Regular readers will have to forgive two columns in one issue on capitalising law firms but the day I write this piece DWF has finally set out its stall for that much-touted public float. As can be gleaned from last autumn’s cover feature on law firm IPOs, there is a considerable scepticism regarding the rhetoric surrounding DWF’s planned float, which, if it goes ahead, would be on the main market.
Despite initial talk of £1bn valuations, even the more modest £400m-£600m range some were circulating is seen as a huge stretch by a number of the advisers that have worked in this area.
The reasons for caution are obvious: DWF has a high equity partner/fee-earner leverage, low margins for a top 50 practice, high debt levels for a law firm and, until recently, was demonstrating pedestrian levels of organic expansion in its core UK business. After all, it’s not as if two of its core markets – insurance and employment – are high-growth or high margin areas. While growth has apparently picked up in the last two years alongside a sustained international push, a sizeable chunk of this appears to be through bolt-ons rather than a buzzing underlying business.
And, as predicted, DWF’s float will require partners to give up a huge chunk of cheese to increase the core corporate profit pool – 60% in the case of equity partners, an eye-watering amount, even if it should come back via dividends and bonus schemes. It’s just as well partners are agreeing to a five-year lock-in because that’s a lot of capital to put at risk.
DWF’s float will require partners to give up a huge chunk of cheese to increase the core corporate profit pool.
Moreover, many legal veterans are yet to be convinced by DWF’s sledge-hammer subtle attempts to replicate the DLA Piper phenomena without the benefits of DLA’s quality mid-market finance/disputes spine. This is not the flux of the 1990s and early 2000s, when the legal pecking order was in constant churn – repeating the Knowles glory days is a huge ask even with Sir Nigel now working at DWF.
Then there is the wider debate of how well public floats fit the model of law firms. In many cases the answer appears to be: ‘not very well’, with the exception of firms focused on volume work and the building of new law business models (which, to be fair, sounds like DWF).
While it is easy to see the case for fresh means of generating capital, at first glance retaining some profits (see Pritchard), securitising income on volume businesses, or floating New Law arms in which partners retain an equity stake appear more viable options for many major firms.
Nevertheless, DWF’s float will be a significant moment for the legal industry, attracting attention far beyond these shores. If nothing else, DWF must be saluted for daring to put its convictions to the test. In a profession that currently does a far better job of talking up its fresh-thinking than delivering real innovation, that must carry some weight and will alone garner much free publicity.
But as the long-term legacy of Knowles’ career increasingly demonstrates, as valuable as style can be, it has to be consistently kept in balance with substance. And that balance DWF has yet to establish.
For more on DWF’s float, see No free lunch – Will law firm IPOs be the next big thing?