The listed legal sector is a “clear outperformer” against broader markets, offering investors value, income and growth opportunities, a new analysis has found.
It said the sector’s average share price has increased around 25% over the year and “many more” law firms – both corporate and consumer – were likely to come to market, “with investors afforded a significant opportunity as they enjoy a first-mover advantage unlocked by deployment of external capital into the sector”.
This was despite Brexit, the impact on the market of the problems at Woodford – a major investor in small-cap companies – and the short-attack on litigation funder Burford Capital, all of which have “impacted legal sector valuations”. The latter led to an “errant overreaction”, it suggested.
There are seven law firms now listed – including multi-disciplinary firm MJ Hudson, which listed earlier this month – plus several others that own law firms as part of a wider business, such as Anexo, Redde and NAHL Group.
The analysis of the first six listed firms by corporate adviser and stockbroker Arden Partners – whose clients include listed law firm Ince and Anexo, the listed credit hire and legal services business – described the “rapid evolution of one of the UK’s last surviving ‘traditional’ sectors” as offering a landscape “rich with opportunity”.
The Legal Services Act has accelerated change: “Structural inertia is slowly reducing, and those able to identify and pick the winners stand to benefit from the disruption being experienced.”
Arden said the new Standards & Regulations – and particularly allowing solicitors to practise from unregulated businesses – should drive increased competition and price pressure.
“We also expect to see increased consolidation in the sector as non-regulated business look to scale. Those firms with access to external capital should be well positioned to obtain a first-mover advantage through investment in efficiencies and scale in this changing marketplace.”
Meanwhile, it said next year’s personal injury reforms opened up an opportunity for firms able to offer competitive pricing to capture the low-value end of the market for which insurers will no longer cover legal costs.
“Those firms which have invested in either a) scale or b) technology to be able to offer competitive pricing through economies of scale or process efficiencies should steal market share, whilst those who have not may struggle to achieve profitability in the post-reform market.
“As such, we may well see an increase in consumer firms looking to develop ‘warchests’ to either deploy against M&A/consolidation, or investment in technology.
“Crucially, stabilisation of the PI markets will give firms the ability to act decisively on the way forward, having stagnated whilst they wait for clarity on these reforms.”
More broadly, Arden said the firms which stood to succeed were those which could rapidly scale and achieve market dominance through “sheer brand power and size”, become scalable providers of unique/differentiated offerings through restructuring the corporate model and consolidation, or invest in processes/technology in order to meet currently unsatisfied customer demands
“As we have seen with the current listed legal cohort, each has identified a differentiated business model, and has leveraged external investment to achieve competitive advantage through investment in process or M&A.
“Corporatisation has distanced them from the consensual model [of partnership], allowing them to act fast and decisively on new opportunities.”
Arden noted recent offers for listed companies Charles Taylor, which offers a range of professional services to the insurance market, and intellectual property adviser Murgitroyd.
The implications of these were “applicable across the listed legal cohorts given the similarities in business models”, the analysis said. “In our view, the demonstrable private interest may provide a floor to valuations in the sector, and should serve to demonstrate our views that there are clear opportunities for investors within the listed legal space.”
Arden identified margin, lock-up and quality of earnings as the key metrics to which investors should pay close attention, rather than profits per equity partner.