Middle East: Future of law firm backers?
The future of investment in the law will be more patient, minority investors who would appeal to the top 50 law firms, which to date have shown little interest in private equity (PE), it has been claimed.
Adil Taha of the legal consultancy Taha & Watmough also cautioned that prices for law firms were “cooling”.
In the first part of this interview, published yesterday [1], Mr Taha said that although it was easy to see why PE firms were interested in buying law firms, where it was relatively easy to find efficiency gains, he questioned why law firms were selling out when recruiting non-lawyer experts could have the same effect.
In any case, Mr Taha predicted that the private equity model would evolve very quickly in the next two years, and away from the type of aggressive ‘buy and build’ deals currently happening.
“I think it’ll be much more of a minority play where they come in, take a slither of the firm and become a patient capital partner who is there for the long term, not just to try and juice it up in five years and sell it.”
It is this approach that would open the doors to the big law firms – and would also bring in new types of investors, like Middle Eastern family offices, pensions funds and sovereign wealth funds for the big firms, which have the resources to make “a quite compelling offer”.
There is only one law firm known to have backing from a sovereign wealth fund [2] – rradar.
The largest firms have hitherto preferred to source their finance from banks, but Mr Taha said they were not best suited for the role of a patient capital partner.
“There are also cross-pollination opportunities, with the family office able to provide quite a lot of legal work to the law firm, and the clients of both sides could be brought together to create more opportunities.”
It was striking last month, when London and Cambridgeshire firm Greenwoods took private equity, that its chief executive told Legal Futures [3]: “The worry is that, had we left this for another couple of years, it would be too late.”
Mr Taha said this showed “there’s a huge degree of FOMO [fear of missing out] happening where partners feel like this private equity train is going to leave the station. I don’t think the PE train will depart. There’ll always be private equity in the hunt for law firms”.
Further, the buy-and-build model may continue to be the right one for consumer-facing firms, as seen with the likes of Stowe Family Law and Fletchers.
“If you stay in your lane and you scale that, going round buying up smaller shops and benefiting from economies of scale and so on, it actually works really well. Stowe and Fletchers are going well,” he said.
The other deal that caught his eye “for the right reasons” was the PE acquisition of Express Solicitors [4] earlier this month.
Mr Taha was less convinced by the model of buying full-service firms and glueing them together.
“If you are just doing it in a one-dimensional product where, say, family is all we do, all you need to do is build the best family practice, make sure you’ve got the right tech, the right people and the right structures.
“Whereas if you’ve got a corporate and commercial desk, an immigration desk, a private client desk, a property desk, dispute resolution desk, commercial property, new builds, IP, it is difficult for a PE investor to find margin gains across all these departments whilst bringing in bolt-ons and ensuring the operating model is evolving, and also managing multiple equity partners from different firms, regions and cultures.
“It’s not possible to build a best-in-class operating model in five years. It becomes a case of ‘We’ll do as much as we can and then we’ll try and sell it’, which is fine for private equity.”
Mr Taha added that law firms often have over-inflated valuations of themselves, especially as businesses where the equity partners take out every pound of profit, which in some cases was itself boosted by client account interest. PE will discount this, however.
Multiples were “cooling”, he went on, with PE now paying 5-6x EBITDA, where in the early days it may have been 8x times. Some deals are still happening at that level, but far fewer than 12 months ago.
“There’s a saying in private equity, you make your money on the way in, which basically means not overpaying. So even if you do a mediocre job whilst you’re there, you can probably still make good money on the exit.
“Whereas if you overpay on the way in, it makes it 10 times harder to make any money on the way out.”
The founder of rradar, Gary Gallen, will be speaking at our Law Firm Growth Summit [5] in March. Early bird tickets are now available.