Sydney may have lost some of its lustre during the GFC, but firms are confident that the Harbour City is set the regain its sparkle. ALB investigates
Sydney law firms are a resourceful lot. As a major financial hub, it was inevitable that Sydney would be hit particularly hard by the GFC. But in spite of some high profile instances of corporate distress – or perhaps even because of it – Sydney firms have emerged from the GFC in reasonably good shape. “The firm had a subdued start to the first half of 2009/10 but September seemed to be the turning point. Our workflow steadily increased from there and we reached full capacity by November and we had our busiest December and January ever,” says Danny Simmons of Chang, Pistilli & Simmons (CP&S).
It is well known that the GFC has not followed the script for a typical economic downturn. While a long period of stagnation was expected, the reality was that firms barely had time to settle into a counter-cyclical routine before the green shoots reappeared. The result is that well-balanced Sydney firms are drawing work for all parts of their practice. “We’ve still got clean up issues - restructuring and GFC problems which need to be resolved and that’s coincided with the upswing. The downturn and the upswing collided,” observes Mark Pistilli of CP&S .
Conditions may be improving, but NSW has been slow to shed the tag of the nation’s basket-case. National firms such as Mallesons have seen business pick up in the first few months of 2010, but CEP Robert Milliner says that the underlying commercial market in Sydney is lagging behind that of interstate rivals. “NSW is still not doing a huge number of progressive things – while Victoria for example has done a whole range of things such as hospitals, water projects – it’s been said that even comparing the number of cranes you see in the Sydney and Melbourne skylines tells the story,” he says.
But the tide may be turning. Henry Davis York has grown its public sector practice by 40% over the past 18 months, a result which managing partner Sharon Cook says is partly attributable to increased infrastructure activity. “Regardless of whether there is a change of [state] government, we will see much more investment in NSW,” she says.
Large national firms are cautious in their revenue predictions for FY2010, but a number of Sydney firms are expecting to report revenue growth – CP&S and Henry Davis York, for example, are both tracking towards double digit growth for FY2010. Firms have adopted a wide variety of strategies for growth. Shane Barber of Truman Hoyle is convinced that his firm’s growth during the GFC is attributable to its status as a tightly branded specialist firm. “There was a lot of regulatory work associated with NBN and other communications work: premium mobile services, competition law. Disputes and litigation was also up,” says Barber.
Gilbert + Tobin is tracking towards 5 to 10% growth this year, although it will be difficult to assess how much of this will be attributable to market conditions and how much will be attributable to an impressive lateral recruitment programme which includes Peter Cook from Mallesons and Nicholas Grambas from Baker & McKenzie in Melbourne. Managing partner Danny Gilbert says that while he expecting to increase market share, the broader market for all of the firm’s offerings is looking positive. “All practice areas are strong except property, which is in recovery,” says Gilbert. “M&A is looking better and there is more interest in the private equity space.”
Southern stars
Sydney is home to several Melbourne-headquartered firms which have made the pilgrimage north into the eye of the storm. Far from regretting the move, those firms are looking to expand their Sydney presence. Mills Oakley is in the process of what CEO John Nerurker refers to as a second stage of expansion which will see the firm’s Sydney and Brisbane office expanded to full service capability. Mills Oakley expects to see 15 to 20% growth this year in Sydney with construction, corporate advisory, litigation and insolvency among the strong performing areas. “It is not just counter-cyclical growth – our front end practices are also growing and we’re taking market share,” says Nerurker. Mills Oakley is well known for its savvy use of lateral recruitment to attract quality partners and clients and this strategy will be stepped up – Nerurker says he would like to see the Sydney office expand from its current seven partners to “between 12 to 18” partners over the next three years.
Herbert Geer increased its Sydney headcount by about 20% last year – albeit off a small base – and is also expecting revenue growth in Sydney this financial year. “In Sydney we weren’t as exposed to the financial services [industry] so it didn’t really affect us as much,” says managing partner Bill Fazio. “Construction, disputes, industrial work were all strong, as was litigation such as the iiNet case. There’s a real slowdown in speculative property development – for example speculative coastal development hasn’t come back. Property is recovering, but not back to where it was – but it’s bubbling up rather than down.”
Perhaps the strongest growth of all has come from the young upstart of the Melbourne cohort, M+K Lawyers. As the most recent arrival in Sydney, M+K has the advantage of a small base from which to grow. Still, few would have expected the firm to expand from four lawyers to 20 and to record 68% revenue growth in Sydney in FY2010 – but that is the kind of growth the firm is on track to deliver through organic growth and lateral hires. Managing director Damian Paul foreshadows that M+K will make its first firm acquisition in Sydney later this year. Meanwhile, he says that business succession and estate planning, tax and commodities contracts are among some of the firm’s better performing practice areas. “In the last three to four months we’ve also seen capital raisings and M&A return,” he says. Paul estimates that M+K’s front end/ back end ratio is about 50% each way, which supports the theory that firms focussing on the mid-market were not as badly affected by the GFC.
