Posted by Ben Holmes, managing director of Legal Futures Associate Invest In Law
We are six months on from my blog ‘Private equity and the law – big bang or damp squib’, and I am looking at the success of the forecasts I made then.
First, I predicted that probate would be the ‘hot’ sector for 2013. This is because it’s a sizable sector with commodity type work, which is very fragmented and generally not very competitively priced. The only drawback is that because the market is so fragmented, there’s a limited number of platform firms to acquire, from which to consolidate.
Most private equity firms have a minimum level of investment, and although this varies it’s generally several million. Then in July we saw Smedvig Capital (already owners of the first ABS myhomemove) invest £4m of growth capital in Kings Court Trust, a top-five probate provider by size.
I think we will see at least one further investment in the probate sector, there being at least one more company of sufficient scale to warrant attention from private equity firms. There could even be another publicly listed enterprise (similar to Quindell) if sufficient elements could be pulled together, particularly to win contracts to provide outsourced probate services to the major banks, accountants, service providers to the aged etc.
My only hesitation with this prediction is the current inactivity of new entrants to the small-cap market. Given the size of probate firms, a listed company would almost certainly have to be on AIM at a time when institutional investors are largely ignoring that market.
This was a problem felt by the second worldwide law firm to list (Integrated Legal Holdings in Australia) whose market cap was too small to grab the attention of the pension funds etc. This does not appear to have curbed their enthusiasm to expand into the UK though, and in August announced they were considering UK opportunities.
Secondly, I noted that all the initial attention had been in the commodity type areas, but James Caan’s investment in commercial firm Knights (through his private equity firm Hamilton Bradshaw) was perhaps an indication of things to come – and last month we saw corporate firm Brilliant Law receive a seven-figure round of investment from a number of private equity firms and high net-worth individuals.
Thirdly, I predicted there was some way to go in the personal injury (PI) sector – and last month we saw JZ International and Souter Investments take a majority share in Winn Solicitors, the £40m turnover highly profitable claimant PI firm in Newcastle.
This development is perhaps testament to the overwhelming move towards consolidation in the PI sector. I predict this trend is set to continue at an unprecedented pace. Slater & Gordon (the first worldwide law firm to list) has clearly been at the forefront with acquisitions of Fentons, Goodmans and Taylor Vinters (PI department) over the last six months alone, and today added John Pickering & Partners as well.
At the time Smedvig invested in Kings Court Trust, they said they would like to back another legal services firm within the year, and hinted that they wanted to re-look at the personal injury sector now that the dust has settled on the Jackson reforms.
All of this activity has created a ready market for PI firms. This PI Calculator helps PI firms compare how the main buyers would structure a deal for their work-in-progress at current market rates.
So where will the next private equity investment be? As mentioned above I think there will be further attention paid to the probate and personal injury sectors. There are always several law firm franchise models vying for the attention of private equity firms. My view, however, is that they are unlikely to get investment.
It’s still too early to tell whether Palamon’s investment in QualitySolicitors has been a success, so the question remains whether this model is sustainable. Private equity firms will be cautions to get involved where it has not yet been proved there’s a market for this model, or even worse where it’s been shown it simply doesn’t work for law firms.
Should it succeed though, the market will have been proved but QS will have had such a significant first mover advantage that it would take very deep pockets to challenge them. The one saving grace for the challengers is the geographic exclusivity of the model. If there’s more than one firm in any given area keen to be part of a franchise, logic dictates there’s space for more than one franchise.