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OPINION

Justice for investors

Justice for investors
August 8, 2019
Justice for investors

The largest of their number, DWF (DWF), entered the fray earlier this year and is among the top 20 revenue generators among UK law firms. That distinction has been reinforced by its maiden results as a publicly listed company, which detail a 15 per cent increase in net revenue and a similar step-up in gross profit to £146m, the latter underpinned by an underlying margin of 53.4 per cent.

Unadjusted earnings were constricted by £12.6m in IPO costs as the company had to undertake regulatory work for each jurisdiction in which it operates, together with changes to its financial reporting system as DWF morphed to a corporate model. The firm doled out 1p a share to shareholders for its year-end dividend, but it is targeting a payout of up to 70 per cent of post-tax profit for its March 2020 year-end, implying a return of 5.8p a share and a yield of 4.9 per cent.

At that point, one-fifth of each stake held by the company’s employees will be released from a lock-in period, followed by 10 per cent for each of the next four preliminary announcements. That’s to be welcomed given that liquidity, or at least the effective level of the free-float, could potentially be an issue given the ownership structure of the listed law firms in their previous incarnations, such as limited liability partnerships. 

Although it’s the largest thus far, it’s unlikely that it will be the last legal firm to move beyond what some might consider an arcane industry structure, one in which partners usually take out the lion’s share of profits each year. The traditional law firm, with its entrenched hierarchical framework, is neither well suited to an increasingly globalised legal industry, nor one which is increasingly preoccupied with building scale.

This chimes with comments by Andrew Leaitherland, chief executive of DWF, who said that “[management] decided that listing on the Main Market was the best option to drive the next phase of our growth. The IPO is helping us to deliver on our strategy, allowing us to attract and retain the best talent through equity incentivisation, while providing the resources to continue with targeted M&A”.

In a sense this is understandable given the changing landscape. In its annual review of the UK’s leading law firms, The Lawyer notes that the top 100 outfits generated around £24.1bn in revenues through 2018, a 9.6 per cent increase on the previous year. But the magazine also highlighted the twin threats posed by the growing influence of the top 50 US firms in London, together with the emergence of alternative legal service models.

Burford Capital (BUR), a litigation finance specialist, provides a case in point, although some might argue that its business model shows what can happen when prudence gives way to innovation. The company, which has been trading on Aim for a decade, finances legal actions which it believes have a decent chance of success – effectively contingency on large-scale commercial litigation. It essentially seeks to monetise the asset value of client litigation, while providing options to “finance, sell, or collect uncollected judgments, at no cost to the judgment owner”.