“One in five UK law firms are at risk of failure by next summer.” It's the kind of alarmist headline that has tabloid editors rubbing their hands with glee, but recent research shows that the legal services field is due a major shake-up. The Association of Business Recovery Professionals, R3, published a study in July which found that as many as 2,000 practitioners may fold within a year.
All small business owners are under pressure these days, but none more so than Britain's 10,000 lawyers. To add to the recession, they've had even more to worry about since October 2011 with the passing of the Tesco Law. So called for making the legal sector more consumer-friendly, anyone can now put money behind the profession.
Things didn't exactly get off to a flying start. Under the law, officially known as the Legal Services Act, firms seeking outside investment and companies offering legal services for the first time must apply for an alternative business structure (ABS). The law may have been enacted 12 months ago but a parliamentary delay in the Ministry of Justice meant the Solicitors Regulation Authority (SRA) was only granted effective awarding powers at the turn of the new year. This three-month hold-up may have been a reprieve, but the clock is now ticking.
Palamon Capital Partners was first up when last October it bought Quality Solicitors (QS), an umbrella brand with big ideas – QS intends to snatch 40 per cent of the high street by picking off existing branches. Hamilton Bradshaw, led by Dragons' Den star James Caan, was next when it took an interest in Knights Solicitors in June. Shortly after, Duke Street got the nod from the SRA, clearing the way for its investment in claims manager Parabis Group.
Now Keoghs is playing the waiting game. Once the Bolton-based insurance claims firm receives its ABS licence it will be free to seek out investment from whomever it chooses – not that it has to. Money is no object for Keoghs. Earlier this year it was in exclusive negotiations with Bowmark Capital. Then along came LDC last month, topping Bowmark's offer. The dealmaker who worked on Keoghs did not respond to requests for information on the transaction, but a spokesperson in the North West team confirmed the undisclosed deal. Once it gets the SRA's seal of approval, LDC can rest easy and go about announcing the new addition.
No trouble at the top
The Tesco Law isn't keeping everyone up at night. The UK's overly fragmented, inscrutable legal sector has long been overdue a makeover, but it's only the second-string names that are lumped in with the country's 2,000 most vulnerable. The Magic Circle has no intention of tying up and Bree Taylor of Memery Crystal says press speculation over a radical overhaul in the corporate end of the market is scaremongering. “Clients who come to me have a huge amount at stake. They're not going to ring a call centre when they need help,” she explains.
Lisa Hart Shepherd, the chief executive of market researcher Acritas, agrees that top-flight players are unlikely to consolidate. “Cash isn't something they need. They're big cash-generating machines.”
But you don't have to head to the bottom of the pack to see that change is afoot. At the time of writing, Field Fisher Waterhouse and Osborne Clarke are in talks over a £200m (€251.1m) merger that would enter the combined firm into the top 20. Dickinson Dees wants in on the league by 2020 and is currently discussing a possible merger with Bond Pearce to help it get there.
Private equity isn't interested in high-end services, or at least not yet. Where it really wants to roll up its sleeves is in commoditised services – think property conveyancing, debt collection, personal injury and insurance claims. Just the kind of prosaic offerings that return a pittance, but stacked high enough can make enough money to pay down LBO loans.
“The age-old problem for lawyers is that you can have a successful, profitable business
but it's only income-producing. At the end when you retire it's very hard to be left with anything of value without you. It's all about intellectual capital. If someone invests in a law firm, what are they actually buying? There are very few firms anywhere that have a brand that goes beyond a handful of key individuals,” says Taylor.
It is with this absence of branding where private equity comes in. QS is repackaging hundreds of anonymous practices into network with a single, unified identity.
Consumers understand brands – like Tesco. But buyout houses will have their work cut out. The Co-op has an ABS licence of its own and even with a false start, the SRA had 100 applications land on its desk within the first month of the year alone. LDC, Palamon and Duke Street were the first out of the gate. They won't be the last.
So far, so good
Palamon Capital Partners and Quality Solicitors – Deal announced in October. Founded in 2009, the company is looking to consolidate the high street market, which is worth £10bn per year.
Duke Street and Parabis Group – Deal announced in February, with ABS licence approved in August. Duke Street met a reported £200m price tag for the claims management business.
Hamilton Bradshaw and Knights Solicitors – James Caan strayed from his recruitment services remit for Knights in June. He aims to help it fulfil its ambition of entering the top 100 commercial law firms by 2015.
LDC and Keoghs – Real Deals has confirmed this undisclosed deal. Keoghs is awaiting its ABS licence to allow LDC's investment.