Wednesday 10 July 2019
July’s MTT meeting, hosted by Lewis Silkin, was a presentation on external investment in the legal sector by John Llewellyn-Lloyd, director and head of professional services at Arden Partners, a specialist investment bank that advises professional services firms on fundraising and mergers and acquisitions (M&A). Llewellyn-Lloyd has advised law firms on alternative business structures (ABSs) and initial public offerings (IPOs).
Llewellyn-Lloyd observed that law firms have, by and large, retained the partnership model. But times are changing, and more firms are raising external capital. Gateley listed on Aim in 2015 at a value of £100m, raising £30m. This was followed in 2017 by Gordon Dadds and Keystone Law, and in 2018 by Rosenblatt Solicitors and Knights Law. 2019 saw the first international IPO in the legal sector, when DWF listed on the London Stock Exchange at a value of £366m, raising £95m or 26% of DWF’s issued share capital.
Llewellyn-Lloyd identified four major investment trends and opportunities:
External capital is the new competitive tool – Gordon Dadds could not have acquired Ince if it hadn’t been able to raise external capital. And law firms with external ownership need professional managers who survive or fall according to how the business performs, not how much PEP they can get to the partners.
Nearly £1bn of equity has been raised in the London markets by the legal services sectors. That competitive tool will be applied against the rest of the market. Llewellyn-Lloyd reckons that that could double in the next couple of years.
Llewellyn-Lloyd pointed out that all the legal IPOs have been successful achieving significant gains in share price and value year on year. It is unusual to see this in any single sector and it explains the enthusiasm among investors.
A broader diversification of the legal model is also driving a shift towards hybrid legal solutions. Llewellyn-Lloyd presented Allen & Overy’s technology-centric business model that uses business processes to provide legal advice, legal consulting, online services, managed legal services, document review and contract lawyers and pointed out its similarities to ASLBs and listed law firms.
However, A&O has invested in high-calibre management and the latest technology. For most consensual (partnership) firms, tech is a challenge because their key decision-makers do not understand it, so they would need to recruit top technology expertise. Another challenge is convincing equity partners to start on that journey.
Llewellyn-Lloyd offered guidance on the key messages that external investors are looking for: the qualities they seek in a listed legal entity. In a nutshell, firms need to start becoming more corporate before they consider listing, and this means adopting commercial processes.
Law firms’ biggest challenge is the pace of change. Listed firms are geared up to cope with change, while mid-market partnerships need to take critical management decisions or risk being left behind. Professional management capabilities and buy-in from external and internal shareholders are key in a market where clients have more choice and firms face more and different competition. Llewellyn-Lloyd predicts massive consolidation in the middle markets due to too many ‘me too’ offerings and the opportunity to make efficiency gains. He believes that any firm with a turnover of below £250m that doesn’t offer niche expertise or serve a particular geographic area is under threat. The presentation was followed by questions from the floor.