‘Corporatised’ law firms which have taken private equity money and streamlined their operations are growing income and profits more quickly than firms that have yet to tap external investment. The global legal industry remains ‘highly fragmented’ and ripe for further consolidation by deal-hungry PE houses.
Those were among the key messages of a panel session at this week’s conference of the International Bar Association on how private equity is reshaping legal business.
‘The UK remains an important case study,’ said Dan Sipple-Asher, a partner at PwC in Washington DC who specialises in M&As. ‘It is ahead of the United States in many respects,' he said.
‘Looking at available data, “corporatised” law firms appear to be growing more quickly on average. Profitability also appears stronger. Not every transaction succeeds. Not every business performs well. But broadly speaking there is evidence suggesting these firms can achieve stronger growth. Part of that comes from scale. Part of that comes from investment. Part of that comes from operational improvements.’
Ian McNamara, head of EMEA at US M&A advisory and investment firm Samson Partners, described law as an ‘enormous’ potential market for private equity.
‘The addressable market is extremely large,’ he told delegates in Copenhagen. ‘There are many firms doing excellent work. However, the market remains dispersed, which creates opportunities for consolidation. Investors also see opportunities for multiple arbitrage [a financial strategy where a company or asset is bought at a lower valuation multiple of earnings and sold later at a higher multiple, generating profit from the difference without making operational improvements]. A smaller firm may be acquired at one valuation. A larger consolidated platform may achieve another.’
McNamara added: ‘Operational efficiency is another attraction. Many businesses are professionally run, others are not. Some organisations are held together with Blu Tack and staples. That’s not unusual in founder-led professional services businesses.’
Sipple-Asher agreed that the legal sector remains widely ‘underprofessionalised’, which enhances its appeal to investors. ‘Profit tends to be distributed to partners - reinvestment often comes second,’ he said. ‘That creates a landscape that private equity believes can be improved. The investment thesis isn’t especially complicated. It typically consists of consolidation, professionalisation, scale and operational improvement.’
He added: ‘We’ve seen similar patterns in accountancy. Investors see potential for similar outcomes in legal services. Whether the outcome is identical remains to be seen.’
Christina Blacklaws, former president of the Law Society of England and Wales, helped to spearhead pioneering UK alternative business structure Co-operative Legal Services. She suggested that the bulk of firms ranked 50-200 by revenue in the UK are actively considering private equity investment.
‘Our liberal regulatory environment [in England and Wales] is an enabler,’ said Blacklaws. ‘There is very little friction for this kind of investment. When I speak to colleagues in other jurisdictions they are often jealous.’
Blacklaws added: ‘We are seeing highly acquisitive PE-backed businesses in the UK. Many are buying small and medium-sized law firms. Succession is becoming a huge challenge. It is increasingly difficult to persuade younger lawyers to invest capital in partnerships. The traditional model is under pressure.
‘Law firms also need to invest in modern systems and technology is expensive.’
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