February 10, 2012 12:05 AM
Continental Breakfast: Three U.K. Firms Ink External Investment Deals As Legal Services Shakeup Starts
Posted by Chris Johnson
It turns out that external investments in law firms are like buses: You wait ages for anything to happen and then three come along at once.
After years of speculation and delays, three U.K. law firm investment deals worth a combined $200 million were signed within the past two weeks. The U.K. legal services revolution has finally begun in earnest.
Technology and outsourcing company Quindell Portfolio got the ball rolling in late January by paying £19.3 million ($30.7 million) for Liverpool-based personal injury law firm Silverbeck Rymer. Then, just a few days later, Australia's Slater & Gordon bought another U.K. personal injury firm, Russell Jones & Walker, for £53.8 million ($85 million).
The latest deal, announced earlier this week, saw Duke Street become the first private equity house to control a U.K. law firm when it agreed to pay a reported £50 million ($79 million) for a majority stake in Parabis Group—the parent company of two insurance litigation firms, Plexus Law and Cogent Law. (It is believed that Parabis will be the world's first private equity–owned law firm.)
The flurry of activity generated adviser roles for a host of other law firms. Russell Jones & Walker was represented in its sale by London-based corporate firm Macfarlanes, with U.K. firm LG acting for Slater & Gordon. Duke Street turned to long-standing adviser SJ Berwin and Paribas to Squire Sanders, while Hogan Lovells advised the banks on the deal.
The acquisitions are expected to be the first of many following the liberalization of the U.K.'s £25 billion ($39.5 billion) legal services market. However, the impact on the profession's largest and highest-grossing law firms remains unclear.
After being delayed by Parliament, new legislation governing law firm ownership was finally passed in December, permitting professional investors and nonlawyers to hold equity stakes in law firms for the first time. The Solicitors Regulatory Authority announced recently that it had received more than 90 license applications for these so-called "alternative business structures." The first ABS permits are due to be granted later this month.
When the Legal Services Act—the overarching legislation under which the ABS law falls—was introduced in October 2007, it was primarily designed to drive reform in the U.K.'s fragmented and poorly serviced consumer legal market. It is perhaps unsurprising, then, that each of the three recent deals involve firms found at the retail-focused end of the industry.
In fact, all three targets specialize in insurance and personal injury claims—an area that is expected to be subject to rapid consolidation thanks to radical civil litigation reforms that will abolish "no win, no fee" conditional fee arrangements in favor of a requirement that claimants pay their attorneys' success fees. (The changes were confirmed last June, but will not take effect until April 2013 after it was announced last week that they were being pushed back by six months.)
Russell Jones & Walker CEO Neil Kinsella says that the proceeds of its sale to Slater & Gordon—which was funded in part by a consortium of banks that includes Royal Bank of Scotland Group plc, Lloyds Banking Group plc, and Santander UK plc—will be used to acquire other businesses as the firm looks to build and secure greater market share. Duke Street's U.K. support services head Iain Kennedy, who led the Parabis transaction team, meanwhile, says the firm has already lined up "four-to-six" additional acquisitions.
High street lawyers across the country are also bracing themselves for an influx of retailers and other consumer businesses with strong household brands that under the new legislation will be able to offer their customers legal services. One law firm partner who has consulted on the ABS licensing process told The Am Law Daily in confidence that the majority of applications received by the SRA have been made not by law firms, but by retailers, insurance companies, and other commercial entities. (The significance of this trend has even led to the new regime being dubbed "Tesco Law," after grocery retail giant Tesco. The U.K. supermarket chain is not currently among those to have applied for a license, however.)
A select group of U.K. top 100 firms have publicly announced plans to convert to the new structure, including Hill Dickinson, Kennedys, and personal injury specialist Irwin Mitchell. Legal Week has reported that several others—including DAC Beachcroft, private client firm Withers and Bolton-based Keoghs—are also actively considering the switch.
Boutique investment funds law firm MJ Hudson, which was established in mid-2010 using a novel corporate structure with the specific intention of later converting to an ABS, has already applied for an SRA license. The business was set up using seed funding from several private equity backers—debt that converted to minority equity stakes when the ABS legislation took effect. Founder Matthew Hudson, who formerly led the London offices of O'Melveny & Myers and Proskauer Rose, says the firm is now on the hunt for "more significant" external investments to help it achieve its target of 100 percent annual revenue growth in each of its first four years of business.
