This article was first written for and featured in Private Equity Manager
For centuries the UK legal market has been subject to closed shop type restrictions preventing non-lawyer ownership of law firms. Indeed ownership restrictions apply in most international markets.
However the principal legal sector regulator in the UK, the Solicitors Regulation Authority, has from the beginning of 2012 been accepting applications for change of ownership of UK law firms. Private equity investors have been exploring the sector for some time with a number of deals being submitted for approval as soon as the regulator was accepting applications.
Leading the way on the private equity front is Duke Street which is set to acquire a majority stake in Parabis Group. Parabis provides personal injury litigation services through law firms Plexus Law and Cogent Law. Parabis is not a traditional law firm in the sense that the group offers non-legal services. This might make it more attractive to investors used to following a buy and build model. The deal will give Parabis a war chest of around £50 million to fund acquisitions with up to five acquisitions being planned for 2012. The ongoing funding will be from a syndicate of banks. The planned acquisitions include law firms aimed at the insurance market so further activity in this part of the market should be expected.
Anticipation of market disruption under the new regime has resulted in small firms considering new approaches in line with a network model, of which Quality Solicitors is currently the most high profile. Palamon Capital has acquired a majority stake in Quality Solicitors for a sum reported to be upwards of £10 million. This investment, which would have been permitted under the old rules, is a product of the need of law firms to respond to the threat of new entrants in the market. This will continue to create investment opportunities.
Firms who have recently confirmed their continuing interest in the legal sector include Smedvig Capital and Sovereign Capital. There is more enthusiasm for volume based businesses, such as conveyancing or personal injury firms. Smedvig became the first private equity owner of a law firm, Premier Property Lawyers, the UK’s biggest conveyancing business, through its investment in MyHomeMove which is regulated by the Council of Licensed Conveyancers.
Opportunities for investment will continue to arise in the personal injury arena. An important part of law firms personal injury business is the referral fee. Firms can pay a referral fee for the allocation to them of a personal injury case. The current intention of the government is to introduce a ban on the payment of referral fees for personal injury cases in April 2013. Claims management companies can derive significant income from referral fees and acquiring an interest in the law firm would be one way to compensate for the loss of those fees.
The new regime means a trade sale or IPO would be routes available to an investor looking to exit. No major UK law firm has as yet committed itself to listing on a public market. Trade sales of law firms to other law firms, including a premium payment for goodwill, have been part of the legal sector for some time and we have advised on a number of these transactions. Among the first deals to be announced in 2012 were the acquisitions by Slater & Gordon of UK law firm Russell Jones & Walker for £53 millon and by UK listed company Quindell Portfolio of law firm Silverbeck Rymer at a value of £19 million.
After the first wave of announcements, Hamilton Bradshaw Private Equity, to general market surprise, announced an agreement to invest in commercial law firm Knights. Many commentators had predicted that investor appetite would be only for law firms doing high volume consumer business.
As at July 2012, all the deals referred to above, with the exception of Smedvig’s interest in MyHomeMove and the Salter & Gordon deal, were subject to the approval of the Solicitors Regulation Authority. Approvals are expected to be announced imminently. At the moment the relaxation of ownership rules is a UK development (with exception to Australia, where Slater & Gordon is listed on the Australia Stock Exchange). External investment is allowed to a limited extent in only one state in the US. The position of the American Bar Association is that there is no interest in having non-lawyer ownership. When the benefits become clear in the UK, it will be difficult for other countries to resist.