In part 1 of this blog we explored the potential for a Brexit driven boost in demand for legal services. At the same time, steady growth continues in the number of law firms changing their corporate structures, giving themselves the option of taking on outside investment. Conditions appear conducive to a boost in investments into law firms.
Part 2: Demand for outside investment
Demand is real but law firms are proceeding with caution.
In 2012, law firms were granted the regulatory flexibility of setting up an “Alternative Business Structure’ or ABS. This allowed firms to have non-lawyers at manager level as well as non-lawyer investors.
Of the 10,000+ law firms in the UK, to date 540* have set up ABS’s , with take-up spread across large and small firms. ABS registrations continue to show steady growth as 2016 exceeds 2015 by 20% on a year to date basis*. According to research by both the Solicitors Regulatory Authority and the Legal Services Board, about one third of ‘ABS firms’ have or intend to change the way their firm is financed. The LSB survey showed the main focus of lawyers’ intended spend of new external investment as being in technology, delivery channels and marketing followed by developing non-legal services, adding on new legal services and recruiting staff with new skills. Clearly this segment of just under 200 law firms have seen an opportunity to invest in growth and are not continuing on a business-as-usual basis.
How many of the remaining 10,000 law firms will convert to an ABS structure and seek external investment remains to be seen but the trend is favourable.
There are already tangible examples of successful external investments in law firms but not without some problems:
Linking the legal market and investment environments:
Gately also provides an interesting and relevant link back to the ‘Brexit Bonanza’ argument. Being publicly listed, more financial, performance and outlook metrics as well as investor reactions are available. It is however, only a single data point and we flag the caution required in drawing conclusions from Gately data in isolation.
As a national UK focussed, mid-market law firm with a mix of corporate, banking, business services, pension and property work, Gately would be expected to be on the receiving end of a Brexit induced slowdown. The firm, investors and the only analyst covering the firm are sanguine on the point:
The legal services sector could present interesting individual opportunities for investors and consolidators, given the overlap of a very unique set of market conditions with the additional investment flexibility now available to the legal sector.
* Solicitors Regulatory Authority, Aug 2016
** Companies House Filings
*** Gately results presentation July 2016
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The views expressed in this article are those of the author at the date of publication. The contents of this article are not intended as investment advice and will not be updated after publication unless otherwise stated.