In our Looking In series, we talk to Partners from outside CEE who are keeping an eye on the region (and often pop up in our deal lists) to learn how they perceive CEE markets and their evolution. For this issue, we sat down with Reed Smith Partner Kevin-Paul Deveau.
CEELM: What was your first interaction with the CEE region?
Deveau: I first touched upon CEE matters in London in 2010, while working at Clifford Chance, which was a relatively dominant law firm in the region at the time. It happened almost by accident, but I think resulted from my willingness to go off the beaten path. In January 2010 I went on secondment to Bucharest and ended up staying for almost three and a half years. Upon my return to London, I continued collaborating with my CEE clients and working on new deals in the region.
From a banking perspective, a lot of work originated from the Austrian banks, which were actively involved in deals across CEE. Deals were coordinated from Vienna under English law. After the eurozone crisis and the monetary crisis in Greece, many banks pulled back from the region, including the Austrian banks (who started doing deals under local law, coordinated by their local branches). This trend was also visible with the Hungarian and Greek banks. But the deal flow from development institutions in the region kept going.
CEELM: What about the current pipeline? What has been keeping you busy in the last 12 months?
Deveau: A lot of focus has been on institutions like the EBRD. There has also been a fair bit of activity in the technology and start-up sectors. The region has become relevant in these areas due to its expertise, technical specialization, and comparative cost base. Also, companies have been innovating, whilst also mimicking best practices from the US, the UK, and other developed markets (producing quick efficiencies and gains).
A lot of developments are more country-specific. While some countries are making headway, Poland stands out for having made the most progress. Private equity managers and alternative credit providers from London and the US are no longer looking at Poland as a developing market, and whilst a lot of private equity and credit used to pass on Polish transactions, that is less frequently the case now. The Czech Republic, Slovakia, and Slovenia are doing well too. Romania and Bulgaria are humming along, although with few blockbuster deals. Greece has managed to stabilize as tourism makes a comeback and there is a significant influx of money into the country. On the opposite side of the spectrum, Turkiye is lagging behind, with significant uncertainty as to whether a new finance minister and central bank governor can lure investors back after tumultuous elections and years of unorthodox monetary and fiscal policies (although the bond markets are showing some signs of life). It will be interesting to see what will happen with Turkiye – it is a big market, and if it can manage a revival, it will have a significant impact on the region.
Overall, the region is doing okay, but it’s not causing a big splash right now.
CEELM: How has London’s role in CEE evolved over time and what is it now?
Deveau: We had Brexit and the financial crisis. Both had an impact on London, generally. In CEE, London played a bigger role prior to those events, and it used to be absolutely indispensable to banking and legal services for the region, alongside secondary cities such as Paris, Frankfurt, and Vienna. That has changed to a degree, but London is still important for the region – not least because of the amount of private equity money managed by the City – but more and more is happening locally in terms of decision-making. Some deals are done under English law, and others are done locally. It’s natural for these sorts of markets, especially given how much local legal and banking markets have matured over the last fifteen years.
That said, there are some deals and some complex products that will likely never be done efficiently in the region. This is in no way an insult to local lawyers – there are excellent practitioners who do astoundingly good transactions and help governments write innovative and complex legislation. They take very complex products and implement them locally. However, there is a collocation efficiency – in London, you still have a lot of specialized teams in one place. There are more bespoke and esoteric deals, and those deals tend to be done under English law. And that expertise will stay in London; it doesn’t need to be located in every jurisdiction.
Look at it this way, international law firms don’t need to be in every jurisdiction. And, for example, Bulgarian law firms don’t need to be the best in some of the highly specialized (and sometimes rare) financial products that are generated in London and other financial centers. I think that the need for specialization in and for referrals to London will continue.
CEELM: What is your perspective on internationals in CEE – how will their presence evolve?
Deveau: I believe it’s incredibly unlikely that we will see an international firm not already present in the region making a bet on CEE this year. We all know there is an M&A slowdown, there is a lot of pressure in the context of the associated wage wars in the US and the UK – now subsiding, but which have put pressure on budgets – to safeguard profitability. And to be cautious. In that context, going into a new jurisdiction is a tough – even brave – decision.
Also, look at it this way. European and Asian legal markets are less lucrative compared to the massive and hugely profitable US market. And CEE is less profitable – on average – than Western Europe. And if you are a US- or London-based law firm and trying to reach into the region, it’s very difficult to make it work without diluting the equity or squeezing the ability of the local lawyers to apply different profitability metrics, absent a booming economy and blockbuster deals (which we don’t have now).
But this isn’t necessarily a bad thing. I’ve seen the negative consequences of the overgrowth of international law firms in CEE. If you have an office of 20 lawyers in CEE, it is likely generating enough profit for one equity partner – usually the founder who managed to bag a merger with an international law firm years ago – who stays around for 20 years. That leaves little room for development within that office for the younger generation. Not everyone will agree with that view, but I have seen it too many times to not mention it.
I do think some international firms have done well in the region, but it requires a specific mentality and flexibility to accept different levels of profits. That is part of the reason why I don’t think anyone new is rushing into the region. Of course, you will see some international law firms (already present in the region) making moves and growing. But those are the exceptions to the rule, and you see a lot of local law firms making inroads, including with regional associations and mergers.
CEELM: What’s your outlook on the situation in Ukraine?
Deveau: We all hope for peace and stability. It has been awful for the region, the country, and all the people affected. Speaking regionally, and looking at its effect on legal markets, the war in Ukraine has caused a lot of disruption. There are still deals happening in Ukraine despite the circumstances, but challenges abound. There is hope that Ukraine will come through and the country will come back to (and exceed) where it was in terms of deal flow and development. But the practical reality is that it has been more than 18 months now, and the war still rages on. I hope we can start hearing some more positive stories from Ukraine before long.
CEELM: Finally, where do you see the most activity in the next 12 months?
Deveau: Poland is approaching an upcoming election, which will likely dampen the appetite for big transactions. So, I don’t expect any significant deal flow at this time, particularly as Poland’s economy and the regional economy soften a bit in line with the slowing European economy. Romania and Bulgaria, as well as the Baltic countries, seem to be making steady progress. Turkiye has seen some life in the bond markets, but deal flow remains very low compared to its healthier years. Turkiye needs the currency to calm down and inflation to come down for a continuous period before investors start placing big bets again. Even then they might hesitate given the tumult in recent years. Some people got burned badly on bets in Turkiye.
The most probable contender for the next 12 months appears to be Greece. The country has experienced a positive year, and it has a relatively stable government that has managed to secure re-election. Despite facing challenges in terms of managing its maturing debt – the cheap money made available during the crisis will need to be refinanced – signs of improvement are visible. The tourism industry has rebounded, and there is a strong focus on and appetite for real estate and tourism investments. I expect it will be a good year for Greece.
This article was originally published in Issue 10.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
