After the magic is gone

An exodus of magic circle firms from Hungary has changed the face of its legal market considerably. Tom Phillips asks five key players in the region for their view on the new legal landscape.

The legal market in Hungary has undergone many changes over the past few years, not least of which is evident in the international contingent, which has retrenched, leaving behind best-friend relationships with smaller firms.

Freshfields Bruckhaus Deringer left in 2007, followed by Linklaters in 2008 (the pair left behind Oppenheim and Andrékó Kinstellar). Then Clifford Chance joined the exodus after its partners left to create standalone independent Hungarian firm Lakatos Köves & Partners.

This trend is familiar to many Central and Eastern European (CEE) markets, with the work available unable to sustain the largest international firms. So what does this mean for the firms left behind? And if the magic circle has left, does that mean more opportunity for independents?

“It may well be that the vacuum created by these departures will be filled up by ­Austrian firms, which are more committed to the CEE region, and very probably ­midmarket local firms staffed with senior associates who broke away from big firms a couple of years ­earlier,” says Pinsent Masons partner Marcell Nemeth.

“The beneficiaries are the less global, midmarket operations such as DLA or Wolf Theiss, or new arrivals such as Pinsent Masons, as well as local boutiques with ­relatively young lawyers trained by magic circle firms. The reality of the magic circle firms’ operations has been that while demand for their services existed it was increasingly difficult to complete those deals profitably.”

With the departure of magic circle firms, other issues have arisen, such as the prospects for local firms (good) and young lawyers (not good, according to some). We asked a group of the country’s lawyers for their opinions on the development of the new-look ­Hungarian market and where the opportu­nities lie for firms in Budapest.

Marcell Nemeth
Marcell Nemeth

Marcell Nemeth, partner, Pinsent Masons

Why has the Hungarian market become unattractive to global players?

The market was always fairly small for the biggest players. The wave of departures began in the late 1990s, when large US firms such as Shearman & Sterling, Debevoise & Plimpton, Dewey Ballantine, and Skadden Arps Slate Meagher & Flom left. This was due to the end of large-scale privatisations, and the next decade was that of the magic circle firms, which did well on privatisations, larger financings and PPP projects.

However, following the credit crunch and the ensuing economic crisis, which was to hit Hungary early on, not only has the market shrunk further but the global competition between the largest players has also intensified and these firms have had to focus even more on global marketplaces such as London, New York, Asia Pacific or big economies such as Germany and France.

The nature of the deals, and the practice that can be built on those transactions in countries such as Hungary, is becoming less compatible with the deals these firms are competing for in the big markets, leaving the smaller offices in a less streamlined position with the rest of the global practice. Added to that, creating new partners and distributing equity on scales similar to the London partnership has become more difficult without applying special formulae for local partners, or indeed reducing the number of new partners altogether. As the example of Kinstellar and Lakatos Köves & Partners indicates, firms with strong local experience and regional ambitions may be a better deal for all parties involved.

Which practice areas will be strong over the coming few years?

Due to strong corporate stockbuilding there will be a wave of M&A activity, which may be helpful for acquisition financings to pick up as well. Overall, however, the lending market will remain ­weaker due to tighter credit controls and a lack of strong corporate ­balance sheets, as well as the banks’ reluctance to lend long
term. There will be a lack of PPPs and similar initiatives. ­International arbitration is an area I expect will grow.

Have you seen a trend towards international firms relying more on best-friend arrangements?

Yes and no. Fully integrated networks with full branding may still represent an advantage for certain types of transaction. Clients can definitely be convinced about best-friend type operations. Given the pressures arising from hourly rates and point values, as well as between the headquarters and local offices, a best-friend relationship may be more beneficial than full integration long term.

With a smaller number of large firms in the country, do young lawyers worry about their partnership prospects?

Definitely, and it is increasingly difficult to produce business cases for promotions. Many young lawyers ask themselves about the future in the local offices of big international firms. In the long run, the successful operation of these firms on the local market depends on whether they are able to work out a sustainable model for the local (and typically smaller) market, with adjustments to the equity ladder or alternative carrier options, allowing for modest growth and motivation of younger lawyers.

András Posztl, managing partner, Horváth & Partners DLA Piper

Why has the Hungarian market become unattractive to global players?

