The quarterly publication of the International Legal Technology Association
Issue link: https://epubs.iltanet.org/i/11430
Private Equity Investment in Law Firms n May 2007, Australia’s Slater & Gordon became the first law firm in the world to go public. Enabled by Australia’s Legal Profession Act, S&G had its equity traded on open markets and acquired two other law firms within the first year. The U.K. Legal Services Act, which will come into full effect in 2012, will allow external private equity investment into law firms and pave the way for similar public offerings. But what about the U.S. legal market and the likelihood of private equity investments? Is the private equity model a pipe dream or a realistic vision? I Over the last 10 years I have worked with law firms around the world, experiencing different law firm management practices and regulations in multiple jurisdictions. I have also been through a management buy-out and, to this day, I live and breathe the world of a leveraged finance business. I offer my perspectives on what might attract third-party investors to the legal sector and, should regulation change stateside, the role they might play in law firm practice by 2020. Paving the Way for Change The rising profile of non-lawyer managers and C-level executives within law firms in the late 1990’s was an early indicator that things were starting to open up in a profession that often pokes fun at itself for its glacial speed of change. Yet despite opening its door to the possibilities of doing business differently (and talking about it a lot), law firm business practice evolution continues to be slow. And herein lies the key to why this profession would attract external investors looking to double their money in a three to five-year period: accelerating change that leads to significant growth and profitability. The justification for any investment is the growth story. In an interview for the Strategic Legal Technology Forum in June 2008, Jeremy Hand, Managing Partner at Lyceum Capital, talked to David Morley, worldwide Senior Partner at Allen & Overy, LLP, about the appeal of the legal market for private equity investors. In his opinion, the potential for profits and growth, combined with market fragmentation and often inefficient business practices, makes for a pretty compelling investment opportunity. The continual battle between partners who want to think long-term and invest in their firm versus those that are more focused on this year’s profits and what they will take home at the end of the year is going to introduce unavoidable inefficiencies. It is not surprising that a senior partner should want to maximize the return on the years he has put into his firm’s growth rather than watch it get reinvested for the benefit of a future generation, but how does that impact the long-term strategy? Necessity Is the Mother of Invention Until 2008, the legal industry had spent most of the decade in a period of unprecedented growth. Demand on law firms to be more efficient and introduce better business processes was less of a priority for many –– after all, “if it ain’t broke…” But over the last couple of years, with the economy falling off the edge of a cliff, law firm management attitudes have had to adjust, and there has been more talk of change than ever before. Resistance to changing regulation that prevents non-lawyers being partners is loosening, and with that the door of opportunity will open for third-party investors to get involved with law firms in a way that was previously not legally possible. In October 2008, Hildebrandt wrote a special client advisory that concluded “the present economic crisis may lead many firms to rethink the fundamentals of how they do business and how they deliver value to their clients.” This is music to the ears of investors who will see an opportunity to get involved in an industry they feel “could probably be better run by professionals who have had more experience running businesses,” according to Mr. Hand. One question is whether partners can make that jump from business owner to “highly paid employee.” Mr. Hand believes they won’t have a choice, and as market pressures drive change, working in a “winning organization” should be more important than holding onto a legacy management structure. And for senior lawyers looking to retire, investors can unlock the value in the equity they have played a role in building, while helping the rising stars accelerate growth in their firms for the future. They might have to share the profits with a third party, but is a smaller slice of a bigger pie such a bad thing? For investors, getting involved in an industry that could be seen in need of a management overhaul is very appealing. At one end of the spectrum is the potential for globalization, similar to what we have already seen in the accounting and consulting industries; at the other end, the potential for commodity-based legal work to be delivered more cost effectively and therefore more profitably. Focusing on Business Process and Technology The introduction of better business process management would streamline the day-to-day operations of a law firm, stripping out unnecessary costs where appropriate and focusing on business strategy. Investing more in support teams like marketing and IT to help facilitate faster change will only help drive growth. Service providers like outsourcing agencies (of both back office processes and legal work) would be more readily embraced and become an integral part of the legal landscape. Alternative billing practices would be commonplace as investor-backed law firms look for more competitive pricing strategies. In essence, so much of what has been talked about as needing to change in law firms over the last couple of years will change. And if similar changes to regulations come to pass in the U.S. as they have in the U.K. and Australia, that change will be out of the control of the lawyers. The innovators will thrive while the others will be left behind, and wind up the same way as the T-Rex. Peer to Peer the quarterly magazine of ILTA 59