Lenkner: Pursuing passive minority investments
Burford Capital has made a clear statement of intent to ramp up its investing beyond litigation by taking a minority stake in a UK consultancy that launches and helps manage law firms.
Equity investments in law firms too are part of the plan but the company made clear to Legal Futures that it is pursuing a very different agenda from the rush of private equity into law in the past year or so – and one that it hopes will attract the largest law firms.
It has taken a stake of between 25% and 49%, according to Companies House, in Kindleworth.
The consultancy has advised on the launch of more than 50 law firms and offices globally, including Three Crowns, Northridge Law and Pallas Partners – London start-ups that specialise in arbitration, sport and disputes respectively.
Post-launch, it helps firms manage key functions, such as finance, compliance, technology, HR, operations and marketing.
“Together, they will provide the scale and support entrepreneurial lawyers need to launch and grow successful firms,” a statement said, creating opportunities for Burford to invest capital in support of Kindleworth-backed firms.
James Hacking, Kindleworth co-founder and partner, said: “The future of the legal profession belongs to entrepreneurial lawyers and forward-thinking legal professionals who can adapt and lead in a rapidly changing market.
“By providing the resources, expertise and infrastructure they need to thrive, we help turn ambition into market-leading law firms. Burford shares our vision, and this partnership strengthens our ability to help exceptional lawyers and firms reach their full potential.”
While Burford started life as a litigation funder, it has in recent years portrayed itself as having a much broader remit, including using the moniker of the legal profession’s investment bank.
Speaking to Legal Futures, Travis Lenkner, its London-based chief development officer, called it “the largest purpose-built investor in the legal industry in the world”.
Its network meant “we frequently encounter people who are launching their own firms or people who are leading firms and are looking for operational support”.
But as well as introductions to potential investment targets, Kindleworth itself was a worthwhile investment, albeit not a big one by Burford standards: “Our aim to generate revenue for Burford from other places in the legal services industry, not just litigation investing,” Mr Lenkner said.
“So we also view Kindleworth as an attractive business that we think will benefit from the capital that we’re putting in. They want to expand what they’re doing in the UK and broaden into other markets and we want to support that.”
While this is not an entirely new direction for Burford – in 2020, it took a minority stake [1] in a London law firm, now called PCB Byrne, in return for providing finance – Mr Lenkner is charged with accelerating it.
When appointed to the new role last year, Burford described Mr Lenkner’s areas of focus as including law firm equity investments, the alternative delivery of legal services to corporate and individual clients, and legal tech, including AI.
So Kindleworth is the first example of the second of those – at least publicly, as Mr Lenkner hinted that other small deals may have been done but not announced – while also opening the door to the first.
Burford attracted headlines last month by telling the financial press that it was also looking to take equity stakes in US law firms [2] – either by using the alternative business structure (ABS) regime in the state of Arizona or through management services organisations (MSOs).
These acquire most of a firm’s assets – except any that must be owned by a law firm, such as client records – and enters into a long-term contractual agreement with the firm. This structure is “old hat in public accounting, healthcare and other professional spaces,” Mr Lenkner said.
However, it does not allow for direct investment, is more complicated and has various limitations, and Mr Lenkner predicted that, in time, ABSs would be allowed in the US.
“But the MSO structure allows now for outside investment in a lot of the aspects of law firm business today. And so we’ve had significant outreach both before and after the recent round of articles, from all levels of the market, including top 10, top 25, top 100 firms globally.”
Burford was keen to help educate the market to understand that “a lot of the things that happen inside a vertically integrated law firm today can happen inside another entity that is not a law firm”, he explained.
Though the largest UK firms have to date shown little interest in external investment, Mr Lenkner was confident that they would do. It is of note that several US law firms have set up their UK operations as ABSs.
“It [investment] is moving up the market. Creating equity value and thinking about law firm and legal business structures in different ways can have a lot of salutary effects, one of which is to pull us back from the current market, where everyone is out for themselves and incentivised to maximise their own personal compensation and to tie clients to them so that they can walk out the door at any point and go to another firm. The incentives all run to that side.
“We have a lot of law firms reaching out to us, not the other way around, saying this can’t go on. We need to find structures that help us create and preserve institutional loyalty and commitment to the greater good that used to exist in more of a lockstep model, but now is almost completely gone…
“And that is something that, if you could poll large law firm managing partners today, they would be desperate to get if they could.”
A poll of all partners may reach a different result, of course, and it has been striking that most of the UK law firms that have been bought by private equity have had relatively small partnerships where agreement is easier to reach.
Mr Lenkner agreed but said the private equity ‘buy and build’ model was not what Burford was interested in.
“There are types of firms and practices that lend themselves much more readily to corporatisation and consolidation. That’s generally not where we are spending our time. The upmarket firms have traditionally been closed to this idea in part because they have viewed outside capital as a path toward a loss of culture or a loss of control.
“One of the reasons we are different is we are pursuing minority passive investments in firms to allow them to retain control and culture because we think that’s what the large firms, the market leaders, the leading specialists and boutique firms, will require in order even to consider an outside investor.
“An investor that can be passive and patient is far better for those firms than getting on a conveyor belt where the interest that one firm holds today has to be exited in a certain number of years and sold to someone else in a process that can’t be stopped.
“We are trying to do something fundamentally different and that’s one of the reasons we are seeing the traction and the response is because what I’m describing is just about the only thing that the firms we are talking to would even consider – and for good reason.”