The global crisis has accelerated the shift of interest from Central and Eastern Europe (CEE) to more promising emerging markets such as the BRIC [Brazil, Russia, India, China] countries and Turkey. The CEE, ­following its integration within the European Union, has gradually lost some of its appeal as an emerging market. Also, the average size of ­transactions originating in the region has further decreased, and so has the number of transactions.

In this context, Poland is a bit different because of the size of the local market, which is the far biggest among the CEE countries.

Is this the end of the magic circle era that dominated the past decade?

This may well be the case. The business model of the magic circle, including some cultural elements, does not appear to match CEE market practices. Again, the Polish market may still represent a good business case for the magic circle.

What firms are benefiting from their departure and why?

Spin-offs of the magic circle continue to benefit from referrals of former ’parents’, although it is difficult to foresee how long this referral model will be sustainable. Independents may position themselves to pick up some work too, although they do not yet have the same market credibility needed to fill in the gap.

Firms that are pursuing a ’global business’ law firm strategy, such as DLA Piper, as well as a small number of international firms including some US offices, are still best-placed to leverage their UK and US capabilities, and their broad ­geographic coverage in CEE.

Which practice areas will be strong over the coming few years?

We expect market recovery in regulatory, litigation and finance and energy sector work in the immediate future.

A number of Hungarian firms have broken away from large firms over the past five years. Do you see a future for these firms?

As discussed before, the main question for these firms is how long they can maintain a healthy flow of referrals and, from a practice management perspective, how they will be able to recruit the best talent in the market, especially as they haven’t got the appeal of
the magic circle.

Have you seen a trend towards international firms relying more on best-friend arrangements?

International firms are becoming increasingly pragmatic and opportunistic in terms of establishing best-friend relationships
in this part of the world. This is one possible route for the ­independents and will help them maintain their status.

With a smaller number of large firms in the country, do young lawyers worry about their partnership prospects?

Partnership prospects are transforming across the legal ­markets, and it is true that smaller markets such as Hungary or the CEE at large are now likely to offer a slower process for partner ­promotion. This situation, however, may ultimately create a healthy increase in ­competition among the most talented lawyers. That will then pose a challenge for the best law firms: how to attract and retain the best talent.



Kinga Hetenyi
Kinga Hetenyi

Kinga Hetényi, Budapest managing partner, Schoenherr

Why has the Hungarian market become unattractive to global players?

There aren’t any more big privatisation deals. The number of attorneys has ­significantly increased, and due to the opening of ­several new law faculties it is expected to increase further. This has led to a decrease in fees and a decrease in law firm revenues.

Is this the end of the magic circle era that dominated the past decade?  

Probably, yes. Lawyers’ workloads are expected to increase again in future, but their fees will probably not reach the same levels they had reached in the nineties. 

What firms are benefiting from their departure and why?  

Regional and well-organised, high-­profile local firms, as well as specialised ­boutique law firms, are benefiting because they are increasingly engaged in high-profile transactions and other deals of significant size. International and multinational transactions and larger deals are no longer reserved for the magic circle firms.

Which practice areas will be strong over the coming few years?

Mergers and acquisitions, banking and finance, regulatory, tax, employment, IP and life sciences.

With a smaller number of large firms in the country, do young lawyers worry about their partnership prospects?

No, because they can become partners at the regional and local firms, which have grown recently and are expected to grow further.

Csilla Andreko
Csilla Andreko

Csilla Andrékó, Budapest managing partner, Kinstellar

Why has the Hungarian market become unattractive to global players?

The markets in CEE are still attractive to them, but more as a region and not as individual countries. These markets are relatively mature markets, therefore the region can still be attractive for more complex structured transactions.

Is this the end of the magic circle era that dominated the past decade?

Concerning the local legal business we can say that. However, the magic circle ­continues to be active in Hungary. Its ­multinational clients have many global transactions that cover our country as well. These transactions are managed by the large international firms with the help of their local best-friend law firms.

What firms are benefiting from their departure and why?

Those firms that are able to provide the best high-quality local law advice in an ­’international’ style. The ’heritage’ law firms, such as Kinstellar, definitely have that right mix of local legal and market knowledge, and magic circle experience and pedigree.

Which practice areas do you forecast will be strong in the near future?

I am convinced that energy and finance are going to be the strongest practice areas in Hungary. We trust that the M&A and real estate activity of the large multinational ­companies will strengthen soon as well. Competition and litigation/arbitration have been playing an important role recently, and we expect further strengthening of these practice areas as well.

A number of Hungarian firms have broken away from large firms over the past five years. Do you see a future for these firms?

