UK law firms are increasingly open to private equity as a means of external funding to fund acquisitions and other investments, according to research from accountancy and investment management firm Smith & Williamson.
The firm surveyed a cross-section of firms, including around half of the top 100 UK-based firms, in May and June this year.
It found that 32 percent of the 109 managing partners, finance directors and other senior managers surveyed said that they see private equity as the principal source of external funding in the legal marketplace in the next two to three years. A figure which is likely to increase if firms increasingly look for bolt-on acquisitions, according to Giles Murphy, head of professional practices at Smith & Williamson, who led the research.
Of the law firms surveyed, 43 percent said that they are seeking to acquire or merge in the coming year, in comparison to only 28 respondents last year. The report found that intensified competition, from niche firms in particular, is causing 59 percent of firms to seek targeted acquisitions or mergers to enhance their offering.
“With the current high interest in acquisitions, it’s logical that firms anticipate a growing role for external finance,” said Murphy. “In fact, a third of respondents expect private equity to be an important source of external funding to the sector in the next few years.”
In addition to private equity funding, a quarter of the law firms surveyed believe that high net worth individuals or family offices will also become an important source of external funding in the future.
Private equity investment in law firms was made possible by the Legal Services Act, which was introduced in 2012. Notable investments include: Newcastle-based Knights Solicitors, which became the UK’s first commercial law firm to receive private equity backing after receiving an undisclosed amount from former Dragon’s Den star James Caan’s private equity house Hamilton Bradshaw, in 2012; North of England-focused private equity firm NorthEdge Capital’s £15 million investment into Cheshire-based industrial disease law firm Roberts Jackson in 2014; and the British Growth Fund’s £5 million investment into UK-based consumer-services law firm McMillan Williams for a minority stake in the company last year.
Murphy believes that external investment has the potential to drive change in the profession as investors will inevitably expect a return on their investment, and potentially seek changes in operational style.
“While investment from private equity into the legal profession has been limited to date, due in part to a reticence from law firms to accept perceived working practices imposed by an external investor, the clouds gathering on the economic horizon may lead to firms seeking alternative strategic plans to survive and thrive. I therefore think we could see greater use of external finance in the next few years,” said Murphy.