By contrast, major international and elite corporate law firms are less likely to turn to external capital—at least in the near future. First and foremost is the question of whether these firms would actually require such funding. Then there's the issue of what form an outside investment might take.
Private equity houses are unlikely to be comfortable stumping up cash to merely sit as a silent partner. Duke Street operating partner Paul Lester will take a new role as chairman of Parabis Group once the deal completes in March, for example. Another Duke Street operating partner, Bob Scott, a former CEO of insurance giant Aviva, will also sit on the Parabis board. But while the experience and expertise of professional investors might be welcomed by law firms with more commoditized, process-driven practices, the same is unlikely to be true of most Big Law partnerships.
Equity partners would also have to come to terms with the fact that significant external investment would likely come at a price: They would make less money, at least initially. Private equity houses would want a return on their investment—typically 20 percent within three to five years.
SJ Berwin private equity partner Tim Wright, who manages the firm's relationship with Duke Street and advised the client on its Parabis deal, says that he "can’t ever see private equity being suitable" for Big Law firms due to their reliance on personal connections and relationships. But he does accept that the opportunity to cash in through an initial public offering, which would be permitted under the new legislation, could be attractive to top-end practices.
"The way partners are remunerated means that law firms have little ability to retain earnings or create long-term incentive programmes," Wright says. "Listing would allow firms to take a more disciplined view on longer-term performance. It would also give partners a capital reward for helping to build the business—currently that's not recognized—and show the firm in a very good light with big corporate clients."
The precedent has already been set by Slater & Gordon, which in May 2007 became the world's first publicly listed law firm after floating a $29 million IPO. The firm has since used that capital to complete more than 20 acquisitions, almost tripling its revenue to A$182 million ($197 million) and swelling its fee-earner head count by over 160 percent to more than 1,100 attorneys. (Slater & Gordon's seven senior partners pocketed between A$2.7 million ($2.9 million) and A$10 million ($10.8 million) as a result of the listing.)
At Slater & Gordon's new U.K. acquisition, Russell Jones & Walker, Kinsella says that the firm is currently investigating ways to offer its staff incentives through share-option schemes. The firm's senior management will receive shares in Slater & Gordon as part of the deal; in return, they have agreed to stay with the business for at least three years.
Up until now, the promised big bang of legal services reform had merely been a distant rumble. The events of the last fortnight suggest that, for the consumer legal market at least, things might finally be about to explode.
Money Talks: The financial fine print behind the first three ABS deals
An announcement made by Slater & Gordon to the Australian Stock Exchange says its deal, which is expected to reach financial close in early April, values Russell Jones & Walker at £53.8 million ($85.2 million). The transaction involves a cash consideration of £36.4 million ($57.7 million), of which £8.8 million ($13.9 million) will be deferred for up to two years subject to a series of performance targets, while £10.3 million ($16.4 million) will be used to pay off RJW bank debt. The cash component of the acquisition will be funded from Slater & Gordon's existing debt facility, while the firm will also issue £17.4 million ($27.6 million) in new shares, subject to restraints on sale for a minimum period of four years. The shareholder statement says the acquisition of RJW, which according to U.K. publication Legal Business generated revenues in the fiscal year ended April 30, 2011, of £36.5 million ($57.8 million), will be "earnings accretive from year one."
Quindell's purchase of Silverbeck Rymer, meanwhile, includes a cash payment of £10.25 million ($16.2 million) and the issue of up to 120 million new shares at 7.5 pence each, which will be subject to lock-in arrangements ranging from 12 to 36 months. A Quindell press release announcing the deal says that it too expects the deal to be "immediately and significantly earnings enhancing." In the fiscal year to April 30, 2011, Silverbeck reported pretax profits of around £6 million ($9.5 million). Its most recently available management accounts show net assets of around £8 million ($12.7 million).
Duke Street has not disclosed the details of its deal with Parabis, which generates annual revenues of around £160 million ($253 million).
Chris Johnson is The American Lawyer's chief European correspondent. Continental Breakfast is his new, early-morning column covering the tastiest events on the European legal menu. Reach him at firstname.lastname@example.org. Follow him on Twitter at @chris_t_johnson.Make a comment