Law firms are increasingly concerned that the current slowdown in M&A activity will damage their profitability, yet place a lot of faith on the success of the technology sector in the future.
According to the ninth annual research survey by Thomson Reuters Legal business, nearly a quarter of the finance directors (FDs) of the UK’s Top 100 law firms fear that weakness in M&A work is now a major risk to profitability, up from 8 per cent last year.
With the global slowdown of M&A deals over the past year, road bumps caused byBrexit may now further dent business confidence already hit by the continued oil price slump and on-going concerns over the slowing economy in China.
Figures from PwC underscores the general business sentiment, with the UK IPO market with the number of IPOs on the London Stock Exchange falling from 137 in 2014 to 92 in 2015.
Thomson Reuters points out that a decline in M&A activity is particularly significant for law firm revenues as this work tends to feed instructions in other areas such as employment, competition and tax.
“The buoyancy in M&A transaction volumes last year was a key driver of profitability for law firms, but further growth was in question even before the Brexit vote and will be even more so now,” says Samantha Steer, director, Large Law Segment for Thomson Reuters UK&I Legal business.
“M&A transactions are a vital source of work for law firms, both in themselves and because they generate a significant amount of workflow across a range of other practice areas. If fears that corporate finance activity is weakening are realised that could rattle the sector.”
Technology: a saving grace?
Law firm FDs predict that technology will be one of the fastest-growing sectors in 2016, with 28 per cent of respondents foreseeing a rapid growth in work from this sector.
“The technology industry in particular has seen massive investment in recent years which has propelled growth in the UK and we expect this trend to continue into the long-term.
“London-based fintech start-ups have seen high levels of private equity investment flooding in which has helped to stimulate corporate activity whilst also cementing the city’s position as a leading fintech hub,” says Steer.
According to Marta Krupinska, co-founder and general manager of fintech startup Azimo, this prediction doesn’t come as a surprise, but the success of the sector will depend on the strength and favourability of post-Brexit negotiations.
“Fintech in London is booming, thanks to the positive regulatory environment, access to funding and a great talent pool – and this clearly has benefits for other sectors, such as law. However, the future of fintech in the UK will depend on the government’s negotiations for Brexit,” she says.
“Many companies here depend on both EU market access and the ability and legal right to passport their services to the rest of Europe. Migration will also be a vital factor for fintech, as the industry has depended on the immigration of highly skilled workers, and many start-up firms like Azimo are founded or co-founded by migrants. If the freedom of movement and ability to passport services is affected, fintech will undoubtedly suffer.”
A sharp jump in demand for regulatory and compliance work is also expected this year, with 48 per cent anticipating fast growth – compared to 28 per cent last year and 18 per cent in 2010.
The survey, entitled Threats to Profitability and Opportunities for Growth: A Survey Amongst the UK’s Top 100 Law Firms, is carried out annually by Thomson Reuters to determine issues facing the industry and to provide valuable insight into law firms’ outlooks and strategies. Research is conducted amongst Finance Directors at 25 of the UK’s Top 100 law firms including Magic Circle and Silver Circle firms.