Private equity is steadily building a presence in legal services markets as a result of the
so-called ‘Tesco law’. As private equity firms make their strategic plans for the new year, it is looking increasingly likely that their focus will move to other professional services – including some that are provided by accountants.
The Legal Services Act of 2011 enabled different types of businesses, such as retailers, to compete against law firms. The Act also enabled existing law firms to opt for different types of legal structure, including the use of outside equity investment.
A Thomson Reuters survey found a lack of enthusiasm amongst leading law firm executives for stock market listings – though personal injury specialists Russell Jones & Walker has been acquired by listed Australian company Slater & Gordon. The survey also found that more than three quarters of directors in the top firms were against the use of outside capital from private equity.
There had been speculation in advance of the legislation that private equity would seek to buy-up law firms using a business model that has proven successful in other activity areas – including general practice and other healthcare. This typically involves bringing small local firms together to create national, branded, businesses, with economies of scale and greater use of technology to cut costs.
While most law firms have been unenthusiastic about the prospect of being bought, there have been several large acquisitions. The first private equity deal after the Act was passed was a £200m investment by Duke Street in Parabis, which used the new provisions to create an Alternative Business Structure, or ABS. Parabis operates under the brand names of Plexus Law and Cogent Law to provide personal injury litigation services to large insurers and now deals with around 200,000 cases a year.
Parabis has expanded beyond its original core business to handle claims management services for insurers, including audit, loss adjusting, rehabilitation and health and safety assessments. It is also moving into other geographical markets, starting with South Africa. Duke Street began working with Parabis for several years prior to the passing of the Act, supporting growth even before the ABS took effect. Parabis claims revenue growth of 25% over the last three years and profit growth in that period of 50%.
Other private equity firms that focus on growth areas within the professional services markets are also investing in law firms. Palamon Capital – a leading mid-market investment house, which also owns the Cambridge Education Group – acquired QualitySolicitors in 2011. Although QualitySolicitors had only been formed two years earlier, it had already built a national brand, based on about 300 high street locations. Its access points include a presence in some WH Smiths stores.
Palamon is strongly committed to other professional services markets. It previously acquired financial advisory firm John Scott & Partners, which at the time had 3,000 clients, and followed this with purchases of another seven financial advisory firms, including Towry Law. The integrated financial advisory service is now branded Towry and with 25,000 clients and over £4bn in assets under management it is the largest independent financial advisory firm in the UK.
James Caan, of Dragon’s Den, is another keen investor in professional services firms, through his private equity house Hamilton Bradshaw. Its portfolio includes Staffordshire based law firm Knights. Other Hamilton Bradshaw investments include a number of professional recruitment agencies, including several that specialise in finding accountancy and finance staff.
Several private equity houses have expressed an interest in buying law firms, but have not done so – presumably because of a lack of interest on the part of potential sellers. In some instances, though, private equity firms have taken minority equity positions in professional firms, meaning that their ownership positions are unclear.
Some private equity investors see greater potential from the acquisition of support services to law firms, than from the law firms themselves. Montagu Private Equity acquired the University of Law – formerly known as the College of Law – from the Legal Education Foundation, a Royal Charter Charity, for £180m in 2011. The University of Law trains about 8,000 law students a year and has responsibility for training more than half the lawyers recruited by the top hundred law firms.
One of the keenest private equity investors in legal services is Smedvig Capital, which began investing in the sector even before the passing of the Legal Services Act. Smedvig Capital owns both conveyancing business MyHomeMove and probate handler Kings Court Trust.
Jordan Mayo, managing director of Smedveg Capital, says: “We are a growth investor and we have invested in a range of different companies. Our first investment in legal services was in 2005, pre the ABS regulations, because we have always been able to invest in firms regulated by the conveyancing regulator.
“We saw that we could deliver conveyancing in a different way, developing the technology, with lower costs and improving the experience for the customer. It is a £1bn market. There are ten thousand local legal firms doing a handful of different services, but which have not invested in their conveyancing and frankly were not delivering quality services to clients.
“MyHomeMove is delivering the service in a different way, it is a clear market leader and is provider of choice for many estate agents because of the quality of service. Because of that experience, we are interested in other vertical investments where firms are doing things in a traditional way, with a low use of technology, a poor service and which have cost saving opportunities.
“Probate has very similar dynamics to conveyancing, with very few firms doing this in a specialist way, offering a quality service. And so we invested in King’s Court Trust, a deal which has just closed in the last months.”
Smedveg is now interested in moving beyond law into other professional services, potentially including some accountancy services, says Mayo. Accountancy is “quite an interesting parallel” to legal services, he suggests.
“We are really interested in different business sectors where business leaders are interested in doing things in a different way, to the benefit of consumers, or at lower costs. I am sure that will be true in parts of the accountancy profession and other professional services. We have not looked at it yet, but we are certainly open to it.”
It is easy to think of several activities undertaken by accountancy practices that could be challenged, or bought, by private equity. Judging by the experience of law firms, accountants could face a difficult challenge from private equity in years to come.