Big Law leaders facing an uncertain year ahead will be keeping a close eye on key practice areas to determine whether they can deliver profit increases or will be forced to cut costs.
Capital markets and M&A, practices that fueled record returns in 2021, were among those that slowed the most this year. Whether they rebound—and an expected surge in litigation and bankruptcy work pans out—is likely to determine major firms’ fortunes in 2023.
Here’s what it will take for four pivotal practice groups to recover next year.
Litigation work has been widely expected to come roaring back after pandemic court closures created growing case backlogs. The surge doesn’t appear to have happened.
A study of federal courts showed that two years after the pandemic, there were fewer pending civil cases on the dockets than would have been expected based just on pre-Covid trends. That was mainly because 6% fewer civil cases were filed during the first two years of the pandemic.
Litigation practices saw a slight dip—down 0.4%—in demand through three quarters of 2022, according to Thomson Reuters’ Peer Monitor.
The most successful litigation practices in 2023 may be be those geared toward taking major cases to trial.
There are still plenty of high-profile cases pending, said Jason Peltz, managing partner of litigation boutique Bartlit Beck. They’ve just progressed more slowly toward trial because of the pandemic, he said.
The firm is coming off its busiest-ever year in terms of the number of cases it tried—12. Its lawyers spent 144 days on trial in 2022. The firm had been handling major cases for Pratt & Whitney, which won a defense verdict over claims it caused a cancer cluster in Florida, and for Walgreens in long-running opioids litigation.
“High-stakes cases are less likely to resolve until reaching the courtroom steps or the courtroom itself,” Peltz said. “They are a lot less likely to go away absent that trial pressure.”
His firm has 17 trials already scheduled for 2023, which is roughly where it stood a year ago.
Restructuring has been among the worst-performing Big Law practice areas for the past two years.
Demand plummeted nearly 11% through three quarters in 2022 from the prior year, according to Thomson Reuters data. The decline followed a down year in 2021 after the pandemic pushed companies into bankruptcy at a record pace a year earlier.
Courts saw 244 Chapter 11 filings by companies with more than $50 million in liabilities two years ago, according to data compiled by Bloomberg. The total fell to 121 in 2021 and was down to 94 in 2022, through early December.
The typically counter-cyclical practice could swing back into high gear this year. A looming recession threatens corporate balance sheets, and higher interest rates could make it more difficult to obtain financing.
Kirkland & Ellis restructuring partner Joshua Sussberg said he’s seen renewed restructuring activity since June. Sussberg anticipates companies will struggle with high debt burdens as interest rates continue to rise.
“This could be several years of major restructuring activity across many, many different types of industries and types of companies,” he said.
Fallout from the crypto crash has already led to a flurry of legal fees.
Kirkland has led the way on that front, representing three of the four major crypto exchanges that have filed for bankruptcy so far. The firm billed nearly $25 million on two of those cases in just three months. Sullivan & Cromwell earned a $12 million retainer for its work representing FTX Ltd. in its filing. Paul Hastings is poised for a haul as lead lawyers for FTX’s nine-member creditors committee.
Plenty of other firms are also working on those cases—including McDermott Will & Emery and Quinn Emanuel. The crypto crash alone will bring in work for restructuring practices, but a recession would bring back to life a practice that’s been floundering in recent years.
Some may (or may not) remember 2013 as the year the term “selfie” was invented. It’s also the last time we’ve seen global M&A activity consistently as low as it’s been during the second half of 2022.
There was $704 billion worth of global deals in the third quarter. That’s a low seen only once since 2013, in the lockdown-influenced second quarter of 2020. The decline in large-cap M&A helped shift the competitive landscape, as smaller law firms outperformed their larger competitors.
A Citi Private Bank survey showed 69% of the top 50 firms saw an overall drop in demand through the first nine months of this year, but most firms in each other segment reported demand growth.
M&A practices saw demand decline nearly 14% through three quarters compared to the prior year, Thomson Reuters said.
Dealmaking has faced headwinds like high inflation, the war in Ukraine, fears of a recession, and the US Federal Reserve’s rate-hiking regime, said Sonia Nijjar, a Palo Alto-based M&A partner at Skadden.
Those factors remain in place as the calendar turns to 2023. But Nijjar said there’s still interest in doing deals, propelled by technological disruption, strategic plays for carveouts and spinoffs, an increase in distressed sellers, and private equity firms holding significant dry powder.
“Right now we have clients working on all types of transactions, including strategic transactions, private equity deals, minority investments, and carveouts,” Nijjar said. “You still have those strategic drivers of M&A in place.”
No one is projecting a return to last year’s record-breaking activity. Still, Nijjar expects dealmaking will eventually return to a more normal, pre-2021 pace.
“It’s certainly a different environment, and we’re having a much different conversation today than we did a year ago,” she said. “But I do think we are optimistic about the amount of M&A we could see for 2023.”
Perhaps no Big Law product line saw as big of a dropoff in 2022 as capital markets. The end of blank-check mania and one of the worst-performing stock markets in years saw initial public offerings enter a deep freeze for much of the year.
New issues raised $2.7 billion in New York in the third quarter, the lightest third quarter since 2008, Bloomberg reported, excluding special purpose acquisition companies. Through three quarters, US IPOs had raised $130 billion during an historic run less than a year ago.
The IPO levels compare poorly to just about every year since 2008. New IPO filings were coming in at a drip—at levels last seen in 2009, according to data compiled by Bloomberg.
For lawyers, that’s meant a huge gap in IPO fees: Firms raked in about $575 million less this year than in 2021, according to a Bloomberg Law analysis.
“The million dollar question is: What does it take to thaw out the equity capital markets and IPO markets?” said Ian Schuman, global chair of Latham & Watkins’ capital markets practice. “I really think it’s inflation.”
If inflation starts to come in below economists’ expectations, Schuman said investors and companies looking to go public will have better visibility into the Fed’s plans for interest rate hikes. That should introduce some calm into equity markets, smoothing the waters for new companies to issue public shares.
Secondary share sales are one metric to watch that could presage an IPO resurgence, Schuman said. If investors are willing to put money to work as valuations decline, it will be a good sign that the IPO market is ready bounce back, he said. But that’s unlikely to happen in the early part of next year.
“I’m optimistic for the second half,” Schuman said. ”There are a lot of companies that continue to be interested in preparing for a possible IPO or public capital raise. Fingers crossed, things will stabilize for the market to open up.”