Tony Williams used to be managing partner at Clifford Chance, one of the world’s largest law firms. Now he works with London-based private equity house Lyceum Capital advising on, you guessed it, investment in law firms.
Decades after investment banks became public companies, the legal profession remains a bastion of limited partnerships throughout most of the world. Until now. Spain and South Africa allow outside investors, and Australia has two publicly listed law firms. And the U.K., with its mighty City of London solicitors, is set to join their ranks with a regulatory change scheduled for 2011.
In a good year, a busy law firm can earn profit margins of up to 40 percent before partner dispersals, says Alan Hodgart, a legal consultant at London’s H4 Partners, which specializes in serving law firms.
But hard economic times over the past year have constricted these cash cows, and now money from the market may seem more attractive.
“Traditional firms are facing a firestorm whipped up by the recession, smarter customers and technology,” says Jeremy Hand, managing partner at Lyceum, which has invested in a dozen British professional service companies from health care to vehicle management. “Legal services appeals to us because it’s big and fragmented, with only a few really well-managed firms.” Fleming Family & Partners, the private equity arm of the venerable Scottish investment house Robert Fleming Holdings, has also said it would consider investing in law firms.
A few City law firms at the center of the action admit to being tempted by outsiders’ cash. “There’s potentially great change coming in the legal profession, and we have to be forward-thinking,” says Tim Eyles, managing partner of Taylor Wessing, which boasts more than 750 attorneys across 13 countries. He set up a committee in July to mull changes in the capital structure. Olswang, a 650-strong London firm specializing in technology and media, has also expressed interest.
First movers will use private equity investments of up to £100 million ($159 million) to gobble up competitors or invest in a legal technology revolution, Hodgart predicts. “About 80 percent of what some law offices do could be done by computer,” he notes. Meanwhile, capitalists could consolidate hundreds of High Street wills-and-closings solicitors into far more efficient national legal brands, says Alasdair Douglas, a partner at London-based corporate and commercial law firm Travers Smith and member of a panel studying equity investment for the City of London Law Society. Legal IPOs are not beyond imagination either. Melbourne-based Slater & Gordon, a global pioneer in personal injury law, is trading near its 2007 issue price, an impressive performance for the past two years.
Most of continental Europe and all 50 U.S. states prohibit laypersons from owning legal practices, either by statute or the self-regulating strictures of American bar associations. But whether cash-flush U.K. competitors could operate local offices looks like a murkier issue. New York or Washington lawyers might also agitate for change once they see London colleagues cashing out part of their equity, says Bruce MacEwen, head of Manhattan-based consulting firm Adam Smith, Esq.
“Plenty of senior partners are miffed at essentially putting capital into their firms at zero percent interest and having no exit option,” he says. “Change could come relatively quickly.”
