PE quick to utilise live Tesco law

My Home Move, a Smedvig Capital portfolio company, is the first company to gain a licence under the new Alternative Business Structure (ABS) regime. My Home Move is a legal service provider for residential movers.

The regime, part of the UK Legal Services Act 2007 which took effect this week, allows law firms to sell stakes to private equity funds and other outside investors. The law “has the potential to transform the UK’s £23 billion legal market,” said Smedvig in a statement.  

Dubbed the “Tesco law” by some commentators, the act also allows law firms to offer combinations of legal and non-legal services. One result of which will be that lawyers can now offer private equity clients both legal and financial advisory services. 

“This can be a significant development. It might for example lead one of the big four professional services group in the UK to begin offering legal advice alongside their auditing and valuation services,” said one London-based private equity lawyer.  

The legislation may also spur a number of private equity firms to explore greater investment in law firms, according to a source working for a UK-based mid-market private equity firm. “This is especially true for smaller law firms looking to expand. I suspect larger law firms are less likely to cede control.”

Private equity-focused law firm MJ Hudson holds the title of being the first private equity-backed commercial law firm to implement an alternative business structure. MJ Hudson distinguished itself from most in the industry by charging clients based on a percentage of a successful fund or transaction as opposed to billing a private equity house by time. The firm additionally considers investing equity in its clients’ funds and transactions as a way of further aligning its fees with its clients’ returns. 

Once formally converted to the ABS regime, the firm’s backers will have the option of converting their seed loans into equity stakes, said Matthew Hudson, the firm’s founder. 

The firm cannot apply for an ABS license until the Solicitors Regulation Authority (SRA), the regulatory body for solicitors in England and Wales, is approved as a licensing authority. This is expected sometime around January 2012, according to sources. 

Matthew Hudson

However firms supervised by the Council for Licensed Conveyancers, including My Home Move, are now able to receive licenses.    

Hudson said he expects private equity firms considering investment in the legal sphere to concentrate on either smaller niche law firms with attractive growth opportunities or minority stakes in the larger global players. However “most law firms are somewhere in the middle between those two categories”, in effect capping PE’s interest in law firm investments. 

A more significant outcome of the ABS regime may be a change in the way law firms are managed. With external investment, firms “will become more disciplined and be subject to greater corporate governance standards,” said Hudson. This could lead firms to begin retaining earnings for example, instead of distributing all profits to the firm’s partners, he added.