With an increasing number of international firms launching offices in South Africa in the last three years, the law firm landscape is changing rapidly. In this article our Director, Sona Walentin discusses the state of play in the South African legal market and discusses the key considerations for a law firm looking to launch in South Africa.
South Africa has enjoyed a rise in prominence as a legal hub in recent years but has long been a strong market for delivering legal services across sub-Saharan Africa through its historic position as the gateway into the continent.
Compared to European countries, South Africa is a vast country, with a land mass equivalent to Germany, France and the UK combined. Similarly to Germany but in contrast to France and the UK, South Africa has a number of business centres. The core of the corporate/M&A, finance and capital markets activity is concentrated in Johannesburg while Cape Town is developing into a hub for private equity, private wealth and funds work. Durban is a further business centre while Stellenbosch and Pretoria (not least due to their close proximity to Cape Town and Johannesburg respectively) are of lesser importance.
What is drawing international law firms to South Africa?
South Africa for the past two decades after the end of apartheid has enjoyed the role as the largest economy in Africa but in the last 24 months had to give up the lead to Nigeria and most recently has slipped to third place behind Egypt. Despite this, it is still viewed as the hub for all business activities in sub-Saharan Africa and as the most advanced economy on the continent.
The influx of investment into South Africa driven by a wealth of natural resources and the rise in wealth in a growing middle class within the country provide a burgeoning market for major energy and infrastructure projects as well as demand for technology and consumer products.
With the growth potential for many international firms slowing in their home markets in the United States or Western Europe, firms see the African continent and more specifically South Africa as a new opportunity for growth. The advantages seem to outweigh the political uncertainties around upcoming elections, the volatility of the exchange rate or the recent commodities’ slump in the natural resources sector.
So who is the competition in the market?
The South African legal market overall has approx. 2,000 lawyers practising at major commercial firms. 1,400 of these lawyers are practising at one of the five leading domestic firms Bowman Gilfillan, Cliffe Dekker Hofmeyr, Edward Nathan Sonnenbergs (trading now as ENS Africa), Webber Wentzel and Werksmans. This group of firms no longer corresponds to the commonly used term of the “Big5” firms which does not include Werksmans but rather Deneys Reitz who merged with Norton Rose Fulbright in 2011. These five firms clearly dominate the South African legal landscape.
Currently only 500 lawyers practise at international law firms in South Africa of which approximately more than half work for Norton Rose Fulbright and Hogan Lovells, who merged with local firms Deneys Reitz and Routledge Modise respectively.
15 international law firms are currently present in South Africa, 12 of which launched in the last five years with the largest influx having taken place in the last three years. Only White & Case, Norton Rose Fulbright and Fasken Martineau have maintained a presence for a longer period.
So why enter the South African market as an international firm?
While internationalisation and technological development have resulted in the world appearing much smaller than a decade or two ago, clients expanding internationally still expect their lawyers to be there for them on the ground. Historically, work by international law firms across the African continent has been serviced out of Paris and London; however, there is an increasing demand by international clients for legal support on the ground delivering service levels they are used to, combined with an in-depth understanding of the local legal environment. South Africa and in particular Johannesburg with its large international airport lends itself very well as a hub to work across the sub-Saharan region of Africa.
With the increasing wealth within the country, private equity and wealth fund investments are becoming more common. These investors regularly demand more of an all-round advisory service from their lawyers, not only handling the legal side of a transaction but also operating as a commercial advisor who can provide context of the market, the sector, the political and economic environment.
Work on the African continent or on international transactions involving an Africa element can provide a means of diversification within the portfolio of an international law firm. The economies of Southern Africa are developing fast, providing business opportunities for clients and in turn for law firms alike. Also, with strengths in sectors such as natural resources, telecoms and technology, the work in Africa provides many law firms with a counter-balance for cyclical work in their firms’ home markets.
A South African office can operate as a low cost centre for US and European law firms without necessarily being labeled as such. Other common law jurisdictions like India have taken a much more prominent role in providing outsourcing solutions for international firms. With the comparatively low cost base in South Africa, the excellent linguistic skills and legal training of the lawyers and the fact that South Africa practically operates in the same time zone as most of Western Europe, it is surprising that not more firms have already opted for a launch in South Africa.
How best to structure a law firm launch in South Africa?
Roughly half of the international firms present in South African have mergers or similar tie-ups with local firms at their core while the remainder have assembled their offices by initially hiring a launch team from a rival firm or moulding together teams of partners from different firms.
Which route to choose will be determined by the firm’s culture, remuneration model and not least by the availability of suitable target candidates in the domestic market.
The Verein structure, which has been the trend of law firm mergers in recent years, allows for maximum flexibility to adjust remuneration to local market requirements when looking at financials in the domestic market, making it easier to acquire an entire firm/office. However, integration and creating a sense of community are the key challenges for these structures.
The key challenge however will be to find a suitable merger candidate as the target pool is limited: While there have been several referral or formal alliance relationships particularly between UK firms and South African firms (e.g. Linklaters has an alliance with Webber Wentzel and historically DLA Piper had an alliance with Cliffe Dekker Hofmeyr which was terminated as CDH opted against a full merger with DLA Piper) leading South African firms show some reluctance to merge with an international firm based on nervousness around profitability expectations, participation in a global cost base and loss of control. Nonetheless, we expect to see domestic firms consider this option as the market for legal services becomes increasingly competitive.
Firms such as Allen & Overy and Herbert Smith Freehills are expanding globally but quite deliberately are maintaining one global partnership. This model quite naturally favours building an office by hiring individual partners or smaller teams rather than hiring a large and diverse group of practitioners. Markets like South Africa pose significant challenges for this model. Domestic South African work does not achieve profitability levels that are found in New York or London (this even is a challenge for most of the continental European markets) and the currently weak South African Rand only aggravates the issue. Firms have generally chosen one of two work around mechanisms in South Africa for partnership remuneration; either a co-efficient has been introduced which is applied across the entire partner remuneration scheme or an additional status level has been introduced below the global equity partnership which is set according to local profitability parameters. While neither conforms to the “pure doctrine” of one global partnership, it has proven to work well in practice in achieving integration of partners while taking revenue pressure off them on the ground in South Africa.
Why join an international firm as a South African lawyer?
With their great level of profitability, international law firms are able to pay much better than most domestic firms at both partner and associate level. However, whilst money is an important factor in making a move, the long-term advantages of joining an international law firm reach far beyond this.
With the changes taking place in the African business landscape the pressures on the legal market are growing. Domestic firms are currently seeing the effects of pricing pressures and a flow of increasingly commoditised work which is driving down fee income. While domestic and international firms alike are chasing revenue opportunities in growth markets across the African continent, it is the international law firms with their global client relationships who are finding themselves much better positioned to leverage these to their benefit by being able to work for them on a truly international basis and add value to clients’ businesses in a different way. In turn, this allows them to invoice their work in “hard currencies” such as US Dollars or Euros instead of South African Rand and achieve more robust levels of fee income.
For associates the international firm can offer the opportunity to work on larger, cross border transactions where they are part of a team working across multiple offices and jurisdictions which allows them to look beyond their own domestic workplace. This quite naturally will open up more possibilities for career and personal development both within and/or outside the law firm world.
So what does the future hold?
While it is difficult to predict, we believe South Africa will see a number of additional international firms launching in the next couple of years. Firms with a focus on natural resources, projects work but also private equity and funds work in particular clearly should be setting their sights on the market.
For more information on the South African legal market or if you are interested in making a more in the region please contact Sona Walentin.
