After the U.K. voted to leave the European Union in 2016 there were big hopes for Germany. Many expected Frankfurt to emerge as a rival financial centre to London and that law firms would be deluged with work from worried financial services companies looking to rejig their European operations.

Brexit was a factor in Covington's decision to open its first outpost in Germany in April 2018, according to Henning Bloss, managing partner of the firm's Frankfurt office.

Fast forward a few years and this has not played out as expected. While banks like Goldman Sachs and JPMorgan have increased staffing levels in Frankfurt and many fund managers have set up new structures to keep them compliant with EU rules, the wave of Brexit-related instructions has yet to materialise and there has been little evidence of law firms prioritising the region.

"The driver for opening the office was that Germany is the fourth largest economy in the world. Another reason was the question of what is going to happen after Brexit," Bloss says. "We didn't do much Brexit work but this will play out over time." He adds however that his office has been busy.

Not only has an expected flood of Brexit-related transactions failed to emerge, Germany's economy is also starting to look shaky. It grew by a sluggish 0.6% last year, its slowest rate since 2013. The trade war between the U.S. and China, as well as coronavirus uncertainty have all played their part in making it harder and more expensive for German manufacturers to sell their goods abroad.

And yet while one might expect this would leave German law firm leaders feeling relatively gloomy about the year ahead, the opposite seems to be true. A slowdown has yet to hit law firms; many racked up record revenues last year. Partners and recruiters report that big ticket litigation and private equity work have been big growth areas and are expected to remain so over the next 12 months.

Private equity

Private equity interest in German companies is one bright spot. Last year, private equity firms spent $37.5bn buying German-based companies, up from $29.9bn in 2018, according to data provider Dealogic. The number of deals remained broadly stable over the past two years but as broader corporate M&A has shrunk in Germany, private equity deals have become a more important part of the transactional mix, making up nearly a quarter of all German M&A last year. Such deals usually make up closer to 10 to 15% of deal activity, according to Dealogic.

Europe's largest-ever private equity deal was inked in Germany in February. Thyssenkrupp agreed to sell its elevator business to private equity groups Advent and Cinven for €17.2 billion ($19.2 billion).

Peter Dieners, regional managing partner of Clifford Chance, puts the rise in private equity activity down to the attractiveness of the market and Brexit woes that are pushing buyout firms to look outside the UK for deals.

He said: "There is a very high appetite for German M&A. It's partly due to the Brexit developments but the German market is still very stable as well. There is a lot of appetite to for the safe environment of healthcare and the German Mittelstand companies."

So much so that Dieners is keen to hire more private equity partners, although competition is fierce.

"It's a hot market and we want to hire three plus partners in Germany but it's very hard to find those partners at the moment."

He said: "It's very difficult when it comes to competition from the US firms who mostly focus on establishing private equity brands. It's a hot market and we want to hire three plus [M&A and private equity] partners in Germany but it's very hard to find those partners at the moment."

Helmut Rogalla, a recruiter at Fox Rodney, agrees that it is difficult to hire private equity partners but points out that it is easier for US firms.

He said: "Everyone wants to hire private equity lawyers, it is still a very hot market. But it's a good time for US firms, the vast majority of candidates would prefer a US firm. Their salaries are high and partners are concerned about Brexit and the effect on the pound."

Latham & Watkins is one such firm that has benefitted from this trend. It is consistently mentioned as having one of the strongest private equity practices in the country, in part because it has been aggressively hiring in recent years.

There are also more exotic deals to be done. Private equity firms are now more interested in taking minority equity stakes, buying up debt in a company or providing private financing – all potential fodder for law firms that have strong funds practices.

Gary Mackney, managing partner of recruitment firm Legalutions, called it a "seismic shift in how lending works, namely that, debt funds and other alternative providers of debt are now very active in Germany."

Dieselgate

Another area that has been busy in Germany has been litigation, which marks a change given the country has traditionally been a fairly conservative market for disputes. It does not have a compensation culture and most companies prefer to resolve matters out of court. But the diesel emissions scandal has been a turning point, marking the first major case where consumers have used a new law to bring collective action against a company and companies like Volkswagen and Daimler have been hit by multi-billion euro fines.

"Even if there are no more dieselgate cases, we still expect that mass litigation will play a role going forward,"

Benjamin Parameswaran, Germany managing partner at DLA Piper, said that working on the case gave a major boost to the firm's revenues in the country last year.

"Litigation is very hot in Europe at the moment. That has had an impact on fee income. We are having the best year ever in terms of our numbers in Germany", he said, adding that the case's impact will be long-lasting.

"We are very aware that dieselgate won't last forever, but we see it as part of a general trend. Even if there are no more dieselgate cases, we still expect that mass litigation will play a role going forward," he said.

"We do not expect associates to do fact finding for more than a few weeks, so we decided to employ part-time project lawyers, which is a bit of a new concept for us."

Freshfields Bruckhaus Deringer has been one of the biggest beneficiaries of the case, representing Volkswagen since 2015. Gleiss Lutz has also been working on the case, advising the Volkswagen supervisory board. Alexander Schwarz, co-managing partner, said firm's revenues rose "significantly" last year and he has even had to hire in extra help to cope with the workload.

"Over the past two to three years this has been the main area of growth for us. The workload is incredibly high. There have been dozens of people working on the core of the case for us," said Schwarz. "Planning in such large cases is a challenge. We do not expect associates to do fact finding for more than a few weeks, so we decided to employ part-time project lawyers, which is a bit of a new concept for us."

Schwarz expects the firm to be working on the core of the case for another year and then smaller spin off cases for another few years.

Restructuring

But the backdrop to all the activity is one of a slowing economy. Legalutions' Mackney is expecting to see more companies forced to restructure because of tough economic conditions.

"Many companies are living quarter to quarter, asking can we flip our financing to get a better deal?", he said. "There is going to be an upsurge in preventative insolvency advisory work and there will more transactional activity on the back of more insolvencies."

"Many companies are living quarter to quarter, asking can we flip our financing to get a better deal?"

The automotive sector, which indirectly employs three million in Germany, is under particular strain. New EU rules that came in to force in January, require carmakers to reduce the carbon emissions of their fleets over the next two years or face billions of euros of fines. It means that companies like Volkswagen, BMW and Daimler are now looking to manufacture more hybrid and electric vehicles, which may leave the thousands of traditional automotive suppliers struggling.

"The German economy is still doing well but it's losing steam."

Thomas Schulz, head of Noerr's London office, agrees that restructurings will be growth area for law firms this year.

He said: "The German economy is still doing well but it's losing steam. I think will see more business restructuring. Some financing may no longer be accessible and there are some industries where it's harder to get financing."

Rogalla of Fox Rodney summed up the mood of many across the market, saying: "Everyone is saying 'when will the financial crisis come back?' But 2019 was very busy for law firms in Germany. So currently clients and lawyers just want to do as much business as possible while it's still possible.