Little big country
4 July 2011
Luxembourg might not be the biggest country in Europe, but with an influx of new law firms it is nevertheless riding high. Joanne Harris reports
For a small country, Luxembourg has a lot of lawyers. And the number of law firms in the Grand Duchy has increased over the past year, with the arrival of Baker & McKenzie, CMS DeBacker, Stibbe and, most recently, Speechly Bircham.
Dutch firm Stibbe was the first to make its move, opening in September 2010 with the hire of Bonn Schmitt Steichen partner Dirk Leermakers. It has since recruited Loyens & Loeff partners Gérald Origer and Ayzo van Eysinga, before adding Linklaters’ local tax head Paul Tulcinsky just a few weeks ago.
Baker & McKenzie followed Stibbe in October 2010. It merged with three-partner Luxembourg firm Findling Collin Fessmann, bringing on board partners
Jean-François Findling, Raphaël Collin and Laurent Fessmann. Ernst & Young partner André Pesch also joined to provide tax advice.
Like Baker & McKenzie, CMS DeBacker launched in Luxembourg through a local merger, with two-partner firm Leclère & Walry. In contrast, Speechly Bircham, which is targeting private client work in the jurisdiction, opted for individual hires, enticing former Oostvogels Pfister Feyten partner Françoise Pfeiffer and senior tax consultant Chokri Bouzidi.
Leermakers says Stibbe’s move into Luxembourg was always going to happen. “For Stibbe it was a long-overdue decision. The intention has always been there to have a footprint across the Benelux,” he explains.
He says the office is focusing on corporate, finance, tax and funds work and the intention is that it will benefit not only Stibbe but also its best friends Herbert Smith and Gleiss Lutz.
“We see our practice in the same manner as the international firms,” Leermakers adds, noting that several UK firms have been present in Luxembourg for a while. “To some extent that means we’ll become their competitors when we gain the necessary size. We’re still quite small compared with Linklaters and so on.”
Julien Leclère, managing partner of CMS DeBacker in Luxembourg, says internationalisation was the draw for Leclère & Walry when the boutique was deciding whether to go ahead with the merger.
“Leclère & Walry had, since March 2008, worked hard to be recognised as a business law boutique offering high quality and personalised services to its clients,” says Leclère. “The alliance with CMS offered us the possibility to interact with more than 50 offices located across several continents. Considering how international the law practice in Luxembourg is, you can easily see the opportunity that integration with CMS represented for a local Luxembourg boutique that had more than 80 per cent of its clients coming from abroad.”
Leclère says that, for CMS DeBacker, the Luxembourg office made sense in conjunction with the firm’s existing Belgian offices.
The firms that were already present in Luxembourg are uniformly positive about the new arrivals, seeing the moves as an indication of confidence in the market.
“We think this is a positive sign, that a number of foreign law firms believe that Luxembourg is a financial centre that has a future,” notes Arendt & Medernach chair Guy Harles. “All of them, of course, are going to advertise Luxembourg and bring new business to Luxembourg. For the incumbents that’s quite a good thing.”
There is, however, a chance that the domestic firms could lose out on the small amount of work that was previously referred to them by international firms.
Oostvogels managing partner Frédéric Feyten says his firm had done work with the latest entrants.
“There’s certainly some drainage towards their own offices now,” he admits. “It’s always the same pond in which people are fishing.”
But Feyten adds that the net effect will be good: “I believe that the more players we get, the more professional the Luxembourg market will become and that will benefit everyone.”
And more firms are likely to arrive, say lawyers. There are rumours that DLA Piper is poised to enter Luxembourg, although the firm itself denies that it is thinking of such a move.
The difficulty for any more newcomers will be recruitment. There are simply not enough lawyers in Luxembourg to meet the needs of the firms there. Luxembourg’s single university does offer a law degree and LLM, but it is more common for firms to look outside the borders when seeking associates.
“It’s always a challenge to find qualified people,” says Clifford Chance Luxembourg managing partner Christian Kremer. “A lot of people come from other jurisdictions who share new ideas, which again is a positive thing.”
Feyten says recruitment has always been difficult in Luxembourg, but it became even tougher during the financial crisis. “Now we see people moving again,” he comments.
Natural locations for Luxembourg firms to recruit from include France, Germany and Belgium. Language is never an issue in multilingual Luxembourg, which shares a civil law tradition with its neighbouring countries.
“Luxembourg corporate law closely resembles Belgian corporate law but it’s not identical,” Feyten explains.
Despite the past and recent influxes of foreign firms into Luxembourg, the domestic practices are unfazed by the competition.
“We don’t feel them as competitors. Most of the new entrants just want to serve one sector of the economy,” Harles points out.
“The market has grown and the market share of each of the firms has grown, but not to the detriment of firms such as ours,” adds Pit Reckinger, head of banking at Elvinger Hoss & Prussen.
Harles is keen to add that the domestic firms are very aware that they cannot rest on their laurels and must keep an eye on what the international firms are doing.
“We’re perfectly aware that with a number of new entrants coming to the market we should be diligent, we mustn’t be arrogant. It really encourages you to stay on top,”
Funds and gains
Luxembourg’s domestic legal market continues to be dominated by two big firms, Arendt and Elvinger, particularly in the area of investment funds (see table, above).
lvinger advises 46 per cent of all Luxembourg-domiciled funds by assets and 33 per cent by volume, while Arendt acts for 27.5 per cent of funds by assets and 35 per cent by volume.
