It is no surprise that law firms have become a new target of interest for private equity firms. The legal sector is a significant moneymaker, expected to grow to £51.9bn by 2025.
Private equity firms are drawn to businesses that have strong, steady cash flows, along with high growth potential, which is why the legal sector is being targeted.
Last month, the south coast firm Trethowans was acquired by a private equity-backed legal services provider, Lawfront. While on Wednesday, PE firm LDC, part of Lloyds Banking Group, invested in commercial firm Harper James.
This comes after private equity firm Inflexion hit the the headlines in 2023 when it de-listed DWF from the London Stock Exchange.
“Law firm investment is one of the hottest topics in private equity right now,” Axel Koelsch, COO of Lawfront, told City AM.
The private equity sector has already been circling the professional services market like a hawk looking for its new prey. Over the last few months, private capital has poured millions of pounds into firms, particularly those with accountancy arms.
From Apax successfully bidding for Evelyn Partners’ accounting arm for £700m, to the UK arm of Grant Thornton positioning itself for private equity backing.
Koelsch stated: “Professional services roll-ups have proven to be a great success, particularly in accountancy, but the legal market is double the size and much more fragmented – offering a great investment opportunity”.
Over the last several years, the mid-tier legal sector has faced its fair share of challenges.
Issues include recruitment difficulties due to a salary wars among City firms, and the UK’s broader economic malaise, with lock-ups frequently prolonged as clients take longer to pay their bills.
For the firms that are able to avoid most of these challenges, their problem is trying to keep up with the rapid rise in technology.
The downside of the partnership model at law firms is that, in order to invest in the firm, partners must draw from their profit pool, which has the potential for conflicts.
Koelsch explained: “The reality is that the equity partnership model, particularly in the small to mid-market, struggles to deal with the need for substantial capital investment and rapid transformation of the business.”
“It is also not necessarily attractive to the next generation of partners to be putting their own money at risk through this model,” he added.
What makes private equity so attractive? Toby Harper, founder and CEO of Harper James, the business that received backing on Wednesday, told City AM that he had been “seriously considering” private equity for the past couple of years.
