GPs considering law firms as investment opportunities were dealt a blow on Monday when research revealed that 77 percent of UK law firms do not consider private equity investment as an “appropriate” source of funding.
Private equity investors “have been casting an eye over law firms as ripe for investment, because they think that the management processes they will bring to the law firm will make them more profitable,” said in a statement Teri Hawksworth, managing director of Sweet & Maxwell, a Thomson Reuters unit which conducted the study. However, Hawksworth notes that law firms fear private equity owners would create new incentives on short-term returns, which would run against a “client-first approach”.
But not all law firms agreed with this sentiment. Matthew Hudson, the senior partner of private equity-focused law firm MJ Hudson, said: “I was intrigued to see that the principal objection is that it would open up law firms to short termism. Whereas the reality is that law firms are essentially annual cash flow programmes at the end of their fiscal year, they distribute most of the cash out to partners, and re-start their business afresh,” in an email to PE Manager.
In January ownership rules for law firms were relaxed, leaving them able to seek external investment, or share ownership, by converting the partnership to an Alternative Business Structure (ABS). Some commentators believe the structure could radically transform the UK’s £23 billion ($37 billion; €25 billion) legal market.
It has been described as the “Tesco law” by many, as it 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.
MJ Hudson was the first private equity-backed commercial law firm to implement an ABS, and also distinguished itself from the rest of 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.
Hudson added that a private equity driven portfolio company would look to build EBITDA and annuity streams for steadier cash flow which leads to a far longer term view of the business effectively turning a law firm into a business and that a private equity portfolio company would also aim to build a better balance sheet.