The Big Deal: Under “Tesco law” the legal sector is changing radically – and attracting new interest from private equity firms
Soon, you might buy legal advice from John Lewis. Why are private equity firms so attracted by this change?
Lawyers have been the butt of jokes since we crawled out of the oceans, and in plenty of cases rightly so. After all, many charge huge fees merely for sitting very still and eliciting a superior sense of entitlement. Hence that epithet: that the only difference a lawyer and God is that God doesn’t think he is a lawyer.
But the lampoonery is double edged. We mock, but we also respect an industry worth £25bn a year to the British economy and capable of turning a tidy profit in the most dreary of economic times. London is the international fulcrum of the legal world: if a global corporate wants legal representation in Brazil or Kazakhstan, it chooses a “Magic Circle” firm like Linklaters or Clifford Chance.
It’s also a world being buffeted by the winds of change. New rulings are for the first time dragging in capital from private equity firms. Mid-level law firms are eyeing listings on the London Stock Exchange and the Alternative Investment Market. High street brands, from banks to supermarkets, are keen to offer bulk legal services to customers, from wills to personal injury to insurance claims.
In a decade’s time, the legal industry will be one we barely recognise. It will look more transparent, fair and accessible. It will be larger, more competitive, and more profitable. And London will still be pulling the levers, the city around which the global industry levitates.
As ever, the devil is in the detail. In December, Parliament passed a law permitting non-lawyers to hold equity sakes in law firms for the first time. This was the ruling is known as the ‘Tesco Law’, so named because in theory it is designed to make buying legal services as simple as buying a tin of baked beans.
Once the door was opened, investors barged their way through. In February Duke Street, a Wigmore Street based buyout firm, applied to the Solicitors Regulatory Authority to buy a £50m stake in Parabis Group, which in turn owns two insurance litigation firms, Plexus Law and Cogent Law.
Both sides would benefit much if the deal is approved by the SRA. Duke Street can offer Parabis new financing channels and five years’ experience running Xafinity, a specialist providing volume pension-payment processing services to the likes of the Armed Forces and the Metropolitan Police. Duke Street sold that firm to Boston-based Advent International in 2010 for £190m.
“In a decade’s time, the legal industry will be one we barely recognise. It will look more transparent, fair and accessible. It will be larger, more competitive, and more profitable”
In return, the buyout firm will gain some serious board representation as well as a majority stake in one of the world’s most pioneering legal firms. Duke Street operating partners Paul Lester and Bob Scott will join as non-executive directors, with Lester doubling up as the new Parabis chairman.
And this is just the tip of the iceberg. “Initially,” says Chris Johnson, chief European correspondent at The American Lawyer, “most private equity activity is likely to centre on high-volume, commoditised practices such as personal injury and debt recovery.” In other words – process-driven businesses that provide bulk services generating steady, scaleable revenue streams, rather than one-off higher-margin deals based on the power of the person rather than the product.
Already, just under a hundred companies, most of them retailers, insurance firms and other commercial bodies, along with a handful of law firms like Hill Dickinson and Kennedys, have applied to the SRA to become an ‘Alternative Business Structure’ offering basic legal services to the public. These include Quindell Portfolio, an AIM-listed brand and software consultancy, which bought Liverpool-based personal injury law firm Silverbeck Rymer in January for £19.3m. Next, Australia’s Slater & Gordon, the world’s first listed law firm, bought Chancery Lane-based Russell Jones & Walker for £53.8m.
And still they come. Bowmark Capital, a small independent buyout firm based in St James’s Square, is rumoured to be seeking an acquisition of claims-and-litigation specialist Keoghs. Jeremy Hand, the founding partner of Lyceum Capital, located on the Strand, is known to be actively seeking investments in this space, while Mayfair-based Palamon Capital Partners has invested £10m in Quality Solicitors, an umbrella network of 150 small law firms.
A few law firms are also actively considering listings as the market opens up. Irwin Mitchell has long considered a London stock flotation, but others are now believed to be mulling the possibility, as they seek to raise capital and protect their flanks by expanding into new services. “In the longer term, you could see even the largest law firms listing,” notes Tim Wright, a private equity partner at SJ Berwin, which advised Duke Street on its Parabis investment.
Up in the rarefied air of the Magic Circle, things are also changing, albeit more slowly, while the very bottom of the market – the one-man family solicitors that once advised your mother and father on their wills and estates – will probably disappear entirely.
Most global London law firms will remain powerful precisely because corporates want the personal touch of an old friend or industry specialist. But many make money on the margins from precisely the bulk services provided by the likes of Parabis and, in future, by major high street banks and retailers like John Lewis or The Cooperative Group. (The latter is looking at bulking up its legal division for this very reason.)
In short, the legal market is undergoing its most seismic shift in a century. Bulk legal services will, a decade from now, be part of the fabric of everyday life, transparent and accessible rather than a mystery shrouded in a fog of obscure legal-speak. “The market will attract a lot more money from private equity as well as corporates,” says Iain Kennedy, a ten-year partner at Duke Street who pursued the Parabis deal since 2006. “You’ll end up with a few volume-players and the specialists at the upper end of the market.”