense, the international law firms in Madrid have an advantage over Spanish firms.”
Lozano adds that he does not expect that legal fees will go up. Meanwhile, Lozano says the legal market in Madrid has been stable for some considerable time and he does not expect much to change in the medium term. “Nothing has happened for the last five years, and nothing will happen in the next five years,” he says. However, he adds that he expects a “push from the audit firms” into the market.
José María Alonso, managing partner of Baker & McKenzie in Madrid, says the audit-related firms have an increasingly strong position in the market. “They [the audit firms] are now able to attract strong lawyers than in the past. There used to be strong opposition to the audit-related firms from the bar association, but now there is no reaction.”
One partner says that audit firms are able to attract good lawyers because they are able to offer them more money than law firms.
However, Martín says there is now uncertainty in the sector largely due to European Parliament and Council requirements regarding statutory audit of public-interest entities. “This may affect the position in the market of the Big Four’s legal and tax departments,” he adds.
One partner says this EU legislation casts doubt on auditors´ role as both legal advisers and auditors. “We´re not sure how the EU legislation will affect them,” he says. The partner adds that while legal fees are “not in their best position”, auditors´ fees are even lower.
Iñigo Berricano, managing partner of Linklaters´ Madrid office says it is important that law firms adopt some of the methods of the large auditing firms. “We have to learn from our competitors such as the accounting firms,” he says. “We do not have the same processes as these competitors have – for example, how many meetings, and people attending them, do you really need to have?”
Francisco Pérez-Crespo, managing partner of Cuatrecasas, Gonçalves Pereira´s Madrid office, says legal fees are decreasing and “we are all fighting” for a share of the market. He adds: “The new investors in the market acquiring debts or assets are coming from the UK and the US, so the British firms have more opportunities.”
In a similar vein, Lupicinio Abogados managing partner Lupicinio Rodríguez says the appointment of Freshfields Bruckhaus Deringer by Repsol, Clifford Chance by Sareb and Weil, Gotshal & Manges by Ono demonstrates that the “trend in the legal profession is leaning towards the magic circle firms”.
However, Alonso says: “I don´t see the US and UK firms having an advantage within the Spanish market where there are well established Spanish firms – the main advantage the US and UK firms have is when Spanish companies invest abroad because US and UK firms have a presence in many countries where Spanish firms don´t.”
Downward pressure on fees
Allen & Overy partner Andrew Clark says there is a “positive mood” in the Madrid market. “There are more transactions around and more activity in M&A – there are a lot of instructions from clients outside of Spain, there is a lot of high yield activity and more bonds work,” he says. However, in contrast, Javier Fernández-Samaniego, managing partner of Bird & Bird´s Madrid office, says he is “less optimistic” about the prospects for the Iberian market. He adds: “There was a slowdown in growth during the second part of 2013, and despite the first half of 2014 being very good, I have doubts, I think growth – or at least double-digit growth – will be difficult to sustain” That said, Fernández-Samaniego acknowledges that foreign investors are showing considerable interest in Spain by foreign investors.
Meanwhile, he also says 20 percent of the firm´s Madrid office revenues are coming from Latin American-related work, that is, Spanish investors investing in Latin America.
Lozano adds that clients continue to exert downward pressure on fees. “This is a damaging game with no limit,” he says. “If you bring the price down 10 percent, clients will ask you to bring the price down a further 10 percent.” He adds that mid-sized law firms in Madrid are particularly vulnerable to the threat posed by the large auditing firms. “Auditing firms are not looking for large M&A deals, they are looking for mid-sized deals, which is where we are.”
So what opportunities currently exist for Madrid law firms? Pérez-Crespo says compliance and tax are two practice areas that are growing as well as refinancing – he adds that the new Royal Decree-Law that introduces measures concerning the refinancing and restructuring of corporate debt also offers new opportunities for lawyers. Meanwhile, Martín says there is more activity in his firm’s corporate and M&A departments. “There is also a significant increase in investment in the commercial and real estate sectors,” he says. “There are always opportunities, having the right balance of areas will keep you working profitably at all times.” Martín adds that growth in the legal sector −not only in Spain− has been almost flat during the last three years and according to predictions will remain so for the next two or three years. “The pressure on prices and costs will continue,” he says. “There may be too many players in the market, but I don’t think there will be mergers between firms – there could be spin-offs with niche firms being established.” Martín adds that there could be newcomers in the market from the UK and US.
