Leading London-based international law firms are starting to feel a chill from the world market turmoil that may threaten the industry’s unprecedented profits boom.

Corporate lawyers say the turbulence in the private equity sector is already feeding through to top legal advisers, clouding their otherwise strong starts to the financial year.

The British legal industry’s financial success is founded on the soaring international mergers and acquisitions market, although top firms argue that their expertise in areas such as financial restructuring will make them resilient in tougher economic conditions.

Chris Bown, co-head of the international private equity group at Freshfields Bruckhaus Deringer, one of the “Magic Circle” of leading law firms, said he expected the market problems of the past weeks to have a knock-on effect on the industry.

“We have had a very strong first quarter,” he said. “[But] we do expect September and October – which is probably about as far as the eye can see – to be quite a bit quieter.”

Mr Bown said law firms would be hit in the medium term by companies’ decisions to pull some takeover deals planned for this year. A number of big leveraged finance lenders, he said, had “for the time put a ‘gone fishing’ sign on the front door and suggested people come back later”.

The more difficult environment is a big test for the firms, many of which suffered badly in market turbulence after the turn of the millennium.

Since then, many of the largest firms have restructured, cutting partners and expanding internationally as part of a successful attempt to revive profitability.

All five Magic Circle firms posted rises in profits per equity partner of more than 20 per cent last year, with Allen & Overy doing best of all with 31.1 per cent, according to figures published last month by the newspaper Legal Week. Average partner earnings at each of the Magic Circle firms topped £1m for the first time.

Legal Business magazine reported last week that earnings at the top 100 firms surged an average of 19 per cent last year, although it also warned the era of “phenomenal” law firm growth might be about to end.

Mark Campbell, global head of finance at Clifford Chance, said the firm was expecting the rest of the summer to be quieter after “probably the biggest quarter we have ever had” in May, June and July.

“The position at the moment is that the froth there has disappeared,” he said. “The question is whether that market will return to some semblance of normality in September and October, or whether there will be a longer period of waiting.”

Mr Campbell said the colder merger and acquisition climate was not necessarily wholly bad for law firms, as deals would generate more legal work if they became harder to pull off and more complex.

Traditionally, lawyers do good business in areas such as insolvency and financial restructuring when worsening economic conditions start pushing apparently healthy companies into trouble.

“The good thing for law firms is that as one door closes, another door opens,” Mr Campbell said.

A survey published this week by Deloitte & Touche, the accounting firm, shows the 100 leading law firms still expect to record annual fee income growth of 13 per cent this year, the same as Legal Business recorded last year.

The big question is whether law firms have truly built up strong and varied portfolios of business, as they claim, or whether critics are right to argue that soaring profits stem just as much from unsustainable cost-cutting and rising charges to clients.

Catrin Griffiths, editor of The Lawyer magazine, said the top firms were probably facing leaner times, but added that they were much better equipped than in the past to survive tough market conditions.

“Most of the big firms are well-hedged,” she said. “You might not see stellar growth this year, but it will be surprising to see huge plunges.”

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