No other firm comes close to these two in funds. Indeed, Elvinger’s investment funds head Jacques Elvinger says he is surprised by the lack of impact made by international firms in this area.
At Clifford Chance, ranked fifth in terms of the number of funds it advises, Kremer is not concerned about the recent departure of three private equity partners from the London office.
“We do, of course, get work from London, but we didn’t get work specifically from these partners,” he says. “The strength of the network certainly goes beyond the strength of the individuals who have left.”
Funds continue to be Luxembourg’s selling point internationally. After a dip in total assets under management (AUM) of funds domiciled in the country in 2008, AUM and fund numbers are back up to record levels.
“One of the biggest success stories of Luxembourg was really its rolling out of the Ucits directive,” explains Allen & Overy (A&O) Luxembourg managing partner Marc Feider.
The Ucits, or Undertakings in Collective Investments in Transferable Securities directive, is the foundation for regulated investment funds across Europe. Luxembourg has always been quick to implement EU directives and was the first country to pass legislation to implement the latest iteration of Ucits, Ucits IV. The directive came into force on 1 July.
Luxembourg’s regulator, often praised for being innovative and user-friendly, has also led the way in other areas of funds regulation. Lawyers are now eyeing the EU’s alternative investment fund managers directive (AIFMD) as being a source of work. The directive will regulate alternative fund managers, including those running hedge funds and private equity funds, for the first time.
“At this stage there’s not much client work but what’s keeping us busy at all levels is how Luxembourg should position itself in anticipation of the AIFMD, which is considered to be a subject that, in our view, will create important and new opportunities for Luxembourg,” says Elvinger.
Harles says fund managers choosing Luxembourg can rest easy in the knowledge that the system works. “A positive thing about Luxembourg has always been its stability,” he explains. “When you set up in Luxembourg you can count on the fact that the rules won’t change in a few months’ time.”
“The Luxembourg government has traditionally and constantly been very proactive and innovative in maintaining the competitiveness of Luxembourg,” says CMS DeBacker’s Leclère. “Thanks to a real and very open dialogue between the people who make the law and those who work with it, the Luxembourg legislation offers a large range of very interesting instruments and features. The favourable tax regime is probably the most visible element abroad but it isn’t the only one.”
The growth of Luxembourg as a financial centre, which in turn has fuelled the development of the legal market, is not only about funds. Most of the large banks are present in the country and Luxembourg holding companies are popular as vehicles for listings in other jurisdictions.
Lawyers identify Poland and the Netherlands as the main jurisdictions for listing Luxembourg companies. Investors come from around the world, but emerging markets are a focus.
Feider explains that A&O has already established Luxembourg desks in Russia and Latin America, and is now planning the imminent launch of a similar initiative in Hong Kong. The desk will be staffed by a Luxembourg-qualified associate who can sell the jurisdiction to clients out in Asia.
“If you don’t know the products how can you sell them?” asks Feider, explaining the firm’s thinking on the desks.
He says the challenge for Luxembourg is to promote itself to investors who might not be aware of what the country can offer.
“I think that generally the investors still need education. They’re not very sophisticated and they’re very cost-conscious,” Feider says.
But he is confident that Asian investors in particular will start to shift to Luxembourg. He points to the fact that the Industrial and Commercial Bank of China has chosen Luxembourg as its European hub as proof of his confidence, as well as signs that Chinese sovereign wealth funds are considering Luxembourg to domicile funds or holding companies.
“Of course they’ll use the British Virgin Islands and Cayman companies, but I think this is changing,” Feider says.
The international nature of Luxembourg’s financial services makes for an interesting variety of work. Reckinger says the insolvencies of Iceland’s banks have kept law firms busy, as Kaupthing, Landsbanki and Glitnir all had Luxembourg subsidiaries and are in liquidation.
A major growth area is IP. A number of law firms are bulking up their IP teams, including Nauta Dutilh. Luxembourg managing partner Josée Weydert reveals the firm has hired two senior associates for the team, who are due to start in September.
“That’s a strategic decision because we can then serve the Benelux from an IP point of view,” says Weydert.
Feider also says IP work in Luxembourg is buoyant, partially as a result of the country’s favourable tax regime for IP rights.
More surprisingly, the domestic firms report a pick-up in real estate work in the past few months. Feyten says Oostvogels’ property team developed “critical mass” during the crisis and continues to do well.
The question now is where Luxembourg, and its growing mass of law firms, goes from here. At the moment its economy and demand for its services are on the rise, and that is likely to encourage more firms to enter the country.
“It’s clear that, in these times of global economic slowdown, the Luxembourg market still represents a real opportunity for growth for some sectors of the legal market,” Leclère says. “Moreover, although many international firms are already present in Luxembourg, there are still quite a few without a presence but with regular and good volumes of business.”
“There’s room for expansion,” believes Stibbe’s Leermakers. “In Luxembourg I don’t think we’ve reached a ceiling quite yet, although it’s always difficult to make such a statement because nobody has a crystal ball.”
Smaller domestic firms may find themselves wanting to merge to compete with the larger players. Harles admits that Arendt and Elvinger share two-thirds of the domestic market and he expects some smaller firms to consolidate.
But the outlook is positive. Lawyers are confident the current buoyant market will continue, given the increasing desire of investors for Luxembourg vehicles.
“I think the market is doing well and the fact that other firms have come to Luxembourg shows that it’s a very important market. We had a very positive year and I’m sure that’s been the case also for others,” says Clifford Chance’s Kremer.