Law firms apprehensive about private equity investment through ‘Tesco Law’

Research from Sweet & Maxwell shows that, on the back of the Legal Services Act, law firms would be reluctant to take on investment from private equity firms.

Some 77 per cent of those surveyed do not consider private equity investment as 'appropriate' while 88 per cent would not consider listing on the stock exchange (see table below).

The Legal Services Act, which has been dubbed Tesco Law, came into force in January 2012 and now means that law firms can seek external investment, or share ownership, by converting to an Alternative Business Structure (ABS).

Sweet & Maxwell points towards what it describes as a 'chequered' history of stock market listings in the professional services sector, such as those involving accountancy firms Vantis and Numerica, as reasons behind the surveyed reluctance.

What kind of external funding is appropriate for law firms?

	Appropriate	Inappropriate
Private equity investment	23%	77%
Listing on the stock market	12%	88%
Bank lending	85%	15%
Alternative finance, such as asset finance or invoice discounting	50%	50%
Other long-term debt such as bonds	23%	77%

The survey also reveals that, so far, only 20 firms have converted to an ABS while just the one has taken on investment from a private equity firm.

Teri Hawksworth, managing director of Thomson Reuters Sweet & Maxwell, says that some investors think that the high margin but fragmented legal sector is an 'attractive, if unchartered' investment opportunity.

'Private equity investors have been casting an eye over law firms as ripe for investment, because they think the management processes they will bring to the law firm will make them more profitable,' Hawksworth adds.

'However, some partners feel that pressure from shareholders to deliver short-term returns would radically alter the culture at their firms.'

The research, she says, raises the concern that senior managers at law firms fear a situation whereby external investment would disincentivise lawyers by allowing the firm's biggest asset, being the partners, to achieve an easy exit route.

While reluctance has been measured by the survey, the research suggests that there is an increased interest amongst some commercial law firms for external investment.

Some 20 per cent of the commercial firms polled are considering setting up an ABS, suggesting that they may be open to the idea of external investment.