These firms have the international experience and legal knowledge that is required by large corporations, multinationals and financial institutions. If these firms are able to keep their teams together and their best-friend relationship with their former parent, as well as establish new ones with other large law firms, they can be successful. Of course they have to be able to acquire new clients and assignments directly as well.

It is even more feasible if they are able to establish a regional firm, or enter into an alliance with another law firm.

Have you seen a trend towards international firms relying more on best-friend arrangements?

Absolutely. It is very important to these firms, when referring work beyond their own jurisdictions, that their partner law firms are able to provide quality advice and ­services to meet their clients’ expectations, thus making them look good in front of their clients. However, while smaller local firms are able to advise on local law issues, often they have little or no experience with managing larger cross-border transactions and providing pragmatic solutions in a business environment, or of international-style transaction management. These large international firms therefore rely more on best-friend arrangements with regional independent law firms that meet these high standards and offer one-stop shop solutions in this region.

With a smaller number of large firms in the country, do young lawyers worry about their partnership prospects?

No, quite the contrary. They understand that partnership is a more realistic goal at a regional law firm than it would be in the local office of a magic circle firm.

Gabriella Ormai
Gabriella Ormai

Gabriella Ormai, CMS Cameron McKenna

Why has the Hungarian market become unattractive to global players?

I think the decision to leave was not specific to Hungary but more about the region. This is true for Linklaters and Freshfields Bruckhaus Deringer. The situation is different in the case of Clifford Chance, where the departure only affected Hungary, but this is the exception.

Why have those firms left the region?

It was probably part of a global strategy. Instead of full integration of the relevant offices, which needs intensive management efforts, they decided they can live with a ­network of best-friend relationships. The attractiveness of the region depends on the strength of the offices in the region. Unless a firm has the critical mass, the region becomes less attractive. Whether best-friend ­relationships will be able to serve the same purpose remains to be seen.

Personally, I think the offices left behind may not follow the same route as the former mother firm. They may not spend as much for training and building the relationship as earlier. Therefore, in time the gap between the firms becomes bigger, and that may have a detrimental effect on client services.

Is this the end of the magic circle era that dominated the past decade?

Most probably. The concept of the magic circle became less important in the region in the past couple of years. Strong regional coverage and the strength of local firms is now seen as more important than the ranking of the UK headquarters.

Which firms are benefiting from their departure and why?

Other international firms benefit from the departures, both by taking some of the good people and also by attracting certain clients. Still, it is too early to say how the legacy firms will do and how clients will react in the long run. If the relationship with the former mother firms becomes looser, the client may decide to leave. As announced, the legacy firms benefit from the departure because they become more flexible in the pricing.

Which practice areas do you forecast will be strong in the near future?

In the coming years I think the focus will be more on sector-specific knowledge rather than on practice groups. Lawyers from each practice group will specialise and be recognised according to their expertise in energy, life sciences, consumer products, hotel and leisure, etc. We think the renewable energy sector will be one of the drivers of the market.

A number of Hungarian firms have broken away from large firms over the past five years. Do you see a future for these firms?

Yes, we have seen lawyers trained in international firms establish their own firm, ­serving clients using their international education and offering lower fees. While this may seem like a good strategy, it remains to be seen how these firms will develop. If they do not grow, they may be left behind by other market players.

If they have no international/regional coverage it will be difficult for them to build up/keep the level of clients they used to work for. If they have a different set of clients, they will face fierce competition among Hungarian law firms.

They have better chances if they join a kind of network of law firms and receive ­referrals from such a network, where they can better use their expertise. It is still to be seen how the governmental organs will approach this – whether they prefer to have ­international firms on their side or rely on those local firms that have some lawyers trained in international firms.

Have you seen a trend towards international firms relying more on best-friend arrangements?

Other than those that left Hungary and rely on their former offices as best friends, we have not seen this trend growing. There are those firms that traditionally worked with best friends (Norton Rose), but this phenomenon did not become more significant.

With a smaller number of large firms in the country, do young lawyers worry about their partnership prospects?

I think this was already the case before those firms left the market, as the possibility to become an international partner in those firms for young lawyers was, to say the least, very limited. This is the reason why the legacy firms’ first step was to announce the ­nomination of a significant number of partners. It is true to say there are only a few firms where an international partnership is a realistic opportunity for new talent. At the same time more firms offer national partnerships and that may be an attractive option for the young lawyers in those firms.