Growth areas in the Australian market

During 2007, Australia's corporate legal market provided significant revenue and profit growth for the major law firms, despite the "top-end" Australian legal market being generally regarded as mature. Work levels were close to capacity, while most firms faced significant people challenges, including recruitment and retention in a very tough demand market, particularly at the senior associate lawyer level.

The Australian economy has grown rapidly over the course of the past decade, averaging around four to five per cent per annum. This economic growth has been underpinned particularly by Australia's resources boom, driven by China and India's insatiable demand for resources, namely iron ore and coal.

Generally, the Australian corporate legal sector across 2007 highlighted significant mergers and acquisition activity, underpinned by private equity. During 2007, we witnessed several huge M&A transactions, including the largest-ever M&A transaction in Australian corporate history, the A$20 billion Wesfarmers takeover of Coles in the retail sector; the CEMEX takeover of Rinker in the heavy manufacturing sector; and the A$11.1 billion private equity offer for Qantas, Australia's national airline.

Apart from this corporate legal activity, Australia's public sector, primarily the various state and territory governments, has invested record spending in major infrastructure projects over the past few years, including on water, road and social (health and education) infrastructure projects. Many of these projects have been Public Private Partnerships (PPPs). Recent examples include the Victorian Government's water desalination project, and major roads, tollways, and hospital projects, particularly in New South Wales, Queensland and Western Australia. The resources "boom states" of Queensland and Western Australia have experienced large and rapid population increases, which have placed enormous pressure on existing infrastructure, forcing those states to lift major projects investment. This has, as a result, increased construction and project finance work for law firms.

Also, in late 2007, the New South Wales Government announced that it was moving to privatise its electricity retail assets, following closely on Queensland's recent sale of its energy assets – all major transactions involving a host of buyers and financiers. Most of Australia's large law firms have been involved in each of these transactions in some capacity.

However, all eyes in the Australian market are on a rapidly slowing (and possibly recessionary) US economy, along with the continuing fallout from the US sub-prime crisis. As would be expected, the recent global securities and credit market turbulence is causing most of the large Australian law firms to prepare for some slowing in growth across 2008, together with a shift in work from bull-market deals to bear-market structuring. Most Australian firms will now be taking a cautious approach to recruitment and closely watching developments in the London and New York legal markets, while also preparing for a possible downturn in the business cycle. Early reports from New York are that some law firms and investment banks have begun to retrench staff.

Already, since Christmas, we are seeing in Australia increased corporate restructuring (workout) and insolvency activity in the market at this very early stage, primarily in the real estate and financial services sectors. We also expect that debt and capital markets activity will be flat for most of 2008.

The real issue will be the extent to which the large Australian law firms will be able to make the transition to a bear market, if there is to be a significant downturn in the cycle. There are several firms in Australia that have the capacity to successfully transition and do very well, whatever the business conditions. On the other hand, there are a few reputable Australian firms that have successfully built their practices over the past decade on particular types of commercial or boutique "front-end" work who may struggle to transition.

That said, as we move into 2008, the fundamentals of the Australian economy remain strong, although rising inflation is on the radar. The Reserve Bank of Australia's view is that any significant global economic downturn caused by a recessionary US economy will have some impact on the Australian and Asian legal markets, although the general view is that the booming Chinese economy will buffer the Australian economy against a global shock emanating from the US. China is still forecasting a staggering 11 per cent GDP growth for 2008.

I see real growth prospects in developing significant funds management, oil and gas, project finance and M&A practices across the region. South East Asia has re-emerged from the economic doldrums of the Asian downturn of the late 1990s to inspire ongoing confidence, and Vietnam is fast becoming the "super" economy of SE Asia.

Climate change is currently a major political and economic issue in Australia, as indeed it is across most of the Western world. The Australian Federal Government is expected to announce the introduction of Australia's first mandatory emissions trading scheme by mid-year. This will have a significant impact on many of the country's leading corporates, given Australia's heavy economic reliance on the energy and resources and manufacturing sectors. A few Australian law firms, mine included, have moved quickly to establish specialist practices advising clients on a wide range of legal issues associated with climate change.

One of the defining characteristics of many large Australian law firms has been the investment that these firms have made over the past few years in developing and implementing client relationship management strategies. This includes effective cross-firm client teams, lead partners, business development resourcing, and extensive client feedback and 'satisfaction' measurement programs. Increasingly, senior associates and lawyers are being encouraged to help build their careers by being actively involved in the various business development strategies and teams with these key major clients.

Paul Nicols is a partner at Allens Arthur Robinson