Lawyers are blind to the benefits of external investment, preferring to cling onto control of their businesses a study by the super regulator into alternative business structures finds.  

Research by the Legal Services Board into investors and some 200 ABSs identifies what it calls ‘cultural’ problems in attracting external investment into the legal profession.

Of the ABSs surveyed, around half had invested in their business since obtaining their licence; another 14% planned to do so. But investors described the legal sector as a 'sleepy' market which still relies heavily on bank lending as a substitute for external capital. The LSB reported it would be a 'concern' if the potential added benefits of external investment are not being realised 'due to issues relating to the overall functioning of the market'.

'The investors we spoke to told us that they see opportunities for investment in the legal services market to improve efficiency, to fund innovation and to increase productivity,' said LSB chief executive Neil Buckley. 'External capital is however not yet used as much in the legal services sector as might have been expected.'

Buckley said there appeared to be few regulatory barriers to investment in the legal services market, with just 6% of ABSs saying red tape was preventing them from accessing finance.

Instead, Buckley added, the key challenges are 'cultural' within the legal profession. 'Lawyers are reluctant to cede control of their businesses, preferring instead to rely on profits and reserves, or bank lending,' he said.

The report concludes that the perception that competition is weak means there is 'little impetus for law firms to take the greater risks (and rewards)' involved with external capital.

In addition to cultural issues, investors were found to be reluctant at times to give funding to the legal sector because of concerns about being able to exit once their investment has matured.

The view was expressed that 'many' law firms do not present financial information in the ways investors expect and/or they have a 'weak grasp' of the value of their businesses. 

Feedback from one workshop held with business owners found investment was associated with 'negative stigma', generated in part by press coverage and high profile negative experiences.