Top 100 UK Law Firms Considering ABS Route

News

posted 22 Jun 2010 in Volume 12 Issue 12

Top 100 UK Law Firms Considering ABS Route

At least 13 of the UK’s top 100 law firms are looking at making structural changes in preparation for the entry into force of the Legal Services Act (LSA), new research has found.

“People are embracing changes in a lot more positive light than previously, mainly due to economic conditions improving,” according to Jonathan Harvey of private bank Investec, which carried out the survey at a recent event.

Thirty managing partners from the top 100 were polled at an Investec-hosted event on external investment in the legal sector.

According to the survey, 45% of managing partners are considering establishing alternative business structures once licenses become available in October 2011 (see ‘City firms to benefit from outcomes-focused regulation’).

“They are quite excited about the innovation that can be applied to grow their businesses under the new legislation,” says Harvey.

Comments Managing Partner board member and event panellist Michael Roch: “Quite a few firms in the top 100, and even the top 50, are considering an ABS or outside financing to further their strategic objectives.”

“Even without external capital it may be worth structuring governance as an ABS because it can provide for a more efficient governance model than a traditional partnership,” Roch adds.

Panellists agreed the LSA would result in greater competition, commoditisation and consolidation but commented that for firms with a global presence, meeting legal requirements on ownership in different jurisdictions would present the greatest conundrum.

Regardless, the managing partners who were polled said they still had growth on their minds, with 55% expecting to grow organically over the next two years, and 33% intending to acquire smaller firms. The remainder expect to grow through lateral hires or diversify their existing business models.

For those considering external funding to finance these plans, the popular model of splitting profits between equity partners will need to change.

“It will be challenging from a cultural point of view as well as from an external investors’ point of view, as the law firm will need to change in a way that there’s some value left at the end of the year,” warns Harvey.

Risks to avoid include doing a deal with the wrong investor, failing to do due diligence about the investor’s value-add beyond money, and not being clear about the strategic cost-benefit or the required return threshold for the law firm, says Roch.

“I know a lot of partners who think they’ll get a cash-out from the investment and in many cases that’s not going to happen,” he adds.

Even if they decide to keep the status quo, UK firms may soon be facing new competition from new law firms established under the LSA.

“The real threat will come from a new law firm being started afresh with private-equity investment,” suggests Harvey. “It wouldn’t come with the cultural challenges facing existing law firms.”