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Capital Markets 2017: Trends & Conclusions

The past year has seen a continuation of many of the trends from 2015. The current market remains unsettled due to the geopolitical landscape, whose features include (but are not limited to) the continued low level of oil prices, the US elections and Brexit, as well as central banks worldwide maintaining low interest rates. In addition, the financial and banking sector as a whole is continuing to embrace IT and technology as part of a drive towards efficiency and competency in transactions. Globally, the legal market is mixed, yet demand for legal services remains and firms will continue to adapt to current business conditions as required. 

UK

The UK has experienced low interest rates since the financial crash in 2008, and as of the time of writing, Bank of England base rates remain at a record low of 0.25 per cent. As a result, sources report that “the loans market is very good at the moment but is terrible for high-yield bonds”. Investors prefer to follow the rates of return and so “when the bond market is busy, the loan market isn’t, and when the loan market is busy, the bond market isn’t”. Consequently, general sources told us, there has been “a slowdown in bond-related work” for law firms. Yet some practitioners stressed the importance of “having a big pipeline of work from the rest of the firm”. Firms that can source bond work from, for example, the USA are likely to handle such leaner times, because, as one source put it, “in New York in particular, they do bond work everywhere”.

Equally, practitioners reported that “securitisation is still not back to the levels of work before the crash”. There is “lots of work to be done to rehabilitate the market” and though efforts are being made “there is a long way to go before it will be is back to what it was”. Additionally, debt capital markets was described as currently being “a very skittish and volatile market” due to the large amount of “cheap government money around”, meaning that “essentially the market is being propped up by quantitative easing”.

The background to this market activity is influenced by current geopolitical events, and in particular Britain’s forthcoming exit from the European Union. Yet experts commented that, “on a day-to-day basis, we have seen no noticeable effect on deal flow” caused by this, as both the private equity and venture capital markets remain buoyant, with lots of activity reported across a variety of sectors. Indeed, one practitioner said, “We haven’t been this busy since before the financial crisis.” However, there is “some significant uncertainty in the market” now that the UK government has submitted formal notice of its departure. Yet sources anticipate “that pressure to do deals will remain”. Figures released lately by Preqin indicate that private equity firms are sitting on record levels of marketable securities, amounting to $822 billion globally in December 2016, compared with $755 billion a year earlier. In fact, interviewees told us that “the period running up to Brexit will likely be even busier than now” as clients look to “opportunistically take advantage of the lower sterling and interest rates”. In the broader scheme of things “Europe is not that stable – national elections being largely unpredictable” and so “it is not just Brexit which is hard to plan for clients”. As one put it, “In the end, it is just one of those things businesses have to adapt to.” Thus, firms offering capital markets legal services are, in general, optimistic about future demand.

Despite this, there was some concern expressed about the state of the current legal market. One source described it as “very patchy” with the number of lawyers in practice “staying flat or declining”. In addition, one lawyer stated, “There are very few firms where finance partners don’t feel under pressure.” Another commented that it is “much harder to become a partner then it was, and then very stressful to stay”. As a consequence, increasingly it is “becoming common for partners to leave a firm, or have equity points taken away from them”. If the market does trend upwards as expected by our sources, the resulting demand for legal services subsequent to Brexit may be a welcome boost for the market.

Internationally

Beyond the UK, practitioners painted a similarly uncertain picture of the market. There is a “general, and quite substantial, trend of decreasing capital markets work-around”. In particular 2016, “saw a shakedown of the market” as one put it, although this “has now stabilised”. Yet there are “still too many lawyers chasing too few deals at this moment” combined with “substantial pricing pressures”, which have combined to create a “very competitive field for law firms”.  Several sources reported that as a result of this competition, the legal market “is going through a period of internationalisation”, with firms looking to expand outside the country they’re based in to “find a market for themselves elsewhere”. In particular, “more and more firms seem to be very serious in their approach to Africa”, with firms not only marketing themselves to the work available there, but also opening offices in “this lucrative continent for capital markets work”.

Additionally, it was reported that there is a “growing integration between banking, capital markets, regulatory and transactional” legal advice required by clients. Firms keen to compete in the current climate will need to be able to provide a high level of legal advice across all these areas to be able to service their more sophisticated clients.  

The use of IT

According to sources, the trend for the increasing use of information technology in “all facets of banks’ and capital markets firms’ operations” is set to “continue if not speed up”. Specifically, end-to-end digitalisation is “high on the agenda of priorities to be achieved”, and clients are expected to receive “much greater tailored financing and lending solutions” through the increasing pervasiveness of big data and predictive analytics. It is anticipated that the Cloud “will become the most commonly used tool for upgrading core transaction banking platforms”, according to commentary by Deloitte, alongside payments enabled by the internet of things, social media bots, and in-app and mobile wallets, which are all expected to become increasingly prevalent. As a result, cybersecurity, including encryption, biometrics and identity, and access management will continue to be “of major significance in the industry”. Sources drew our attention to a consequent rise in demand for regulatory advice from clients, as “banks focus more on regulatory compliance than risk mitigation”. It is likely that the future will see an “increasing convergence between capital markets legal services and expertise in technology law”. Interviewees further commented that clients are more interested in “comprehensive legal advice from a firm that can cover all their legal needs”. Firms that are best placed to serve the market, therefore, are those “that can offer high-level legal services in these fringe areas where capital markets expertise bleeds into other areas of legal expertise, for example IT law”. 

***

In summary, the future looks mixed for the legal market. The sector as a whole is experiencing some difficulties, yet “deals will continue”. With uncertainties regarding the future regulatory landscape stemming from geopolitical issues, especially the US elections and Brexit, “business as a whole may be supressed for a while, but demand for legal services to answer these questions may not be too negatively affected”. One source highlighted how “the reputation of a firm counts for a lot” in terms of getting work, and “so the good firms will always be all right”. Whether these predictions are correct remains to be seen.

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