Keystone share dip shows market contagion risk

Knight: More law firms will list

Investors have still to understand the legal market fully, according to the chief executive of listed law firm Keystone, which suffered market contagion last month because of problems at a litigation funder.

Keystone yesterday issued “above expectation” results for the first half of 2019, with both revenue and adjusted profit before tax up 15% to £23m and £2.7m respectively.

The firm also announced a special dividend of 8p per share, on top of an interim ordinary dividend of 3.2p, reflecting that its listing was more about profile and boosting its brand to drive organic growth than raising capital for acquisitions.

Keystone is described as a platform law firm, as its lawyers are partner-level consultants (called principals) who work independently but under the Keystone brand and with its back-office support.

Total lawyer numbers increased by 34 in the first six months of the year to 355, with 114 applicants to join the firm in that time.

There has also been continued growth in ‘pods’ – principals’ service companies that employ junior lawyers – with 10 new pod members joining during the period.

Keystone listed in November 2017 at 160p and closed yesterday at 503p, having been as high as 542p in June. It was the most successful listed law firm in 2018 when judged by share price.

Chief executive James Knight said the size of the mid-market sector the firm targeted – which he put at about £9bn – and the “scalability” of the platform model “has really helped the share price”.

Keystone says its model means it can increase the number of revenue-generating lawyers more quickly than traditional firms.

However, Keystone saw its shares dive 15% last month to 415p after the short-selling attack on Burford Capital that severely knocked confidence in the litigation funder.

Mr Knight said this impact was “incredible” given that the issues with Burford have no read-across to Keystone.

“It is such a new concept on the public markets that a lot of people don’t really understand the difference between a [traditional] law firm, a platform law firm and a litigation funder… It was a learning experience for me.”

He said the Keystone share price was driven down by small volumes of sales by retail investors rather than institutions, and in fact it provided “an excellent buying opportunity for existing institution shareholders”. This enabled Keystone’s shares to recover.

Mr Knight said he expected more law firms to list, particular those with less traditional models and revenue streams, while DWF’s entry to the main market showed that “conventional firm of that size with international operations [could] achieve what they set out to do reasonably well”.

Keystone’s primary purposes in going public were to enhance its brand and reputation, and engage with bigger clients.

Mr Knight said it was “impossible to say where we would have been” without the listing, but “anecdotally it has helped us a great deal along the way to become a more serious operator in the mid-market”.

He added that the special dividend “demonstrates how acquisition and capital outlay to support growth is not our model”. The focus is on continuing to recruit lawyers and growing the infrastructure supporting them.

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