Almost 1 in 4 of the UK’s top thirty law firms may seek external finance in the next five years, according to industry research

Seven law firms from the UK’s top thirty may look to raise up to £50million in external capital in the next five years, according to new research of the legal sector. Two of these seven firms state that it is ‘likely’ that they will consider raising this through an IPO, while five firms will be considering private equity. 

This interest is not confined to the largest firms, as nine practices from the top 100 will consider an IPO, and 20 firms from the top 100 report that they will be looking at private equity as a means to raise finance.

These are key findings of a survey carried out by Smith & Williamson, the accountancy and professional services group, which involved 126 law firms and explored the impact of the Legal Services Act which will take effect in October 2011. Participating in the survey were 62 firms from the UK’s top 100 which included four from the top ten and 17 from the top thirty. (For further details on the participants, please see below).

“Publicly, there is a sense that external capital may not have a big impact on the top 100 law firms as initial  take-up will be minimal, whereas this research demonstrates that a significant core of the top 100 is taking the opportunities very seriously. Some are looking at an IPO and considerably more will be talking to private equity houses. Ambitious practices appear to be exploring how the liberalisation of the legal market can provide an opportunity to develop at a much faster rate than their peers. As a result, those firms who prefer the traditional model of partner-funded finance could find themselves left behind,” said Giles Murphy at Smith & Williamson who heads its professional practices team.

In recent years, Smith & Williamson’s surveys of the legal sector have revealed a steady increase in the interest in, and acceptance of, the role of external finance by the legal sector once the LSA is introduced. For example, looking at the responses from the 126 firms who took part in this year’s survey, just over half of respondents said it was likely or possible that their own firm will seek to raise external capital in the next five years. However, in 2007, the equivalent figure was a mere 22%. Further details are shown in the table below.

“In just four years, the number of firms which are considering the use of external capital has more than doubled. The freedom brought by the Legal Services Act is going to prove a catalyst for the sector and the early movers will have a great opportunity to raise their profile as all eyes will be on them,” added Giles.

Similarly, back in 2007, 57% of respondents predicted that their peers would seek external finance through the use of private equity, but by 2010, 86% of respondents expect to see law firms using this, as shown below.

The survey also explored why firms might wish to raise finance and the most popular reason was to fund long-term development (56%), closely followed by the ability it would bring to fund the recruitment of teams and acquisitions (49%). The third most common reason was to fund development into new areas (40%). However, using external finance to strengthen the balance sheet was a reason for just 25% of respondents.

Further statistics from the survey provide additional evidence of the expectation of change. For example, almost three quarters (73%) of the 126 respondents expect that firms from different professions will join forces to create multi-disciplinary practices once the new rules apply.

“The provision of legal services will change radically in the next five years with consolidation, external capital, new entrants and mergers with other professions; those who are best prepared will be in a strong position to take advantage,” said Giles.

Background on the survey

The UK’s largest 230 law firms were invited to take part in the survey

Firms were represented by managing partners, FDs or similar

126 different law firms took part, which included:

• 4 firms from the UK’s top ten
• 10 from the top twenty
• 17 from the top thirty
• 30 from the top fifty
• 63 from the top one hundred

54 of the firms interviewed have their head office in London

75% of the sample group are structured as an LLP

For further information:

Giles Murphy, head of assurance and business services and a member of Smith & Williamson’s Professional Practices group.

Tel 020 7131 4369

Email Giles Murphy

Press queries:

Kate Harrison, tel 020 7131 4228 or Matt Rowe, tel 020 7131 4550

Disclaimer

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing

Notes to editors

Smith & Williamson is an independent professional and financial services group employing around 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. It operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Salisbury, Southampton and Worcester. Nexia Smith & Williamson is the audit practice of Smith & Williamson and is an independent company.

Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International

Nexia Smith & Williamson Audit Limited
Registered to carry on audit work and regulated by the Institute of Chartered Accountants in England and Wales for a range of Investment business activities. A member of Nexia International