Change in perception
José Luis Blanco, managing partner of Latham & Watkins´ Madrid office, says that there is now “tremendous demand” for both investment grade and non-investment grade risk in Spain. “There has been a radical change in the perception of Spain as a market – high yield is here to stay.” Blanco adds that Spain has left behind the “recession phase” and that many Spanish companies are now gaining penetration on the international market because they are being backed by foreign investors. “We are seeing more transactions in the media and financial sectors, as well as in real estate, construction and civil engineering.” Blanco also says, that in the second half of this year, he expects to see transactions in the energy sector as companies “redefine their portfolios”.
Garrigues managing partner Fernando Vives says that the areas of practice that are currently “most active” are financial institution divestments, debt refinancing and advice on insolvency and pre-insolvency situations. He adds: “Litigation and pre-litigation advice and Labour law advisory services are also prominent areas.”
Herbert Smith Freehills´ Spain managing partner Miguel Riaño points out that transactions and cases are getting increasingly complex and generally need an integrated team of lawyers from different practice areas – such as corporate, finance, and dispute resolution. “This is mainly because most of the transactions/cases involve companies facing financial difficulties and a number of different parties with different interests which requires a multidisciplinary overview of the matter,” he says.
Écija managing partner Hugo Écija says that many institutional investors believe that this is the right time to invest in the Spanish market. He adds that total turnover in Spain’s retail investment market is on the increase – it was approximately €850 million in 2013, representing nearly a three-fold increase compared to the 2012 total of €320 million. Emiliano Garayar, partner at Garayar Abogados, says the practice areas with the most potential include real estate and hospitality, while advice to private equity investors and venture capital work is also expected to increase. Meanwhile, Alberto Díaz González, partner at Hernández-Echevarría Y Díaz Abogados, is convinced the Spanish economy is recovering because of the upturn in corporate M&A work. There is also a growing interest in Spain from investors in the Asia Pacific region, according to Carlos Pazos, managing partner of King & Wood Mallesons SJ Berwin. But Mariscal & Asociados partner Karl H. Lincke says: “Spain appears to have pulled out of its double-dip recession, but growth remains low. Spain’s steadily increasing unemployment rate stands at 27 percent, and youth unemployment stands at an estimated 55 percent and is still the main problem of the country.”
International taxation is a key growth area, according to Luis Fernando Guerra, managing partner at Deloitte Abogados. “We continue to undergo a significant process of internationalisation, one of the most effective ways companies have found of diversifying risk and minimising the ups and downs caused by economic difficulties,” he says. Mercedes Fernández, head of Jones Day´s Madrid office, observes that, with regard to litigation, there is an increase in the number of cases with an international element. She adds: “We have also received more cases related to problems between the parties of joint ventures. Private equity work is starting to pick up but we are seeing participations being taken instead of whole buyouts, which is, in a way, going back to the roots of private equity. Banks simply will not allow much leverage on large deals.” Meanwhile, Rafael Alonso, managing partner of Squire Sanders´ Madrid office highlights the following areas as those that offer the greatest potential for new practice growth: healthcare and life science, industrial, consumer/retail, real estate investments in key assets, and private clients.
