As the first UK law firm goes public, Peter Noyce considers whether its competitors will rush to follow Gateley to market.
Gateley’s IPO today values the company at £100m and applying a similar multiple to the top-50 law firms would see partners walking away with millions from such an offering. So could a successful IPO by Gateley start a stampede?
For now, partners at other law firms will be far more interested in where the share price goes after trading starts. They will look at the earnings multiple and start bashing calculators to work out their own firm’s valuation – and of course their potential windfall.
That therefore might make it surprising to see mostly negative comment on Gateley’s IPO, especially given how transparent the firm has been about its ownership and strategic plans. We can all see that it has decent earnings, an overarching roadmap, a full-service offering and international capability. And unlike the accountancy consolidators of the last decade, its growth plan focuses on buying complementary firms that add something to the pot – not just acquisitions for acquisitions’ sake.
Gateley has been brave in opening up to the market, and so has benefited from the corresponding free publicity. Many people will be attracted to a firm that is a dynamic trailblazer, yet comfortable enough in its own skin to withstand the scrutiny of its peers. And it promises stability – with a five-year lock-in, continuity of leadership is almost guaranteed.
However, a more likely cause of negativity comes from what can only be described as custodianship – or the partnership ethos. As equity partners we commit to be custodians of our practice, be it accountancy, legal or any other professional practice. We enjoy (hopefully) high earnings whilst in post, and on exit (again hopefully) expect our own capital back.
Twenty-five per cent of law firms are limited companies, but this tends to be smaller firms and the move was made often for historic tax reasons or where the partner age profile was not considered a problem. Custodianship means that, among larger firms, floating or incorporation can be seen as a step too far.
So if custodianship is the accepted - or rather the abided by - ethos, what message does Gateley’s IPO give to its fixed-equity or salaried partners and other key staff?
This will no doubt have been a big consideration for its management. It will want to keep staff motivated, production high and maintain KPIs. Then there are the external investors to consider. They will want their own return on investment and be hungry for management information showing that results are on track.
And it is precisely this external interference that will put so many law firms off the idea of floating. Despite the attraction of huge financial gain, partners in larger firms still see themselves as its custodians – and this does not sit well with having external stakeholders and being answerable to market comment.
Gateley’s staff can be custodians, participating in its brave new world through share schemes. But custodianship is for the long term and runs deeper than shared ownership. Its share schemes designed to align employee and corporate goals might achieve retention, but that remains to be seen.
As always, the legal market’s perception will be based on hearsay, rumour and any high-profile departures. Other firms may look for signs of disenfranchised talent and try to swoop. Gateley may have first-mover advantage, but it is the threat of publicised talent drain that will have deterred many firms from being the first to act.
Since the advent of alternative business structures, the legal sector has been waiting for the well-capitalised, ultra-efficient force that will disrupt the market for ever. Gateley will not immediately have the national presence that Co-op Legal Services would have secured had the Co-op bought 632 Lloyds branches a few years ago. So most high street firms are safe, for now.
But the larger firms that are Gateley’s competitors will undoubtedly review their own strategies. Their management committee meetings will have an extra agenda point, and possibly a few actions such as:
- See what happens to Gateley;
- Work out what they are worth;
- If this should be discussed at the next full partners’ meeting;
- Re-do SWOT analysis and dust off strategic plan;
- And finally… review LLP agreement for an anti-embarrassment clause, so that if the next generation decides to float we may still get something.
So will a successful Gateley IPO create a stampede? Definitely not. But there will be a few interested parties. My guess would be for Gateley to be the subject of a so-called reverse takeover within five years, when and if a large law firm is satisfied it works and decides to shake off their own custodian principles and join Gateley’s party.
At present, the partners of the now-renamed Gateley Heritage LLP have control, and will continue to be custodians for the five-year lock-in. But after that, diluted ownership will make the plc far more answerable to external parties. The real test of the success of this venture will start on 8 June 2020.
Peter Noyce, head of professional servies at Menzies LLP