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Half of UK law firms are considering an ABS to access private equity

Many firms are changing their partnership structure and management strategy, survey finds

27 June 2012

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By Manju Manglani, Editor (@ManjuManglani)

More than half of UK law firms are considering a conversion to an alternative business structure (ABS) to obtain external investment, according to research published yesterday.

Fifty-four per cent of respondents to the Fox Williams/Jures survey described access to private equity or other third-party investment to finance their firms’ growth as either a ‘compelling’ or a ‘very compelling’ reason to convert to an alternative business structure.

About three quarters of respondents said that obtaining access to finance (not available from partners in the firm or from traditional borrowing) and improving the firm’s cashflow was either ‘important’ or ‘very important’ when considering an ABS conversion.

“The possibility of using the ABS model as an opportunity to refinance firms to enable growth or better facilitate survival in a newly-competitive environment is clear to see,” says Tina Williams, senior partner at Fox Williams.

Nick Miller, investment manager at Sovereign Capital, notes that investors are interested in the legal services market, but that they have been waiting to determine the regulator’s approach to ABS applications involving private equity (such as Duke Street’s investment of £200m in the Parabis Group).

“Certainly the volume end of the market feels more like a business,” he says. “What doesn’t interest us is non-specialist mid-market firms.”

The economic downturn has also affected PE investors’ interest in the legal market. “It’s not as easy to see how private equity could take an exit from the market in three to five years after investment,” says George Bull, head of professional practices at Baker Tilly.

However, well-managed firms could still tempt investors, particularly those with “new and disruptive models of business with very able management teams”, according to Jomati’s Tony Williams. “It’s less likely to be more traditional models. If you haven’t got anything to say in a consolidating market, just how likely are you to be a winner?”

Structural changes

Although there have been only a small number of licensed ABSs to date, the report suggests that the Legal Services Act has resulted in a much deeper structural shift within the legal profession.

Thirty-nine per cent of responding firms have changed their management strategy as a result of the LSA, while 36 per cent have reviewed it in the past six months. Only six per cent said they have not considered a change in their management structure.

Many law firms are also reviewing their partnership structure. A third of respondents said they were implementing changes to their partnership structure to – variously – promote to partner other legally qualified personnel; promote to partner non-lawyers (such as HR and marketing specialists); or to recruit non-legally qualified management to an executive or leadership role, according to the report.

A fifth of respondents also said they were looking to incentivise staff through equity, although Williams notes that this is possible without an ABS. Earlier this year, DLA Piper’s partners agreed to an all-equity model across the non-US side of their business. 

“The trick is to create capital value separate from income rights, which is equally entirely possible within the partnership structure although more challenging to do in a tax efficient manner,” she says. 

About two thirds of respondents said they wanted to realise a capital payment, either through spinning off services in an ABS or accessing external investment to fund growth. 

Interestingly, the report found that almost a quarter of respondents are interested in being part of a collective membership organisation with other law firms to share common services as part of a network.

Williams says it is clear the advent of ABSs was “a catalyst for change in the profession”, but points to several obstacles still in place.

Loss of control is seen as one of the biggest barriers, with 62 per cent of respondents mentioning it, while resistance from partners was noted by just over half.

The Solicitors Regulation Authority’s role was another concern, with 49 per cent of respondents saying they were “not confident” about the regulator’s ability to successfully manage the ABS application process.

The survey findings, which are based on responses from 100 law firms, are published in ABSolutely Fabulous?

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