A third of senior managers at law firms expect private equity to be an important source of funding in the next few years, a survey has found.
A quarter also believed that other financial investors, including high net-worth individuals or family offices, will play a key role, the poll of 109 senior managers in a range of firms discovered.
Though bank funding remained the main source of funding, Giles Murphy, head of professional practices at Smith & Williamson – which carried out the survey – said: “While investment from private equity into the legal profession has been limited to date, due in part to a reticence from law firms to accept perceived working practices imposed by an external investor, the clouds gathering on the economic horizon may lead to firms seeking alternative strategic plans to survive and thrive.
“I therefore think we could see greater use of external finance in the next few years.”
Last week, a leading corporate financier predicted a “second wave” of external investment in the legal market.
The accountancy and investment management firm, which carries out the survey annually, received responses from 19 firms with 100+ partners this year, 21 with 50-99 partners, 28 with 25-49 partners and 41 with fewer than 25 partners.
It recorded a sharp increase in the number of law firms looking to acquire or merge in the coming year, with 43% on the hunt, compared to 28% in 2015.
With six in 10 saying that competitive pressures have increased since last year, and niche firms the main cause, firms were looking for “targeted acquisitions or a merger to enhance their offering”, said Mr Murphy.
“Focusing on specialist sectors can help firms to strengthen their niche and so differentiate themselves. Like any brand, being able to explain and demonstrate why your service is different and superior to the competition is fundamental to taking market share.
“However, differentiating your firm in a crowded marketplace where services from one firm are often considered to be interchangeable with other firms is not easy and was considered the second biggest challenge by respondents.
“Nevertheless, the right acquisition combined with an effective strategy can help firms to scale-up and develop market presence in a chosen niche or by geography, and so set themselves apart.
“The growing trend of relatively small acquisitions as opposed to full mergers can also deliver the benefits more efficiently as the incoming team simply plugs in to the larger acquiring firm as if it were a lateral hire.
“In contrast, it can take years for two similarly sized businesses to reconcile reward structures, roles and disparate systems following a merger resulting in the risk of them being inward focused at a time when they should be seeing the benefits of the combination through increased levels of income.”
With Brexit adding to the uncertainty, Mr Murphy said the growing strength of specialist firms, coupled with the arrival of new entrants, “means firms must fight hard to maintain market share and keep up with clients’ growing demands”.