to flock to Romania. But with the global downturn beginning to have an effect, have they arrived too late?
Romania has certainly made its fair share of headlines in the international legal press over the past 12 months. In the period before and after the country’s EU accession in January 2007, observers of this young but promising legal market confidently predicted that international firms would soon arrive in their droves.
By all accounts the past year has seen them proved right, with the arrival of several high-profile Anglo-Saxon names including Allen & Overy (A&O), DLA Piper, White & Case, as well as Spanish firm Garrigues. At the same time, firms already present in the market – including several large Austrian players – have been investing significantly in their Romanian operations, with unparalleled levels of both internal partner promotions and lateral hiring.
How has Romania managed to elicit such significant investment from incoming international law firms, not to mention those already on the ground, in the midst of a global economic crisis?
The golden years
Being the fastest-growing nation in recent history explains much of the country’s allure. Sectors such as real estate, pharmaceuticals, telecoms and automotive have historically attracted consistently high levels of cross-border investment from foreign companies, and with it their legal advisers.
Catalin Grigorescu, managing partner of four-partner firm bpv Grigorescu, the Romanian member of the bpv Legal Alliance, admits: “The number of foreign law firms entering this market was inevitable. We didn’t yet have the list of international names like our neighbours in Hungary, Poland or the Czech Republic.”
However, Romania’s story is more complicated than a simple legal gold rush. Although the golden years of 2000-2008 saw uninterrupted growth in Romania, with estimated real GDP growth of 8.2 per cent as recently as 2008, the Economist Intelligence Unit among others is forecasting a sharp slowdown in growth for 2009-10, due to the effects of the global economic crisis and a deceleration of domestic demand due to policy tightening.
“The credit crunch started to show its effects much later than in Western Europe and the US,” says Grigorescu. “For some time Romanians thought it wouldn’t hit us here – but it did, and what’s more, very abruptly.”
Ion Nestor, managing partner of Nestor Nestor Diculescu Kingston Petersen (NNDKP), says: “Our firm grew continuously since 1990 and the legal market in general has never experienced stagnation or a decrease in profitability.
Everyone will have to adapt and people aren’t prepared. At the end of 2008 people were still in denial and trying to convince themselves the crisis couldn’t happen to us.”
Yet few Romanian lawyers would now disagree that those golden years are behind them – for the foreseeable future at least. Real estate work has been almost entirely ‘frozen’, agree most, and is unlikely ever to return to previous levels. Firms that have entered the market on the back of real estate and construction work, such as Garrigues, are now “suffering the consequences of a gamble that hasn’t paid off”, as one plain-speaking partner puts it.
Catalin Baiculescu, managing partner of 12-partner, 95-lawyer firm Musat, says: “Project finance is also struggling because since the beginning of this credit crisis everyone is unsure of the value of anything and banks can’t get realistic valuations for collaterals.”
However, he adds optimistically: “Slowly the market will revive and we’ll then gain some more relevant benchmarks in terms of prices.”
The international invasion: why now?
With important sectors such as real estate locked down for the duration of the downturn, local partners in Romania have been left scratching their heads over the number of international players choosing to set up shop in Bucharest now.
“For me it’s a mystery why experienced international players would pick such a bad moment to come here,” says Nestor, adding that pressure from clients was undoubtedly behind many openings.
Many lawyers explain the timing of the latest incursions as due to the bureaucratic nature of large international firms causing an unfortunate time-lag between planning and execution.
“Several of these firms made the decision a number of years ago to enter the Romanian market but their plans have only recently become a reality,” explains Marian Dinu, country managing partner of DLA Piper’s new office in Bucharest and former head of Linklaters’ Romanian practice.
In truth, the law firm traffic in Romania has not been all one way. In the same week that A&O announced it would be setting up in Bucharest, magic circle rival Linklaters – one of the international pioneers in the country – signalled a total retreat from the country. The news was met with considerable surprise in the local market, not least because many smaller firms are direct descendants of the Linklaters Bucharest office and many lawyers received their international standard training there.
“Linklaters undoubtedly raised the bar for quality here,” believes Dinu.
The withdrawal – part of a wider revamp of Linklaters’ Central and Eastern Europe (CEE) regional practice – led most of the partners to take positions in other firms, while the remaining formed a legacy firm named Kinstellar.
