UK law firms soon able to float

Next month, the long-awaited Legal Services Act will come into force in the UK. After years of waiting, worrying and hypothesizing by many in the legal fraternity, law firms in England and Wales will be allowed to receive outside investment from non-lawyers and even float on a stock exchange.

That could see the likes of Clifford Chance, Allen & Overy and Freshfields Bruckhaus Deringer being able to go public. That’s the theory, at least, since the loudest expressions of interest so far have come from middle-tier English law firms like Irwin Mitchell, which is reported to have appointed the Portuguese investment bank Espirito Santo as its adviser.

These impending investment opportunities have excited interest among some of the banks and financial firms in the City of London, of which Investec is one high-profile example. The FTSE 100 banking and asset management company has already set up a professional services finance group, in preparation for what has been labeled the legal equivalent of the Thatcherite Big Bang that deregulated the UK banking sector in the 1980s. Of course, the Legal Services Act also goes by the name ‘Tesco law’ because of its perceived opening up of the provision of legal services to all and sundry, including the leading supermarket in the UK.  

Nomenclature aside, should any of these law firms choose to go the whole hog and list on a stock exchange, they will be entering the whole new world of investor relations, taking on all the expectations and obligations that are thrust on a public company, such as annual reporting, investor meetings and analyst calls.

To find out what awaits any of these UK law firms should they decide to take the plunge, IR magazine went to the other side of the world in search of the first ever listed law firm.

New world pioneer
Slater & Gordon (S&G) listed on Australian stock exchange ASX in 2007, following a similar relaxation of the ownership rules around law firms in Australia. The modest A$35 mn ($36 mn) IPO was oversubscribed and attracted plenty of interest from institutional investors, according to Andrew Grech, CEO of S&G, who continues to be the single largest individual shareholder in the company.

Internal shareholders like Grech currently account for 34 percent of the issued shares in S&G and 11 percent is owned by retail investors. But the bulk of investment, some 55 percent, comprises institutions like Aviva, Perpetual and Colonial First State. The Australian capital market sees healthy demand for investment opportunities from these types of institutions, says Grech, partly because of a requirement for Australian employers to pay 9 percent of employees’ salaries into superannuation funds, a mandatory retirement program that includes pensions.

S&G communicates with its investors in the same way as every other public listed company. Presentations are made to investors independently and through brokerage firms. One-on-one meetings are conducted with both existing and potential investors at half-year and annual results time. Investor days are held and the management gets invited to speak at investor conferences. There are six analysts covering the stock at the moment, including notable international names like Macquarie, RBS and Credit Suisse.

At present, there is no dedicated IR team at S&G, nor does the company employ any external assistance. Grech is of the opinion that investors want to speak to management, so that is what they will get. His willingness to meet investors is commendable, although this may soon change as demand for the stock increases, not least from overseas. Investors from the US and Hong Kong have recently been added to the register.

Punching above its weight
The current largest institutional investor in S&G ‒ which had a market capitalization of A$323 mn as of last month ‒ is Mawer of Canada. ‘For a small company by market cap, we attract more interest than perhaps a company of our size normally would get,’ says Grech.

Novelty is perhaps part of the attraction, he admits, but there are also the results. Revenue  - at A$182.3 mn for year-end June 2011 – is up by more than 46 percent. EBIT is up by more than 50 percent, EPS is up 7 percent and dividends up 10 percent. More than 80,000 inquiries came in from new clients in the latest financial year (2011), which is perhaps one line in the investor results presentation that is peculiar to a law firm. At the height of global investor uncertainty in August, S&G was selected as a standout stock by the Australian business magazine BRW.

In Grech’s view, this safety is what makes S&G attractive to investors and high-revenue visibility is partly responsible for this. His lawyers invest a lot of time in personal injury cases. It is one of the cornerstone practice areas for the company and the build-up of this work-in-progress means investors can get a very strong look into future revenue.

‘We are seen by investors as quite defensive, but with strong growth prospects,’ he says, at ease with the seeming anomaly. The compound annual growth rate for S&G is 30 percent year-on-year growth since float, he adds.

Post-float, the injection of public capital and subsequent financial growth has also seen a transformation in the look and size of the firm: head count has almost trebled, swelling in four years from between 300 and 400 employees to 1,100 staff, located in six state jurisdictions across 12 practice areas.

External influences
What was less certain for S&G, and a cause for concern for many UK law firms, is the potentially negative effects outside investment could have on other vital stakeholders in any law firm ‒ namely, clients, employees and the court.

Grech dismisses each of these concerns with the same nonchalance. ‘Clients are not that interested in who owns law firms,’ he says. ‘They care about the quality of service and its affordability.’

On the perennially sticky issue of fees, he says management is under an obligation to investors to price fees effectively, but this does not necessarily mean investors will push for higher hourly rates. For instance, the competitive legal market could also warrant charging lower fees. Moreover, Grech has never had an investor try to interfere in client matters.

Listing has also had a positive effect on recruiting talented employees, as well as retaining them, both of which are key concerns for any professional services firm. For one thing, being listed enables the company to differentiate itself from its competitors.  

Also, the draw of partnership is not what it once was and the aspirations of lawyers are changing, as Grech explains: traditionally, young lawyers have to wait in line for a long time to make partner, whereas the long-term incentive program at S&G allows staff to get an interest in the law firm much earlier in their career. Around 100 staff members hold shares in S&G and the decision to list, with the greater transparency it brings, has been particularly welcomed by female lawyers, says Grech, who in the past may have questioned whether the award of equity partnership and its maintenance was entirely merit-based.

As for the overriding duty all lawyers have to the court, Grech says this was made explicit to investors in the S&G IPO prospectus: the court comes first, clients come second and investors and shareholders third.

Don’t all rush at once
With that compelling story to relate, it is strange that the avalanche of Australian law firms coming to market has yet to materialize: just one other firm has since followed S&G’s lead and gone public.

It may be a question of time. S&G first converted to a corporation in 2001, six years before it made the decision to float. But that may mean that investors in the UK, not to mention the banks, could still have to wait a while for the first law firm listing to test the London market.

What’s more, when a UK firm does float it is unlikely to be one of the big-ticket magic circle firms announcing a multi-billion pound IPO. There is, after all, a limit to the parallels that can be drawn between the big corporate law firms in the UK and S&G, a no-win-no-fee specialist, whose principal business is asbestos litigation and personal injury. A feeling exists among some of the UK legal elite, with its stronghold in the City of London, that the Legal Services Act will have its biggest impact on the high street, hence the ‘Tesco law’ epithet.  

It is nonetheless interesting that the early shots in that battle may be fired by none other than S&G, as the fast-growing Australian firm is preparing to deploy its public capital in the lucrative overseas market. Grech describes his outlook for the future in S&G’s latest announcement to the stock exchange, which accompanies its 2011 annual results. UK law firms should take note: in his parting words, Grech says the UK is of particular interest because of its jurisdictional similarities to Australia and the imminent introduction of legislation allowing for listed companies to operate there.