Articles in this report: Reflections on New Zealand; Climate change - more than hot air; The viability of IP; Financial advisors under the spotlight; Duncan Cotterill on international stage (firm profile); Chris Heilbronn Kensington Swan

Reflections on New Zealand

The winds of change have been whipping around New Zealand firms - accompanied by the scent of opportunity

Allowances always have to be made for management hyperbole, but 2007 seems nevertheless to have been another genuinely strong year for New Zealand's leading commercial law firms.

"It was a fantastic year ... We've had revenue growth of around 10%," says Rob Fisher, chairman of Simpson Grierson. "There isn't a single practice area which isn't on budget. It's our third consecutive year of year-on-year growth," says Gary McDiarmid, CEO of Russell McVeagh. And these firms were not alone. Several others, including Mayne Wetherell, Chapman Tripp and Duncan Cotterill, also told ALB that they had experienced record years.

Of course, the credit situation has made the first part of 2008 entirely different from the corresponding period last year, but firms are upbeat about their performance to date. Most firms claimed to be up on last year's figures, with litigation practices particularly busy. At Simpson Grierson, for example, four teams in the litigation practice are working on four major cases each involving claims worth over NZ$2bn in total.

Some firms claimed not to have felt the impact of the credit crisis - claims which were doubted by Laurie Mayne, partner at Mayne Wetherell. "The credit crunch is having a huge effect. Sure, if you've got a litigation practice, your firm will be humming along. But corporate finance is slow and will continue to be slow. Anyone who tells you that they haven't been affected at the top end by the crunch is having a lend of you."

Credit crunch

Top-end deal activity has to a degree dried up in New Zealand. "High-leverage private equity transactions are almost at a complete halt," says Bell Gully chairman Roger Partridge. "This is a trend which started in the latter half of last year. The private equity focus has moved to medium-sized deals under NZ$150m - that's where the activity is."

Firms are nonetheless maintaining a positive outlook, with the general feeling that despite a pronounced hiatus in big-deal flow, there is still plenty of work to go around. And while M&A work is mostly tending towards the medium-size deal level, that does not mean that the odd big deal is not coming through.

There is less cash around generally, and McDiarmid sees a stand-off situation developing. "There are people with money waiting to see what will happen, and on the other side you've got sellers who aren't willing to sell just yet. But there's no doubt that there are some very astute investors out there who are biding their time," he says.

While local private equity continues to be a growing source overall of M&A deals in New Zealand, there is a view that Australian PE funds may become more active in the New Zealand mid-market this year. According to Bryce Davey of Hesketh Henry, this could lead to more competition for mid-market deals in New Zealand. He too is upbeat. "Despite anecdotal evidence that deals in the New Zealand mid-market are being re-priced due to banks reassessing risk, most PE participants still believe there will be some great deals and good deal flow in 2008," he says.

Insolvency

The overall picture for the rest of 2008 is strong, but with a different mix of work. Firms are expecting more insolvency, workout and restructuring-type work.
 "Our insolvency work has tripled over the past year," says Nigel Oliver, partner at Anthony Harper. "We're talking general bad debts, loan recovery, receiverships, restructurings and workouts - but I'd say secured debt recovery and receiverships are the most common."

New Zealand's voluntary administration regime is also relatively new. Only two voluntary administrations have occurred in the country so far, although several have made it to the creditors' vote stage. "We're still in a bit of a 'feeling out' period and I [expect to] see more voluntary administration in the coming months," says Oliver.

Chapman Tripp is another firm that has seen the advantages of having a strong insolvency practice. The firm brought in two new partners in insolvency in 2006 and found that the decision immediately paid dividends.
 
Of course, this is not to suggest that insolvency work is the panacea for law firms looking to shore up revenue. "We don't think there will be huge insolvency or restructuring work at the top end," says Mayne.

"This isn't 1987 - balance sheets are okay in corporate New Zealand. We haven't had the leverage in the stock markets which the Aussies have had. Perhaps there might be a bit of stress in the building industry or the finance industry - or what's left of it - but nothing too dramatic", he adds

Election

A general election is scheduled for later this year, but most firms are nonchalant about the possible impacts on their businesses. There is much less apprehension about the election than in previous years because the current government is a known quantity, and the policies of the opposition, the National Party, are generally perceived to be conducive to business.

"The major parties are more aligned than what they were in the past," says Fisher. "The National Party is more positive on matters like public-private partnerships, but there won't be a great deal of difference either way."

