Client turned shareholder

The UK’s Legal Services Bill could pave the way for private equity investments in law firms. By Andy Thomson.

Through their deal advisory and fund formation functions, law firms are well used to working closely with private equity firms. In the UK, at least, relationships between the two parties may be about to become a lot closer still as a result of a new piece of legislation.

Alasdair Robinson, director and head of transactions, Noble & Co

Details of the Legal Services Bill announced at the end of May revealed that, for the first time, firms from outside the legal profession will be allowed to own or acquire stakes in UK law firms. Rolling out the welcome mat to external shareholders will bring the legal profession into line with other comparable professions, such as accounting and architecture, where external ownership is now common and a number of such firms are quoted on the London Stock Exchange.

Observers say strong interest in the legal sector can be expected from GPs. “Law firms are generally doing well – their high fee income and profit levels make them an attractive proposition,” says Alasdair Robinson, director and head of the transactions team at Edinburgh-based financial adviser Noble & Co. “They are also more recession-proof than most businesses,” he adds.

From law firms’ perspective, there are also strong potential benefits of teaming with private equity backers. One is access to capital, enabling firms to grow domestically and overseas, perhaps through acquisitions or opening satellite offices. Robinson says this demand is most likely to come from mid-tier firms, as the larger players “have generally got enough capital to satisfy their expansion plans”. Another possible motivation for deals is partners looking to realise some of their equity.

Perhaps the biggest obstacle to such deals is the need to face up to cultural change. At present, UK law firms are almost invariably structured as partnerships, with the board comprised exclusively of the firm’s partners. There is understood to be keen scrutiny of the implications of having to accommodate external shareholders – including the possibility of switching from a partnership to a corporate structure. Robinson said private equity investors might be prepared to compromise by retaining a board of partners, albeit with a more typical management board sitting on top.

The Bill comes into force early next year, at which point Robinson expects the first private equity deals in the UK legal sector to emerge from the pipeline. At which point, some of the legal profession’s most prized clients might also become its most demanding shareholders.

This feature first appeared in the July issue of Private Equity Manager.