An oft-cited phrase from partners of law firms is that ‘the partners are the guardians of the firm for the next generation of lawyers’.
However, cultural changes and behavioural traits, particularly those of Generation Y and Millennials, has – and is – leading certain professional services firms to consider the appropriateness of their existing corporate and organisational structures, as well as their working environment and culture.
What incentivised lawyers to attain the holy grail of partnership historically is changing and today fewer lawyers are willing to make the sacrifices of previous generations, in part due to changing priorities, but also because of other opportunities available.
These changes, together with factors such as legislation permitting an alternative business structure, have resulted in some firms unwinding their previous partnership models, and adopting different corporate and organisational structures, including benefitting from external investment from a public listing or private equity.
The IPO option
Several law firms have now listed on London’s Main and AIM markets and, interestingly, the market positioning and strategic rationale of each are markedly different.
There are therefore two key questions for the board or partner group of any law firm considering following suit to ask themselves:
1. Why initial public offering (IPO)?
2. What makes us a compelling investment proposition?
While there may be a compelling business case for an IPO, that does not necessarily make it an attractive investment proposition from a fund manager’s perspective.
The existing group of UK-listed law firms each had different motivations for seeking a public listing. To differentiate themselves, any further law firms considering a flotation will likely need to articulate a different strategy, market position or varied investment proposition from the existing peer group in order to entice investors.
Questions regarding ‘why IPO?’ are wide ranging but may include:
– Does an IPO facilitate delivery of the firm’s strategy?
– Reaction of both the partner group and employees?
– Does being listed make the firm a more compelling proposition to work for and enhance its ability to recruit, but also to retain partners and staff?
– Ability to use equity as acquisition currency?
– Ability to raise cash for expansion and/or investment in the business, on an ongoing basis?
As with nearly all companies seeking investment, fund managers will focus on, inter alia, the strength and experience of the management team, historic and projected financial performance, the firm’s growth strategy (organic and M&A) and market dynamics, the nature of revenues, the strength of the balance sheet, and the size and composition of the fundraise (ie growth capital and/or vendor sale).
However, much of the intellectual property (IP) of professional services businesses is their people and those same people are thus fundamental to its future success. Fund managers will therefore want comfort over a range of ‘softer’ elements and this is where the relevant experience of advisers is key. Such factors will include:
The partner group: understanding the level of support for an IPO from the existing partner group (and staff), but equally, the expected evolution of the partner group post IPO, and protections against partners and staff leaving the firm post IPO, particularly if they have sold down a material sum under any vendor placing.
Cultural impact: particularly for the existing partner group given the emergence of external shareholders and a plc board. Cultural risks are more pronounced where the group has significant international operations with different cultures and regulatory regimes.
Execution risk: how much are the partners/owners selling down? Post IPO, are the motivations of the partner group and staff aligned with the new independent investors?
This focus on culture and perceived ‘execution’ risk should not come as a surprise to any senior legal management team, but time spent pre-IPO finessing the optimal structure and rationale for listing will be rewarded.
Other changes to the UK legal marketplace
The UK’s legal marketplace has been subject to rapid change, which shows no sign of abating: increasing prominence of US law firms and the expansion of the Big Four accountancy firms’ legal services practices, international and domestic consolidation, challenger firms and technology (including automated and intelligent learning, and artificial intelligence).
These changes, combined with the aforementioned cultural changes, mean professional services firms need to differentiate themselves, and clearly define their service offering and what they represent, in order to remain relevant to both clients and staff.
To IPO or not to IPO?
If properly structured, and with the right investment proposition, an IPO could be a valuable platform to help deliver the growth strategy of many law and other professional services firms, but it will not be appropriate for all firms.
As noted earlier, the reasons for listing and the growth strategies of each of the law firms who have already floated on the London Stock Exchange are markedly different. This provides scope for further IPOs of law (and other professional services) firms, but they must represent a compelling investment proposition and be able to differentiate themselves from other listed ‘peers’.
Given investor sensitivity to securing the IP of a law firm, ie its people, careful consideration must also be given to the restructuring of a firm and its positioning for IPO. For those who cite ‘the partners are the guardians of the firm for the next generation of lawyers’, if properly structured, there is no reason why an IPO and the senior ‘partner’ group of a plc cannot still fulfil this role.
David Foreman is a director of corporate finance and leads the professional services sector practice at Cantor Fitzgerald Europe.
For more information, please contact:
David Foreman, director of corporate finance, Cantor Fitzgerald Europe
T: 020 7894 7684