The collapse of the Ince Group will discourage law firms from going public but it has not ‘infected’ the existing group of listed practices, the boss of one of them has said.
James Knight was speaking as Keystone Law announced an 8% increase in revenue to £75m, with adjusted profit before tax flat at £9.2m, in the year to 31 January 2023.
The Ince Group announced earlier this month that it was going into administration and Mr Knight, Keystone’s co-founder and chief executive, told Legal Futures that it would have an impact of the ambitions of others to go public.
“You can’t expect that to encourage further listings because investors look at sentiment as much as anything,” he said. “It’s not impossible [that more will list] but for foreseeable future it will be quite challenging.”
However, whilst there has been contagion in the past from the struggles of other listed law firms – Keystone’s share price was affected by a profits warning from Knights in March 2022, for example – Mr Knight said it had not happened this time.
The market has “become more sophisticated” and understood that problems at one particular firm did not mean another would be affected, he explained, while Ince was also “considered to be an outlier”.
Nonetheless, Keystone’s share price has been on a downward trajectory. Having hit an all-time high of 865p during 2021, by the end of 2022 the price had nearly halved to 440p.
Though it recovered to 550p in March, the share price closed yesterday down 3% at 453p.
This was all despite Keystone announcing a special dividend to shareholders in April 2022 on the back of a successful year which saw profits jump by 52%.
Mr Knight was sanguine about the ups and downs on the share price – saying it was sometimes difficult to know why it fluctuated – but attributed the dip over the last year to the wider market and also Keystone having a “very high” P/E [price/earnings] ratio of about 40.
It now about 20 which he said was “still very healthy”.
Keystone told investors that the flat profit figure was distorted by the fact that, in 2021/22, the firm had benefited from cost savings because the Covid-19 restrictions had prevented face-to-face activities among its lawyers. This resumed fully last year.
Keystone received 232 applications from lawyers to join the firm in the year, similar to the previous 12 months, and made offers to 79 candidates, with 42 accepting.
Some 32 joined during the year but because of departures, including retirements, there was only a net increase of four principals to 398.
There was a total of 507 fee-earners, up from 481, reflecting that some principals employ their own lawyers in ‘pods’.
Mr Knight’s annual report said: “This year, client demand across the legal industry has remained strong and the most apparent impact of this has been the increased revenue per principal (£190,000, 2022: £182,500), which has been the key driver of our revenue growth.”
He said this demand has impacted the legal recruitment market on both the demand and supply side.
“On the demand side, most law firms across the sector have been actively recruiting in order to fulfil the client demand, which has led to significant wage inflation as firms have competed for talent by offering substantial pay packages.
“This, in turn, has created a candidate-led market, where the balance of power has shifted towards employed lawyers who are presented with a variety of options, forcing law firms to be more aggressive when it comes to retaining lawyers by actively buying candidates back in.
“On the supply side, many of the push factors, which in normal times cause lawyers to seek change, have been absent.
“The significant demand has meant that lawyers have had less difficulty in hitting targets, wage inflation has meant that they are better rewarded for the work they do, and, with the balance of power in their favour rather than the employers, they have been able to avoid politics and resist pressures to return to offices which would otherwise, probably, have been brought to bear.”
On top of this, the broader economic instability “created an environment in which candidates were less likely to seek change”.
However, Mr Knight said recruitment demand was “cooling slightly”, adding: “I am confident that, as the year progresses, we will see traditional push factors generating increased candidate flow which will further support our growth.”
Keystone is paying a final dividend of 10.9p, making 16.1p for the year, compared to 15.7p the year before.