When I was a newspaper City hack I always considered private equity to be the reductive apotheosis of late-capitalism (sounds pretentious, but bear with me).
I still do. Private equity firms don’t provide any service; they are pretty much invisible; and their owners do their utmost to remain anonymous (with a few exceptions). How many passengers on your train or bus today could tell you anything at all about Permira, or Blackstone, or CVC? Yet these institutions are in the vanguard of the ‘creative destruction’ described by the economist Joseph Schumpeter.
They are, typically, rootless mountains of (borrowed) cash searching for a return, wherever it can be found. They do not discriminate, yet choose their targets carefully - which sounds like a contradiction in terms but isn’t.
That’s why, paradoxically, I think the legal profession should be grateful to former Dragons’ Den star James Caan. Last week he spelt out the priorities of private equity investors in admirably candid, if brutal terms. Lawyers fetishise ‘service’ and don’t prioritise profit enough; and they need to start firing underperformers who don’t bring in multiples of their earnings.
Lawyers need to understand that as external investors enter the market, profit is not their main priority - it is their only priority.
That’s why the immediate past-president of the American Bar Association, in denouncing alternative business structures recently, highlighted the fact that non-lawyer investment in law firms could compromise the client's best interests and undermine professional independence.
Which is not to agree with him that it will, necessarily. The SRA is determined to prove him wrong. But at least the splendidly named William T (Bill) Robinson III ‘gets’ it. Capitalists want their return, and they want it as quickly as possible, so it’s not difficult to envisage that tensions will arise if an externally funded legal services vehicle isn’t meeting its targets. The unambiguous message then will be: do more work; or do it quicker; or cut your costs (staff). ‘He who has the gold makes the golden rule,’ as Robinson said.
Private equity firms were lambasted as ‘casino capitalists’ only because of their debt-leveraging model and the rate of ‘churn’ they demand. Typically they work to a tight three- to five-year timeline which - going back to Schumpeter - can certainly ‘create’ profits but also has the potential to ‘destruct’ people. And that’s putting it mildly. In the three years after Permira helped take over the AA in 2004, for example, about one-third of the workforce of 10,000 lost their jobs.
Private equity likes flabby companies. A three- to five-year timeline demands a crash diet that can generate staggering short-term returns (and massively enrich the PE partners, of course).
Many solicitors will feel uncomfortable that it is now conceivable to talk about their profession in such terms. But whatever you think of Caan, he is doing no more than introducing them to the real world of business.
Paul Rogerson is Gazette editor-in-chief
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