‘Who would possibly invest in a law firm?’ asks one leader this month, reflecting a common view. Yet the current vogue for floating law firms suggests momentum is indeed building, more than a decade after the introduction of the Legal Services Act.
In recent weeks, DWF has turned heads with talk of a £1bn float this year. While the price – not officially attributed to the firm – looks fanciful, even a standard £400m-£600m valuation would be by some way the largest legal float yet seen. The last 12 months have seen a series of offerings, with Knights in June raising £50m and others recently braving the market, including Rosenblatt, Gordon Dadds and Keystone Law. And while larger commercial law firms publicly play down the prospects of raising outside capital, there is no doubt it is now getting more active consideration.
Yet for institutional lawyers, the basic tension in attracting outside shareholders remains. Large law firms generate plenty of capital and have the advantage of an owner/manager structure that closely aligns to the business’ needs and interests. It has never been that clear how the very different incentives of outside investors can be aligned with partners, beyond giving a payout to older partners, a poor outcome for the business as a going concern. Law firms are built on ‘elevator assets’, partners bred to expect huge autonomy make a lousy bet for outside shareholders.
Some counter that equity investors are sophisticated and can see value, but that observation flies in the face of the changes in the fund management industry for the last 25 years, that has seen the rise of closet index trackers and traders over value investors. I have heard a number of pitches from the investment community on why law firms should tap outside capital and not been impressed by the rationale or even their understanding of the legal industry.
But there is a but and it is a big one. Institutional legal services have historically been people businesses, but it is inevitable that technology and automation will turn more of that personal service into process, and a scalable one at that. That fundamentally changes the attraction for investors and the motive to bring in outside capital. Yes, it is still debatable if an IPO is the answer. A model where a law firm retained more capital and positioned New Law businesses as arm’s-length ventures that raised their own debt looks a more practical intermediate step if, say, an Allen & Overy wanted to scale up its alternative legal services. But another major caveat to such caution is that legal services outside conventional partnerships look far more compelling investments. Gateley floating sends ripples through the industry – the wave that will be felt by all would be Axiom finally going public in multibillion-dollar style.
For now it is hard to see credible reasons partners at most large law firms would want an outside shareholder, but the pressure to keep repositioning law firms will only build. Many firms will thrive in future by building large, high-growth New Law brands alongside conventional partnerships and capital structures will have to evolve to accommodate that. The best way to make yourself a prime candidate for investors is to not need the money at all.