In the second and final part of this interview, Neil Rose talks to Will Evans, who leads the professional services team at Arrowpoint Advisory, the mid-market advisory arm of Rothschild & Co, about the next steps for private equity investment in the law. The first part is here
City of London: A step too far for private equity?
For investors, “the buy-and-build thesis is very compelling” as scale “drives a lot of good things in these businesses”. But the real opportunity, to be cynical, is the “valuation arbitrage opportunity” to buy lots of small law firms cheaply and build a platform that is worth far more than the sum of its parts.
“Lawfront are doing this better than anyone and that’s exactly their thesis,” Mr Evans says. At the same time, the lawyers would not be selling up if it was not a good deal for them.
Lawfront has the first-mover advantage and Mr Evans predicts that plenty more will follow; there has already been Adeptio, launched last October.
The opportunity for law firms is to become the foundational platform for these new operations, and the danger is missing out altogether and being left behind, maybe then becoming a bolt-on to an established platform.
He reckons the market is big enough for another five to 10 platforms to follow the Lawfront formula and all do well, while more buyers will push the price up for desirable law firms.
A difference between law and accounting is branding and integration: while a lot of the accounting firms have integrated under one brand, making their offering look more seamless, the house of brands approach of Lawfront and others might be better suited to the legal market.
“It’s very hard to get partners who have started a law firm to shake off the name above the door because of the egos involved.”
If you keep businesses standalone and just try to centralise some of the infrastructure, it is easier to attract bolt-ons than saying you want to bring them in under a single brand, perhaps a new building, and change how they work.
“Maybe that creates a more valuable business at the end of the day, but it’s harder for you to attract the right targets,” Mr Evans says. “So there’s a toss-up between trying to build a cohesive business and actually the scalability of the whole thing.”
Listed firm Knights is the flag-bearer for the single brand, ‘do it our way’ business, and has completed more acquisitions than anyone else in the last seven years by far.
Mr Evans says more people might leave under this model as their firms are acquired, but it’s worked for Knights. “And if you budget for that and you factor it in, and you pay the right price, then it’s not an issue. There’s going to be a space for all different strategies.”
The idea of a publicly recognisable law firm brand remains relatively new – the likes of QualitySolicitors and Slater & Gordon tried to build one in the early 2010s but nobody has cracked it.
How important is this? If you are trying to serve a UK-wide client with from different offices around the country, but each is under a different brand, “the client perception is that you’re not one firm”, Mr Evans says. But the platforms will show a least a degree of integration, as Lawfront does – eg ‘Nelsons, part of Lawfront’.
He questions whether ultimately clients will care if networks can show consistent levels of quality and service.
Notably, the firms that have been bought up so far for these platforms are not large partnerships – will we see a firm with 50 or 100 partners? “There’s a lot of them talking about it,” Mr Evans says. “I am not aware of one that’s about to happen but I’d be shocked if in the next 12 to 24 months one doesn’t.”
Specialist firms are a harder sell – the volatility of the property market over the past five years, for example, has “demonstrated the flaws of the conveyancing market from an investor perspective”, while family is a “zero growth market” where Stowe Family Law, sold on by its PE investor to Investcorp last year, had to show how it had built a market-leading proposition and was able “to eat up market share”.
At the same time, Mr Evans says there has been a lot of excitement about intellectual property (IP). “There’s obviously a lot of spend on IP because of how much technology and innovation is going on globally. Lots of the clients are often very big and blue chip and protecting their IP is increasingly critical and international.
“And also the IP market has better quality of earnings, which is underpinned by the fact you need ongoing management of the IP.”
Mr Evans sees value in fee-share model law firms, pointing to Keystone Law as the stand-out success of listed firms and others that have attracted investment, like Setfords.
Investors see these platforms as scalable and as having a lot of supply side demand, with lawyers turning their back on the City and wanting to work in a more independent way. The biggest challenge for this market is differentiation, he adds.
“There’s an unprecedented number of investors looking at legal services and they’re all trying to work out which of these strategies is going to win,” he says. “And they’re all forming very different conclusions because they’ve all got their pros and cons. It’ll be interesting to see which wins out.”
But while Mr Evans expects a further uptick in activity in the coming year, will City law firms ever join the party? “They’ll look with intrigue at what’s happening in the regional market but it’s a far more challenging transaction to get partner buy-in for.”
The thesis for a London firm is more around internationalisation because of the nature of the client base and so “you’re probably more likely to see them continue to merge with international firms as opposed to take investment”, he continues.
“The other thing that is that bigger law firms are now able to do is to access debt. Banks are slightly more open to lending to professional services and LLPs in particular, which is allowing them to make the tech investment that they need to stay ahead. And the bigger you are, the easier you can do that. So I don’t think anything will happen imminently at the larger end of the market.”
But then most people who saw the regional roll-up in accounting firms start five years ago would had said the same, he notes. Last year, PE firm Cinven took a majority stake in Grant Thornton UK, the sixth largest firm in the country with over 240 partners and more than 5,500 employees.
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