RBS: more than £1bn of private equity cash waiting for law firms

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RBS: analysis says legal profession will outperform general economy

There is in excess of £1bn of private equity money available for investment in the legal market, while at least one UK law firm will proceed to a public listing this year, one of the profession’s leading bankers has predicted.

In a report on the shape of the market, James Tsolakis, RBS’s head of legal services, said the bank’s research, including conversations with private equity houses, had uncovered the £1bn figure.

He said that while private equity will initially be targeted at the retail end, “with the benefit of some market experience, we expect momentum to build and we are aware of discussions taking place among some larger firms”.

The experience of Australian law firm Slater & Gordon “provides a useful example of how public equity markets might be accessed by law firms in the UK”, Mr Tsolakis continued.

Although he thought the role of public equity will be limited, “we expect the appetite among investors for the asset class to be strong, and for early issues into the market to be well received”.

Mr Tsolakis also foresaw an acceleration in the rate of consolidation among law firms, identifying three main areas of activity. At the top end firms would merge with US practices to build “critical” cross-border capacity, although the more this occurs, the less it will differentiate them in the market.

In the mid-market there is the opportunity to create “a dominant national firm”, either from the merger of two existing national firms, or one national firm combining with several local or regional firms.

This has the potential to create a leading force in such a fragmented market, Mr Tsolakis said. “The scale of the firm would be of sufficient magnitude to easily leverage its substantial resources so as to extract the synergistic benefits of the merger, leverage existing systems, on-shoring, off-shoring and outsourcing arrangements and structural advantages so as to create the platform for dominance in the UK market.

“Such a position, and the advantages that result, might manifest itself in unique and proprietary pricing models combined with a cost of delivery that is superior to peer-group competitors.”

The third area is small, specialist firms. “The opportunity for like-minded small and independent firms with similar ambitions to scale their businesses looks to be a logical outcome if the potential sacrifice of independence is more than compensated for by the benefits of scale.

“There are many areas of opportunity for this trend to grow, including professional indemnity, insurance, private client, litigation, sector focuses around new technologies and emerging industries such as renewable energy and telecommunications, and all their related requirements such as planning, property, asset financing, intellectual property and taxation.”

Though RBS’s analysis is that the legal profession will outperform the general economy – with the legal market no longer in decline – there will be considerable variations depending on their main areas of practice, especially those affected by continuing economic uncertainty, such as corporate.

Mr Tsolakis argued that firms must be prepared for further restructuring; around 15% of fee-earners and support staff were made redundant after the recession hit in 2008/9, but he said that based on current levels of activity, “we believe that at least a further 5% of fee-earner capacity needs to be removed from the market to achieve the profitability levels the profession formerly enjoyed”.

Nonetheless, Mr Tsolakis concluded that he was “immensely optimistic about the future of the legal profession in the UK” because of clear signs that lawyers are willing to respond to the challenges they currently face.

“I see evidence of firms adopting new visions of their future, goals that respond to the changing environment and initiatives that are crafted to deliver immediate tactical success. Those firms are resolute and clearly articulate, pursue and execute their plans and differentiate themselves against other market participants.

“There is no doubt an early mover advantage in positioning the firm for success. Those firms that challenge convention and think creatively about their business model, are nimble and agile in the execution of their plans, and who quickly organise themselves to deliver superior service, value and results to their clients will enjoy success.”

RBS/NatWest is sponsoring next month’s Legal Futures Conference in London. See here for more details