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.