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.
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