Mayne, however, is more blunt: "The current government has only paid lip service to PPPs. The country is well overdue for a more lateral approach to funding, which is more likely to happen under the National Party," he says.

The government sector generally slows down in the lead-up to an election, which could have an effect on Wellington practices. However, firms were significantly more interested in the macro-economic scene than national politics.

Part of the reason for the bullishness among New Zealand firms is the general expectation that, regardless of the election result, there will be a significant increase in infrastructure investment.

"Whether it's new roads, or investment in green energy to meet renewable energy targets, we're confident that we'll see a lot of work in this area," says Partridge.

Fisher agrees: "New Zealand is in infrastructure catch-up mode. We've already got projects such as grid upgrades for electricity and the Christchurch motorway that are definitely going ahead and not dependent on what's happening in the economy."

China FTA

New Zealand has scored a world-first with its free trade agreement with China. The agreement facilitates the elimination - albeit over an extended period - of tariffs on 96% of New Zealand's current exports to China.

"This is an extremely good deal which has a great effect on a wide number of New Zealand companies doing business in China," says Poole. "We can expect to see more things like joint ventures as overseas companies look to use New Zealand as a base to get into China. It's long consistent with our trade liberalisation policy."

McDiarmid agrees: "This is a massive opportunity. Any crumbs falling off the Chinese economy would amount to boulders in New Zealand." He predicts that exporters might struggle to meet the demand in the huge Chinese market, adding that there would be an increased likelihood of local mergers as a result. He also sees growth opportunity in the public law area and assisting commercial clients in their dealings with government.

Expansion

Firms are lukewarm about the idea of opening new offices in Asia. "If we can't lead in it, then we're not in it," McDiarmid says. "The scope of a New Zealand firm to make an impact in that market is limited - it would be like chiselling on the side." 

Poole is similarly not sold on the idea: "We admire the investment made by the Australian firms going into China, but they've got the benefits of scale and the resource base to do it. Even so, it's a long-term investment. The only way we'd go into China is if it were client-led."

An Australian expansion is also seen to be fraught with difficulty. "I can't really see the benefit of moving there," says Poole. "Both markets are fairly mature and then we have to think of the impact it would have on the Australian firms we have relationships with. Again, the only conceivable situation where we'd consider it is if there was a clear client demand."

One New Zealand firm which has made the move across the Tasman is Duncan Cotterill, which established a Sydney office five years ago. "We didn't have a formal alliance with any of the Sydney firms, so really we didn't have to take the risk of jeopardising that when we moved across," says Janice Fredric, chief executive of the firm. Fredric says that the move has paid dividends: "We've had more referrals from Australian firms now that we're here than we did before we opened the Sydney office, because we have a presence and we've built relationships. We've had other firms referring quite a lot of work to us, mainly because of problems with conflicts."

Overseas brain drain

A stint overseas has long been a rite of passage for New Zealand lawyers (see our salary trends report on page 68 for recent developments). But is the experience as essential to professional development as traditionally assumed?

"Ten years ago, you had to go because the work you did in New Zealand was of a different nature and less sophisticated than that on offer in London," says Poole. "That's no longer the case."

Poole acknowledges that professional development is not the only reason why lawyers travel, and OE will probably continue to be a high priority for young lawyers. The challenge for firms is to ensure that those lawyers return to the same firm when they finish their OE, or retain their relationship with the firm while overseas.

"We work with our lawyers to plan their OE," says Poole. "If they go too early, they might not get the sort of work they're after. We can advise them on when to go and assist with the placements, and we've got reciprocal arrangements with the top firms, so we often get a UK lawyer coming here in return."

In-house perspective

The generally upbeat picture from firms is confirmed by in-house counsel. "It's organic growth and infrastructure investment that's the key area - not M&A," says Ross O'Neill, general counsel at Contact Energy. "We've got over $2bn worth of development projects happening over the next few years, which is considerably more than what we've had in the past few years." O'Neill says that there has been considerable investment in New Zealand energy projects, particularly with the push to move to renewable energy. "We're talking geothermal, hydro and transmission projects, among others." He agrees that the election will not have a major impact on business. "It's a good political environment generally," he says.

The issue of using national firms versus boutique firms is a perennial one, and O'Neill is clear with his preferences: "We have a very wide brief of legal work and we prefer firms that have the suitable depth and breadth - this generally means the larger firms which have more partners and a deeper knowledge base. Boutique firms may be suitable for one-off jobs, but when it comes to the longer-term relationships, we think we get more out of building a consolidated relationship with one or two larger firms."

Go to page: 1 2 3 4 5 6