Alternative debt providers on the rise
DLA Piper´s managing partner in Spain, Pilar Menor, says that, with regard to the banking and finance sector, the rise of alternative debt providers and sources of capital has been the “most profound change in the Spanish market” – she adds that these include private debt funds, bond funds, institutional investors and private wealth managers. Guzmán López, head of the real estate department at Adarve Abogados, says he expects foreign funds to continue investing in real estate in Spain because prices are “well below the market´s value”, and will increase in the next year or two. BDO Abogados & Asesores Tributarios partner Ignacio Legido Castiella says: “Some recent and expected changes in the Spanish regulations and the arrival of several Anglo-Saxon companies in recent years has increased concern about compliance – it is no longer viewed as an irrelevant area of the company but as a part of the overall business strategy of any organisation.” However, it is perhaps an indication of the fragile nature of the economy that, according to Ceca Magán Abogados founding partner Esteban Ceca Magán, there is “still more destructive work than constructive”. He adds: “Splits, restructurings, collective dismissals are the most demanding issues at the moment.” But Davis Polk & Wardwell Michael J Willisch partner is much more bullish. “Equity capital markets work has picked up tremendously – we have already closed three IPOs in Spain, and one in Portugal in 2014, and have several other significant equity capital markets transactions in the pipeline,” he says.
Telecommunications and new technologies will offer huge practice growth that will require “a greater degree of specialisation due to the number of businesses involved in its applications and specific regulations,” according to Alfonso Caldevilla, managing partner at Dutilh Abogados. Meanwhile, Kennedys partner Jesús Vélez says directors and officers claims relating to fraud in financial institutions and professional indemnity claims are among the key issues clients are currently seeking advice on. The transport sector is also one to watch, according to MVA Asociados partner Javier Montalvo Cleofé.
Lener partner José Lombardía says his firm is focusing on helping its business clients become more competitive. He adds: “Coexistence of lawyers and economists is natural at our law firm – this allows us to easily handle any type of business transaction, including the search for new forms of financing, cross-borders transactions, or restructuring,” he says. Andrés Monereo, founding partner of Monereo Meyer Marinel-lo Abogados, says that with credit now more available in the Spanish market, real estate investors can approach the banks to get financing, and consequently, more deals are being concluded. He adds: “Last year, there was a lack of credit, and, in addition, sellers were reluctant to reach deals since they felt the value of their asset was not recognised.”
Big firms don´t merge
Lozano says that, while there have been a lot of mergers in the UK, for example, they have mostly involved mid-sized firms. “In Spain there are too many law firms, but the biggest firms will not merge,” he adds. Pérez-Llorca says one of the main reasons for law firm mergers is one firm having too much debt and that, as Spanish firms do not have much debt, there is little prospect of mergers in the Madrid legal market.
Berricano disagrees with the claim that there are too many law firms in the Spanish market. “All the firms are doing well and innovation and efficiency are the drivers,” he says. “Competition between firms is a good thing – M&A work is back and restructuring work will continue – we are in a marketplace that is extremely successful, the number and quality of the law firms shows how successful it is, there are good quality lawyers.” The increase in M&A work is resulting in firms tinkering with their internal structures – Broseta managing partner Luis Trigo says his firm has reorganised some teams to work in acquisitions.
Alonso says clients are now not only paying less in fees, but also asking for more partner involvement. “We have to work more, we have to control costs in terms of recruiting and we have to get more from technology.” Eversheds Nicea managing partner Juan E. Díaz Hidalgo says clients are demanding predictability on cost, efficiency and cost effectiveness are key drivers. He adds: “Firms need to be more flexible in their work processes and much more innovative in finding ways to address legal needs.” Francisco G.Prol, senior partner at Prol y Associados, says law firms have had to undergo restructuring changes “not only in their number of lawyers” but also in the sense that lawyers are having to be redeployed to work in different fields such as arbitration, which is growing considerably. Araoz & Rueda Abogados partner Alejandro Fernández de Araoz says that, in terms of fees, firms have to come with “creative structures on ´success and abort fees´ while also being more prudent and often requesting retainer or upfront payments before we begin work”. He adds that clients are also demanding greater partner involvement, with the result that there is increased pressure on associates to be ´up-to-standard´.
