Private Equity May Invest in Law Firms
When shopping for law firms, private equity firms may head straight to Tesco. Tesco, one of Britain’s grocery retail giants, has become synonymous with one-stop shopping. Known for its bargains, the ubiquity of its stores, and its relentless advertising campaigns, Tesco seems to have little in common with private equity or law firms. Now, thanks to the British tabloids’ obsession with catchy headlines, “Tesco Law” stands for a set of new regulations that will allow law firms to issue shares to non-lawyer investors, merge with companies, and list shares on the London Stock Exchange. Though these new rules don’t become effective until 2011, Bloomberg reports that several private equity firms have already scouted the market by holding quiet talks with law firms.
Reform of the Legal Profession
The Legal Services Act of 2007 sets the stage for the legal profession in England and Wales to become arguably the most liberal in the world. According to the Ministry of Justice, the government designed the reforms to “encourage more effective competition and [to allow firms] to provide a range of legal services to consumers, increasing access to justice.” The government began rolling out the reforms this past March. By forming “legal disciplinary practices” under the Legal Services Act, law firms can be owned by different types of lawyers and can sell up to a 25% stake to non-lawyers. The only requirement is that the firm continue to limit its business to providing legal services. In the next stage, expected to be implemented in 2011, firms will be allowed to reorganize as alternative business structures, providing them even greater flexibility in raising capital. Once reorganized, law firms will be able to offer shares in their firms to non-lawyers, merge their firms with companies that offer other services, and list their shares on the London Stock Exchange.
So far, according to The Law Society’s Gazette, the legal disciplinary practice option has not attracted many keen investors. But private equity firms don’t seem to have cold feet merely because others have been afraid to dip their toes in the water. Bloomberg reports that small and mid-sized private equity funds may be willing to invest millions of pounds in law firms. Fleming Family & Partners Ltd., Phoenix Equity Partners Ltd. and Lyceum Capital Partners LLP are all said to be considering investments. In interviews with Bloomberg, representatives from private equity firms indicated that they are also evaluating investments in other legal service providers.
Non-lawyer Investors and the Future of the Legal Profession
From initial news reports, it appears that the Legal Services Act will have the greatest influence on mid-sized firms. Law firms that historically have been limited by liquidity constraints will be able to raise capital through equity offerings. With more money on hand to expand their services, entrepreneurial mid-sized firms may acquire greater market shares. As of now, the UK’s prestigious “Magic Circle” firms scoffed at the idea of allowing non-lawyers into the fold, but they may have to reassess their stance once a radically new legal regime has altered the competitive landscape.
It’s tempting to see the changes in England and Wales in the light of whispers about possible changes to the legal profession in India. Currently, foreign lawyers cannot practice in India and foreign law firms cannot open offices there either. Undeterred by resistance, British law firms have been pressing the Indian government for changes to India’s protectionist policies. If India were to loosen restrictions on the practice of law by foreigners, we could witness a Copernican turn in the management of law firms. Companies already outsource routine legal tasks, such as prior art searches in patent applications, to captive or third-party legal process outsourcing companies. Non-lawyer investors in British law firms would be less likely to heed traditional conceptions about the legal profession. It may take a non-lawyer to recognize and take advantage of the cost benefits achievable through vertical integration in the legal industry by consolidating traditional law firms with other legal services providers, including outsourcing companies.
What about the chances of a successful law firm IPO? Unfortunately, the May 2007 initial public offering of Australian class action law firm Slater & Gordon is the only case study we have of a law firm’s stock listing. Slater & Gordon’s stock has declined by around 33% from its high price in September 2007. Yet, Deloitte & Touche notes that Slater & Gordon’s stock price has tracked the overall market and concludes the correlation suggests that the market values law firms just as any other business.
