US private equity ‘likely to target UK law firms’
Investors see legal firms as investable prospects
US private equity firms are expected to turn their focus on UK law firms in the new year, according to sources in the legal sector.
Investors would be particularly keen on those that provide damages-based agreements or ‘no win no fee’ deals to clients.
Steve Din, founder of Simpson Millar owner Doorway Capital, told a Legal Futures Innovation Conference in London that the DBA regulations had previously discouraged many law firms, but were now seen “as a mainstream way of funding litigation”.
Enabling them to offer clients DBAs was the “most exciting prospect and future in relation to providing capital to law firms”.
Listed law firm Rosenblatt expected to see returns of four or five times the amount it has invested in DBA cases.
Doorway Capital is an equity investor in law firms and Mr Din said his diary has been filled with meetings with US private equity firms interested in investing in UK legal services.
“They’re simply looking at the landscape of the UK legal services market and how they can target their capital into it,” he told the conference.
“I think we’re going to see a significant amount of US private equity coming over to the UK. They’re going to target the large law firms.”
Mr Din noted that there had been more private equity investment worldwide in 2021 than in any previous year.
“It’s not that law firms are particularly attractive to private equity, but there is a lot of private equity available.”
Andrew Leaitherland, former chief executive of listed City firm DWF and the founder of Arch.law, said firms that offered both litigation funding and good-quality legal services a “more investable proposition”.
He told delegates: “The US private equity funds will do their homework before they come over, but I do think they will come and when they do, they are going to want to create value based on what they have done with their other portfolio companies.
“That’s the benefit of private equity investment. They have the benefit of seeing what works in different models and applying those lessons into your business… The US private equity guys will be able to do that on a big scale.”
He said brokers had tried to estimate how many “investable” UK commercial law firms there were and come up with a “range of answers” between six and 20.
“There is not a plethora of law firms out there which are right for private equity money. Those that have got the right model need an awful lot of preparation for that type of investment to secure the right return.”
The conference heard from UK private equity firm ScaleUp Capital, which targets much smaller businesses, and in 2014 took a 35% stake in Keystone Law in return for £3.15m.
As of 27 April 2020, businesses in Scotland can now enter into Damages Based Agreements with their solicitors.
Along with greater predictability and transparency on costs, DBAs allow businesses and solicitors to share the risks of litigation together. DBAs may therefore be attractive to businesses with limited resources following the COVID-19 pandemic.