Half of firms consider ABS conversion to access private equity

More than half of law firms regard access to private equity as a reason for conversion to ABS, according to research published this morning.

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.

In addition, nearly eight in ten (77 per cent) said access to finance – not available from partners in the firm or from traditional borrowing – was either ‘important’ or ‘very important’ when converting to an ABS.

“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,” said Fox Williams senior partner Tina Williams (pictured).

Nick Miller, investment manager at Sovereign Capital, estimated the legal services market at £25-30bn, which has largely remained unchanged “over many, many decades”.

Miller suggested investors were still mostly waiting to see how the SRA would handle ABS applications involving private equity, such as the Duke Street investment of £200m in the Parabis Group, but he confirms his sector’s interest in legal services.

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

The economic downturn has dampened private equity’s interest in law firms: “It’s not as easy to see how private equity could take an exit from the market in three to five years after investment,” said Baker Tilly’s George Bull – but well-managed organisations could still tempt investors.

“New and disruptive models of business with very able management teams” will be key, 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?”

Although the very small number of SRA-licensed ABSs to date (seven) suggested that the Legal Services Act has had “a statistically negligible impact”, the report said its findings “contradict such analysis”.

“The survey indicates a much deeper structural shift has occurred within the profession,” the report continued.

Already, it revealed, 39 per cent of firms have changed their management strategy as a result of the Act and 36 per cent have reviewed it in the past six months.

Only six per cent had not considered a change in management structure, with 63 per cent contemplating a change in partnership structure and “a significant minority” (14 per cent) having already changed it to promote to partner non-solicitor lawyers or non-lawyers such as HR professionals or marketing specialists.

These figures, the report said, suggested that the legal profession had responded quickly to the changes introduced by the Act.

Williams said it was clear the advent of ABSs was “a catalyst for change in the profession”, but pointed out there were still obstacles.

Loss of control was seen a one of the biggest barriers, with 62 per cent of respondents mentioning it, while resistance from partners was mentioned by 51 per cent.

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 manage successfully the ABS application process.

The report surveyed 100 law firms via an online questionnaire and telephone interviews between February and May 2012, with research carried out by legal journalist Ben Rigby.