Axiom Legal Financing Fund facing serious allegations

The Axiom Legal Financing Fund is rapidly becoming engulfed in a storm of controversy.

The Cayman Islands fund  was established to provide finance to a select panel of UK regulated law firms, to enable them to conduct "no win, no fee" litigation cases. As the legal actions were all to be backed by insurance policies, the fund was offering what appeared to be an attractive, low risk, uncorrelated investment opportunity.  And by all accounts there were plenty of investors happy to put their money in to the venture - it is understood that  well over £100 million has been invested in the 3 years that the Fund has been up and running.
However OffshoreAlert has been raising red flags about the probity of the Axiom fund since August, initially because of its links to Tim Schools, an English solicitor who is being investigated by the Solicitors Regulation Authority for alleged misconduct at ATM Solicitors, an English law firm which he sold last year. The allegations made against Mr Schools, which he strenuously denies, include failing to maintain proper books and records, acting recklessly and without integrity.  As there has not yet been a final hearing into Mr Schools conduct by the SRA, it is not known at this stage whether there is any substance to the complaints, but it was enough for a red flag to be raised and for OffshoreAlert to take a closer look at the dealings of the Axiom fund and its Cayman Islands based investment manager, Tangerine Investment Management.  

Mr Schools was a director of Tangerine until his resignation last week in light of the escalating allegations by OffshoreAlert.  

The claims being made by OffshoreAlert against the Fund became more serious when they alleged that all of the loans which have been made have gone to firms which are affiliated to Mr Schools (some of which are heavily indebted) and that the insurance company backing the loans is an unregulated firm currently fighting a fraud case.

Tangerine has strenuously denied any wrongdoing and has confirmed to investors that it has retained KPMG to provide an outside audit of the legal fund’s assets by the end of the month in light of the press stories.

In the meantime, OffshoreAlert have claimed that the Fund has suspended redemptions and ceased accepting new investments whilst the situation is reviewed, a move which will no doubt leave the existing investors nervously awaiting the outcome of the report.

Law Firms and Private Equity - Uneasy bed-fellows?

Thomson Reuters Sweet & Maxwell has published a survey showing that more than three-quarters of finance directors at leading commercial law firms believe private equity investment is inappropriate.

According to their press release, in a survey of directors at 25 of the top 100 firms, 77% were unhappy with law firms attracting capital through private equity investors. And an even greater number - 88% - felt listing on the stock exchange was inappropriate.

Both options are available to law practices under the terms of the Legal Services Act, but as yet there has only been a limited take up of the opportunities.  Parabis was the first firm to have announced backing from private equity investors, with a £200m from Duke Street and Knights then announced an investment by Hamilton Bradshaw, a fund connected with Dragon’s Den star James Caan. But two deals is hardly a flood. TRSM put this lack of deal flow down to a limited interest being shown by law firms and I am sure that is true to an extent – certainly amongst the larger commercial firms which were included in the survey.  However, it seems the caution works both ways, as I am aware that a number of private equity houses have been approached by law firms seeking investment, but who have ill-thought-out and naive proposals.  All too often, there is a poorly articulated explanation of why investment cash is required, and how it will be used to drive growth in the business, rather than simply enabling a bonanza pay-day for the partners who are holding the equity at the time a deal is struck.  It seems to me that firms sometimes look at the issue through the wrong end of the telescope; they see the opportunity to raise some cash and then work backwards to work out where they could use it, instead of first devising a coherent strategy and then considering whether external cash is needed to achieve it.

There are numerous PE houses which are happy to look at opportunities in the sector, but they are all too well aware of the many complications – such as the need to move from an income stripping remuneration model to one which gives both income and capital in the form of shares and the issue of how to attract and motivate up and coming lawyers.  The model is therefore likely to work best in those firms where the usual partner-to-fee-earner ratios are not applicable, or where technology can make a real impact on productivity and service delivery.  For high end commercial firms where clients want and expect partners to focus on their cases, the PE model is probably not ideal.

It seems though that although the commercial law firms have by and large rejected the private equity model for the time being, they are not completely averse to change, with the poll showing that 20% of the leading firms are considering setting up an ABS.

Direct Line to offer legal services

The Direct Line Group will apply for alternative business structure (ABS) status this year in a bid to “improve efficiencies relating to legal expenses”.

The intention is disclosed in the IPO prospectus produced in preparation for the insurance giant’s forthcoming stock market flotation. 

In a masterpiece of impenetrable management-speak, a spokesperson for Direct Line Group said “In light of possible regulatory changes to remove dysfunctionality from the UK motor insurance market, which we support, we’re looking at a variety of options including legal services to ensure we’re able to sustain our competitiveness and continue to offer customers choice, and great value and service.”  So what does that actually mean?  It seems that Direct Line has earned £110 million in solicitor referral fees over the past three and a half years – a valuable revenue source which will cease once the referral fee ban comes in to force in April 2013 as a consequence of civil justice reforms aimed at reducing fraudulent insurance claims.  Not surprisingly, Direct Line is looking at ways of filling the hole, and it seems that having its own legal capability in house may be the answer.  

Quindell announces its second law firm acquisition

Quindell Portfolio has agreed to acquire high-end consumer claims law firm Pinto Potts for around £14m, subject to SRA and FSA consent.

This represents the second acquisition in the space by Quindell, the first being its acquisition of specialist personal injury practice Silverbeck Rymer earlier this year (a deal which is still awaiting SRA approval).

A consideration of £1.5 million will be paid initially by Quindell, with a further £1.5 million in 12 months time, together with 87.5 million shares in AIM listed Quindell (worth just under £11 million at today’s share price), subject to lock-in provisions. This part cash part share offer is a similar structure to that used in the £19.3 million Silverbeck deal, one of the first instances of a legal practice being acquired by a quoted plc. 

 Pinto Potts has warranted a profit after tax of £2m and operating cash flow of £1.5m for the 12-and-a-half month period ending 31 August 2013.

At the same time, a partnering agreement has also been confirmed which will see Quindell, Pinto Potts and Silverbeck provide a joint-outsourcing offering to the UK insurance claims market, primarily in the areas of personal injury and also other consumer related services including wills, probate, and conveyancing.

Whilst these deals are not huge in financial terms, they are of interest to the wider legal community because, being acquisitions by a listed company, they provide a far greater insight into the financial aspects of the transaction that is normally the case.  In a market where the valuation methodology for law firms is still very immature, these transactions give some interesting benchmark data.