- Almost a third of firms "actively considering" IPO
- Just six law firms have listed for far
In 2011, law firms were given permission to list on the stock exchange, in a radical relaxation of ownership rules. Ten years later, just a handful have taken the plunge. Things might be about to change, however, as a host of senior solicitors reveal they are contemplating an initial public offering (IPO).
More than 200 partners at practices with at least 50 lawyers took part in a survey commissioned by privately-owned litigation funder Harbour. Of these, 31 per cent of partners said their firms are “actively considering” a stock market listing, while half said the pandemic had presented new growth opportunities.
Investment analysts have spotted a similar trend. Robert Plant of Panmure Gordon said IPOs are increasingly attractive as they can raise firms' profiles with both clients and recruits, on top of the likely cash injection.
"It can provide the proceeds for higher investment, especially in areas such as technology, and to move into areas outside of traditional legal work such as corporate finance," he said.
Plant concluded that law firms that do list could enjoy a first-mover advantage and help to consolidate a “fragmented, traditional sector”.
What’s in it for investors?
It’s perhaps unwise to lump listed law firms into a single pile. They have adopted a variety of business models and, in most cases, have sought to distinguish themselves from traditional legal practices. However, as a lump, they have weathered the pandemic fairly well.
While shares took a serious hit in early 2020 as the market flocked to tried-and-tested stocks, they have since rallied strongly. Revenue at Keystone Law (KEYS,) for instance, which has a decentralised model where all of its lawyers keep 75 per cent of their billings, jumped by nearly two-fifths in its latest half-year period, and Gateley’s (GTLY) share price is up on pre-pandemic levels. Both firms' shares prices are now double or nearly double the March 2020 low.
Their success was matched – if not overshadowed – by their unlisted City peers, many of whom celebrated double-digit profit growth and record revenue this summer. Exceptionally high levels of merger and acquisition (M&A) activity and prudent cost-saving measures protected firms against slowdowns elsewhere and partners across London received pay packets of well over £1m.
Large practices therefore seem well-placed to list. Legal services are booming and have proved more than resilient during a crisis. But it is worth dwelling on those partner pay packets for a little longer. Most law firms are still run as limited liability partnerships (LLPs) under which equity partners receive a share of the practice’s profits, as opposed to a fixed salary.
Partnerships and public markets are not natural bedfellows. Will overworked solicitors really want to share their spoils with shareholders? And what happens if they resist?
Mishcon de Reya, which is preparing to float on the main market, has lost several senior lawyers in recent months, including six partners specialising in white-collar crime. In a capital-light sector where value is tightly bound to people, departures are worth keeping an eye on.
On the other side of the coin, shareholders should look out for measures to appease partners, such as large bonus pots of which external investors won't get a taste. Indeed, this is one of the potential pitfalls of investing in people-based businesses.
Lawyers, unlike timber, or clothing, or pet food, can jump ship if they are not treated properly – taking their business with them. Given the battle for talent currently raging between City firms, “proper treatment” is likely to involve a hefty pay packet.
James Knight, chief executive of Aim-traded Keystone Law, flagged another issue with traditional LLPs that go public: share dilution. Practices will have to issue extra stock “as a matter of necessity, I would have thought, in order to bring new partners”, Knight said. Over the longer term, therefore, investors could see their shares watered down as firms seek to attract new blood.
Vying for value
These problems could all be hypothetical, however. Firms may well be interested in IPOs, but whether they go ahead with them is another matter, said Nicola Foulston, chief executive of legal and professional services group RBG Holdings (RBGP).
“The market won’t necessarily attribute the value these law firms think they have,” she said. “Generally speaking, the view of the partners is that [their firms] are worth more than they are. There will be a lot of interest in businesses coming to the market, but when values settle down – and the market decides what it will pay – some IPOs won’t happen.”
If Foulston is right, that mismatch could see many firms stay away from public markets and those that arrive have a rough early ride. But IPOs are opportunities to develop innovative business models and ambitious expansion plans, and right now would be buoyed up by a healthy legal sector.
Companies are increasingly branching out from pure legal services, generating new revenue streams. Most recently, Mishcon set up a £150m litigation funding in partnership with a third-party funder.
These developments could prove exciting for investors – but, given their untested nature, should be approached with a lawyerly caution.