Better to increase sales than cut costs
Fernández-Samaniego says it is important that law firms are innovative and “think outside the box” in what is a very competitive market. He adds that, to this end, Bird & Bird has created a product called Virtual General Counsel: “We created this product for mid-sized American companies which do not have in-house teams in Europe – we are effectively doing in-house work for clients through virtual secondments, and our Madrid lawyers are assisting clients in other jurisdictions.” Santiago Mediano Cortés, founding partner of Santiago Mediano Abogados says it is critical that law firms offer “highly specialised services, solution-oriented advice and multi-territorial scope while restructuring their fees to meet the new needs.”
Pérez-Llorca says innovation is more important than efficiency. “Bringing in sales has a higher yield than cutting costs – we have to build a good client base and develop more innovative lawyers,” he says. But Pérez-Llorca adds that his firm does not ask new lawyers to be business-minded. “We still look for legal skills and we ask them if they will be committed – we can add business skills later.” But Lozano says: “I don´t know what entrepreneurial skills are in a lawyer´s context – you can´t make a good lawyer a good seller, you have to bring work to some lawyers.”
The challenge for lawyers is how to become marketing-orientated, according to Berricano, who says his firm runs personal development programmes that aim to achieve this. “Some lawyers can get physically sick if they´re trying to sell something and fear rejection, so we are putting in place a coaching programme that aims to develop these personal skills at an early stage in the career of lawyers,” he says. But one managing partner says the best way for a law firm to develop its business is to provide “good legal skills”. Clark adds that, as professionals, lawyers are expected to be self motivated, but says the personal development of lawyers in now also a priority. One partner says that, historically, the big accounting firms have been “much better” at the personal development of their accountants and now the large international law firms are doing the same. Another partner admits: “Management is an important element of law firms, but we don´t often know how to manage our business and we have to be more professional in this respect.” Lozano says: “I don´t know what entrepreneurial skills are in a lawyer´s context – you can´t make a good lawyer a good seller, you have to bring work to some lawyers.”
Eduardo Gracia, managing partner of Ashurst´s Madrid office foresees “another year of good opportunities” ahead. He adds that in the last 12 months, it was mainly the biggest companies that benefitted from foreign investment, but, in the coming year he expects a second wave of investment focused on mid-sized companies in Spain, with the real estate sector in particular offering “good opportunities at good prices”. In addition, Gracia anticipates a continuation of significant amounts of work relating to non-performing loans and the deleveraging of banks, while compliance is another area of growth.
Luis de Carlos, managing partner of Uría Menéndez, says: “The market changed after last summer and we´ve closed a good number of M&A, capital markets and real estate deals.” However, he adds that the firm´s goal is to keep growing organically. “We do not expect a substantial increase in staff or revenues – the Madrid legal market is very open, we need to offer good services at competitive prices,” De Carlos says. “But the crisis has shown that the Spanish legal market has performed quite well.” Roca Junyent partner Isidro del Saz Cordero says Madrid is well placed to meet the needs of both traditional investors (such as the US, Germany, France, and the UK) and new actors (such as China, Russia, and the Middle East). “Above all, Madrid is in a good position to serve as liaison or bridge to Latin America for Spanish investors,” he says.
Less client loyalty
José-Antonio de la Calle Peral de Vergara, managing partner at DelaCalle Abogados SLP, says the creation of small, but highly competitive, law firms by former BigLaw partners will be a “critical factor of the Madrid legal market for years to come, and is already having a beneficial effect for clients, who may now select their counsel from a larger pool of different firms offering high quality legal services in very distinctive ways.” Raposo Bernardo partner Serena Argente Escartín says clients have become less loyal to their legal advisers. “Today it is common to see a company hiring for a single project, or a firm for each project, without the traditional loyalty of the past,” she says.
While there continues to be downward pressure on legal fees in Madrid, some confidence is beginning to return to the market. Deal volume is on the increase as international investors renew their appetite for Spanish deals. The market is becoming increasingly competitive – domestic Spanish firms are having to fight harder against the big auditing firms as well as the Anglo-Saxon law firms in the battle for market share. The advance of the auditing firms in particular offers law firms in Spain a valuable opportunity to learn from such competitors and use these lessons to build a more promising and sustainable future.