Commercial law firms remain cautious about taking on external shareholders under the Legal Services Act, according to a survey of finance directors at the top 100 law firms by Sweet & Maxwell.
According to Sweet & Maxwell’s research, 77 per cent of law firms polled do not think that private equity investment is an “appropriate” source of funding for a law firm. Similarly, 88 per cent do not consider a stock exchange listing as an “appropriate” form of external funding.
Under new ownership rules, which came into force in January 2012, law firms can seek external investment, or share ownership, by converting to an Alternative Business Structure (ABS).
However, the chequered history of stock market listings in the professional services sector such as accountancy firms Vantis and Numerica and property consultancies such as DTZ and Colliers CRE may be behind the reluctance of some law firms to seek investment.
“Some investors think that the high margin but fragmented legal sector is an attractive, if uncharted, investment opportunity. Private equity investors have been casting an eye over law firms as ripe for investment, because they think that the management processes they will bring to the law firm will make them more profitable,” says Teri Hawksworth, managing director of Thomson Reuters Sweet & Maxwell.
“However, some partners feel that pressure from shareholders to deliver short term returns would radically alter the culture at their firms.
“Law firms have always prided themselves on a client-first approach and investment in their staff, that is not incompatible to delivering shareholder returns but not all lawyers or their FDs would relish constantly explaining that ethos to more impatient shareholders.”
There are also concerns among senior managers at law firms that inviting external investment would disincentivise lawyers by allowing the firm’s biggest asset – the partners – an easy exit route.
“Allowing too many fee-earners to swap part of their stake in the business for cash could disincentivise some. Partners may also be wary of opening their business up to the level of public scrutiny that goes with external investment. That is not to say that external investment will not work – just that lawyers are aware of the downside,” says Hawksworth.
Just 20 firms have converted to an ABS so far, with just one of these taking on investment from a private equity firm.
However, there does appear to be increased interest amongst some commercial law firms for external investment.
Sweet & Maxwell reveal that 20 per cent of the top commercial law firms polled are considering setting up an Alternative Business Structure. This suggests that top law firms may be warming to the idea of external investment.
According to Sweet & Maxwell, nearly one in five (19 per cent) commercial law firms now rate competition as a result of the Legal Services Act to be a high risk to the profitability of their firm, compared to none two years ago.