Infrastructure
NSW has a dubious history with infrastructure, with the failure of the A$5bn Sydney Metro being one of the more spectacular failures to blot the state’s copybook. However, there are significant projects underway or mooted such as the building of new coal loading facilities in the port of Newcastle by a consortium led by BHP. CP&S was one of many firms which advised on that deal and also advised on a complicated suite of arrangements to govern the operation of the port. The arrangements had to be negotiated between the government and multiple coal producers, train operators and track providers in the Hunter and required ACCC consent.
“The restructuring and underlying contracts involved a lot of work,” says Mark Pistilli. He says that this is the type of work which will continue regardless of the political climate: “With resource prices being as high as they are, particularly for coal and iron ore, deposits in other areas are now becoming economic even where they are not close to train lines and ports, so then you need infrastructure corridors to the ports and expanded capacity at port. Keep in mind that we don’t even have adequate port capacity for the mines which are currently operating.”
This work has the character of a fight over scarce resources and Pistilli says that he can’t see any end in sight for the foreseeable future: “The system is capacity constrained all the way up the eastern seaboard and in Western Australia – there is a desperate need for new infrastructure. To give you an idea of the economic imbalance, people are buying resource companies now as much for their rail and port capacity as for their reserves.”
Local and international
Truman Hoyle is an example of the flexibility of a typical Sydney firm. The firm is not afraid to take on less glamorous work to keep the wheels turning. “Clients are using us more often for day to day legal work – it’s almost as cost effective as doing it themselves,” says Shane Barber. “You can’t always do A grade work. I used to work in-house and I know how frustrating it is when the best work goes to law firms and the mundane work is left in-house – you can see the [in-house] frustration at getting swamped in minutiae. We’re happy to do things like tender responses and advertising approvals.”
Truman Hoyle is perhaps better known for higher end work, a significant proportion of which is done for international clients. The firm is not limited to providing advice on Australian law, but also plays a “turn-key” role for overseas clients wanting information on the regulatory environment in other jurisdictions such as New Zealand and Singapore. Truman Hoyle performs preliminary investigations and liaises with correspondent firms such as Colin Ng & Partners in Singapore or Hudson Gavin Martin in NZ and provides an integrated response. It’s a model which demonstrates that Sydney firms do not need to open new offices to serve international clients and the natural advantage enjoyed by Sydney firms.
“Clients are not fussed that we’re not in multiple locations – but that said, it helps to be in Sydney,” says Barber. “When people come to Australia, they naturally look to Sydney law firms. I think sometimes that Sydney firms underestimate themselves – there are a lot of good firms out there.”
There is a theory that in the post-GFC era, Sydney has consolidated its position as the financial services hub of the Asia-Pacific. As the source of capital shifts from Europe to Asia, the new breed of investor, unfettered by traditional ties with centres such as Melbourne, is said to be more likely to proceed directly to Sydney. “It is the place which is seen to be dominant, it is also somewhat iconic and Asian investors are more likely to come here – we’ve seen a marked increase in this [trend] since last year.” says Sharon Cook. Henry Davis York has seen a tremendous opportunity in this trend and has invested heavily in its funds management practice for this reason.
Distress work
After the storm has passed, the clean up begins – and it has been largely Sydney lawyers who are wielding the broom. Babcock & Brown, Allco, Macquarie and Challenger are just some examples of institutions that have generated restructuring or insolvency work in Sydney.
However, Sharon Cook does not agree that insolvency and restructuring work necessarily has an inherent Sydney bias, pointing to Octaviar and ABC Learning as two examples of matters which had a strong Brisbane component. “A lot of the work is done out of Sydney, but I think clients are attracted to the expertise rather than the location of a firm,” she says.
Restructuring can take many forms – for example, negotiating with banks and selling off assets and management rights and also fixing legacy issues for the buyers of those assets. CP&S, for example, has acted for Babcock & Brown on its disengagement from its power, infrastructure and real estate satellites and has acted for HNA Group in its acquisition of the Allco aviation business and is now advising on the legacy issues associated with the purchase of that business.
“Allco proved to be a difficult receivership because it was a highly financially structured business – it was difficult to work out what assets were actually saleable. It was difficult for the receivers as well as the buyers,” says Danny Simmons. He also commented on how the legal work on distressed disposals has evolved: “When I first started out, distressed disposals were typically done by insolvency lawyers – there’s now a trend towards that work being done by corporate and M&A lawyers.”
Whether or not the present round of insolvencies and distress will be capped off by extended litigation remains to be seen. Sharon Cook says that this kind of work has a long tail and there could conceivably be “at least a couple of years” left to run. Still, Henry Davis York is anxious not to put all of its eggs in the counter-cyclical basket and has taken the uncharacteristic step of making lateral partner hires in the public sector, environmental planning and IP spaces
