The UK’s top law firms have become increasingly sceptical about listing on the stock market or taking on private equity investment, according to new research.
The poll of finance directors at the top 100 firms – conducted by Thomson Reuters – found that just 4% saw a public listing as a suitable means of funding a law firm – down from 12% last year – while there was a similar fall in relation to private equity, from 23% to 8%.
Instead the attractiveness of bank lending has surged, with all respondents this year describing it as an appropriate source of funding, compared to 85% last year. Just yesterday Irwin Mitchell announced that it had secured a £60m, four-year facility from three banks to finance its growth plans, while Linder Myers was able to refinance its debts to avoid administration.
Thomson Reuters said that as law firms are under pressure to maintain distributions to partners there is an acceptance that a sensible level of debt can allow those distributions to be maintained whilst the firm trades through a tough period.
At the same time, law firms are becoming more open to the possibility of using alternative forms of finance, such as asset finance or invoice discounting, with 67% now saying this is a reasonable option, an increase from 50% last year. It was the same story with forms of long-term debt, such as bonds, which was given the green light by 39% of finance directors, up from 23%.
Sam Steer, head of large law for Thomson Reuters, said: “The liberalisation of the legal market has enabled law firms to overhaul their ownership structures. But having considered all the new options, the largest firms are becoming less, rather than more, persuaded that taking on external investment through a stock market listing or private equity involvement is a suitable way forward.”
Thomson Reuters suggested that the recent collapse of RSM Tenon, which was the first accountancy firm to list on the London Stock Exchange, could be a factor behind the growing reluctance of many firms. This follows on from several other high profile failures of listed professional services firms, such as Numerica and Vantis.
“Our survey reveals that successful firms are cautious of the risks associated with such a fundamental change to the way fee-earners are incentivised and risks managed,” said Ms Steer.
“Many firms may struggle to see how external shareholders’ desire to squeeze value from the business can be aligned with the longer-term outlook they have always taken. Managing the transition from a partnership model to ownership by outsiders can be difficult.
“However, as the stock market recovers further, and the potential value of law firms increases again, we might see interest amongst partners to sell some shares revive.”
In the meantime, options like leasing or invoice discounting are “already providing a lifeline for some smaller firms”, she added. “We may see more of the large law firms use leasing to smooth the impact of major investment such as IT infrastructure.”