Article by Alex Spence, Legal Correspondent, Times Online.
CityÂ lawÂ firms are preparing to raise millions of pounds from external investors as the British legal market braces for its own version of Big Bang.
At least 20 firms are planning to raise outside funding under rules that will allow non-lawyers to own a stake in legal practices for the first time, accountants advising the firms told The Times.
Three of these firms are planning to raise a war chest for acquisitions of more than Â£20 million, either through an initial public offering or from private equity investors.
The new rules, which will come into force next year, are expected to transform the legal sector, as deregulation did financial services in the 1980s.
Jeremy Black, a partner at Deloitte, the Big Four accountant, said: â€œItâ€™s going to change the way firms look at the provision of legal services. Nobody will be untouched by these changes.â€
Under the Legal Services Act, firms will be able to adopt a range of business models in place of their traditional partnershipÂ structures. In addition to taking outside capital, they will be allowed to go into business with other professionals and to admit non-lawyers as partners.
Firms at all levels of the market are examining their options, but external funding is likely to be embraced most enthusiastically by small and mid-tier firms. The prospect of flotation is particularly attractive to those that carry out a lot of straightforward work, such as personal injury cases, that can be standardised through investment in technology and processes.
Some City firms are looking closely at an IPO. George Bull, a partner at Baker Tilly, the accountant, said that some were aiming to raise funds to acquire other legal practices or to poach staff from competitors.
Others are planning to raise money from private equity or from family funds rather than through a listing. Research by Smith & Williamson, the accounting firm, suggests that as many as 60 UK law firms will seek some form of external funding.
Giles Murphy, head of professional practices at Smith & Williamson, said that many firms were thinly capitalised, as their profits typically are withdrawn each year by partners. Some are attracted to the idea of third-party funding as an alternative to bank financing.
Many partners remain sceptical. They argue that external funding will dilute their partnership culture and force them to give up too much control of their businesses.
Mark Briegal, Partner and Head of Ralli Partnership Law comments:
“The first stage of this has allowed law firms to have partners owning up to 25% of the business who are not lawyers.Â This has not been widely taken up, although a few senior legal executives and practice managers have now been made partners, which makes sense.
The next stage, to which this article refers, will be more interesting.Â The big firms may seek investment to fund growth and takeovers.Â Mid sized firms may find it cheaper than loan capital and possibly an interesting influx of non-legal business skills.Â The small firms may find it useful for survival.Â The same issues apply with any decision to raise capital – loan or equity?Â The partners in successful firms may prefer to borrow to fund expansion if they can then keep a greater share of the equity for themselves.Â Floatation is a different matter is the existing partners believe they can make a killing on their shares.
Weâ€™ll watch this space with interest.”