Kinstellar – an anagram of Linklaters – began operating under its new brand on 1 November 2008.
At first glance the closure of one of Romania’s longest standing and most prolific international firms, at a time when several international peers were just arriving, makes little sense.
One explanation offered by lawyers in Romania is the diminishing number of large privatisations in the region. Another is the firm’s global strategy decision to focus on fewer clients in fewer key jurisdictions. Others point to the precious equity at the lockstep firm and the resulting lack of opportunities for those aspiring to partnership.
Certainly the limited partnership prospects at international firms is one reason why local firms appear so calm in the face of these latest challenges to their previously comfortable market share. For the time being at least, Romania’s leading local firms seem remarkably resilient to international incursion. A consequence of the late arrival of the international law firms is that, unlike in other CEE jurisdictions, Romanian firms enjoyed an extended period of peace, the time and space to grow and strengthen, and in many respects conquer the domestic legal market. Partnerships in these firms are young and dynamic and there are tremendous opportunities for associates who show partnership potential.
On the other hand, in international firms, say several local managing partners, often the only prospect for partnership is on a salaried, local basis, which young lawyers quickly realise is not true ownership of the firm. In addition, their argument goes, local firms are able to offer a more secure future.
“Many young lawyers here are reluctant to work at international firms – particularly in light of Linklaters retreating – because they can never be sure that the firm will continue to commit to Romania in the long term,” says Musat’s Baiculescu. “Two years ago no one could have imagined that Linklaters would have disappeared from the legal scene by the end of 2008.”
However, this view is not shared by all. “Romanian local firms have grown considerably in recent boom years and will soon be forced to freeze salaries and layoff staff,” retaliates a partner in the Bucharest office of an international firm.
Looking on the bright side
Despite the doom and gloom that has finally cast its shadow over Romania’s economic success story, several sectors still have the potential to provide a steady stream of mandates in 2009. Energy is one such area.
“Renewable energy has been strong over the past 12 months and wind farms have saved a lot of firms from what would otherwise have been a seriously bleak year,” says DLA Piper’s Dinu.
The few firms in Romania, such as NNDKP, with a broad range of strengths – particularly those with litigation expertise – are also hoping that their investments in traditionally less high-profile departments will bear significant fruit in the coming months.
Equally, firms focusing on high-end deals, such as Badea Associatii in association with Clifford Chance, are confident that, although there will be fewer transactions, those that remain will be less commoditised and more legalistic.
“Legal risk will become more important to clients,” says Badea managing partner Daniel Badea. “Until a few months ago the first priority was time of execution, but in today’s climate they are focused on fewer but safer deals.”
Infrastructure improvements could be another source of regular work this year, if the newly appointed government gets behind some significant projects.
“We’ve been severely held up by bureaucracy compared with other Eastern European jurisdictions,” complains one frustrated partner. “If the government had any sense it would actively encourage infrastructure work and PPPs.”
“Everyone’s been hoping for the past 10 years that we would have some real infrastructure work to get our teeth into,” says Baiculescu. “We still hope that the new government, under pressure from the economic crisis, releases the necessary funds into the market and will generally be more active than its predecessors. PPP projects are an obvious next step for Romania but we remain some way behind our neighbouring countries in this regard.”
One issue that continues to impact on firms, international and local alike, and particularly now the economy has slowed, is recruitment. Romania’s young partnerships are facing unprecedented demand for business development expertise.
Yet no one in the management of any firm, foreign or local, has had prior experience of an economic slowdown. The majority of lawyers here have not been exposed to such a competitive market and, argue some, lack the entrepreneurial instinct that their counterparts in more established legal markets have been forced to acquire.
“It’s hard to be a rainmaker in your 20s,” explains Grigorescu. “Clients are sometimes reluctant to give business to lawyers who might be younger than their children.”
Wolf Theiss partner Gabriel Klarsfeld, who joined the firm last August and had previously been with Linklaters, says: “In boomtimes you can create some exceptional lawyers simply because there’s so much work you’re obligated to delegate as much as possible and push them to the limits of what they can do. But, as technically good as they may be, they still lack the overall experience that would allow them to connect with clients in the way they need to.”
Dinu agrees: “A year and a half ago you didn’t actually have to do anything to get clients here. Only now will we really see which lawyers have the skills and experience to bring in business.”