Private equity-backed law firms have outpaced the growth rate of the UK’s biggest law firms, doubling their size over the past two years.
Over the last two years, law firms backed by private equity have seen revenue grow at twice the industry rate, shows new research from Hazlewoods, Chartered Accountants and Business Adviser. PE-backed law firms grew their revenue by 30%, whilst the Top 50 UK law firms managed 15% growth*.
According to Hazlewoods the faster growth of PE-backed law firms suggests that the strategy of private equity firms to consolidate the sector delivering positive results.
Private equity firms entered the legal sector both for the industry’s relatively stable revenue streams and because the relatively fragmented legal sector gives PE fund plenty of opportunity to “buy and build” bigger law firms.
The merger of smaller law firms can helps extend their range of services and geographical reach allowing them to attract larger clients. Consolidation also allows law firms to deliver economies of scale through cutting their back-office costs as a percentage of fee income.
At the same time the legal sector has become more accepting of PE investment. The sector’s need to invest more heavily in legal technology, especially in the growth area of AI, makes the capital that a PE fund can bring more attractive to law firms. Previously la firms had been able to fund their capital investment largely out of retained earnings.
PE funds have invested more than £1.2 billion in UK law firms over the past five years**.
Access to PE funding also provides law firm founders with a potential retirement exit strategy, allowing them to sell their capital interest as part of the deal.
Ian Johnson, Partner at Hazlewoods says: “Not every PE investment in law is going work out but at the moment PE firms are delivering faster growth than the very biggest and most competitive firms in the UK.”
“Rather than seeking to disrupt the industry PE is, by and large taking a careful approach of adding and integrating bolt on acquisition only after careful due diligence.”
“Because of the number of deals that these PE backed firms are doing they could become the more favoured bidders for firms looking for bigger partners – having a track record of completing deal is very attractive to vendor law firms.”
The changes in the law industry were made possible by the Legal Services Act 2007, which allowed non-law firms, including PE firms, to invest in the sector.
*PE-backed firms’ revenue rose from £598m to £780m over the last two years, while the Top 50 law firms’ grew from £21.1bn to £24.2bn, based on law firm accounts. Based on sample of 12 PE backed law firms.
**Research by Acquira Professional Services.
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