Law firms focus on IPOs

  • Almost a third of companies are “actively considering” an IPO
  • Only six law firms have registered so far

In 2011, law firms were granted permission to be listed on the stock exchange, in a radical relaxation of property rules. Ten years later, only a handful have taken the plunge. Things could be about to change, however, as a host of seasoned lawyers reveal they are considering an Initial Public Offering (IPO).

More than 200 partners from firms with 50 or more lawyers participated in a survey commissioned by private funder Harbor Litigation Funding. Of these, 31% of partners said their companies were “actively considering” a stock exchange listing, while half said the pandemic had presented new opportunities for growth.

Financial analysts have spotted a similar trend. Robert Plant of Panmure Gordon said IPOs are increasingly attractive because they can improve the profiles of companies with clients and rookies, in addition to the likely injection of liquidity.

“This can generate income for larger investments, especially in areas such as technology, and to expand into areas outside of traditional legal work such as corporate finance,” he said. declared.

Plant concluded that the law firms on the list could gain a first-come advantage and help consolidate a “traditional, fragmented industry.”

What is in is it for investors?

It may not be a good idea to lump listed law firms into one pile. They adopted a variety of business models and in most cases sought to distance themselves from traditional legal practices. However, as a whole, they have weathered the pandemic fairly well.

While stocks took a serious hit in early 2020 as the market flocked to proven stocks, they have since rebounded strongly. Turnover to Keystone law (KEYS,) for example, which has a decentralized model where all of its lawyers keep 75 percent of their billings, jumped almost two-fifths in its last semester, and Gateley The share price (GTLY) is up from pre-pandemic levels. Both companies’ stock prices are now double or nearly double the March 2020 low.

Their success has been matched – if not eclipsed – by their unlisted peers at City, many of whom celebrated double-digit profit growth and record earnings this summer. Exceptionally high levels of merger and acquisition (M&A) activity and prudent cost-saving measures have shielded companies from downturns elsewhere and partners in London have received salaries of well over £ 1million sterling.

The large firms therefore seem well placed to list them. Legal services are booming and have proven to be more than resilient in times of crisis. But it is worth dwelling a little longer on these partner salaries. Most law firms are still run as limited liability companies (LLPs) under which partners receive a share of the profits from the practice, as opposed to a fixed salary.

Partnerships and public procurement do not mix. Will overworked notaries really want to share their loot with shareholders? And what if they resist?

Mishcon de Reya, who is set to float into the main market, has lost several senior lawyers in recent months, including six associates specializing in white-collar crime. In a small-cap industry where value is closely tied to people, departures are worth watching.

On the other side of the coin, shareholders should look for measures to appease partners, such as big bonuses that outside investors won’t get a taste of. Indeed, this is one of the potential pitfalls of investing in people-based businesses.

Avocados, unlike wood, clothing, or animal feed, can leave the ship if not treated properly, taking their things with them. Given the current battle for talent among companies in the city, “proper treatment” is likely to mean high pay.

James Knight, managing director of Aim-traded Keystone Law, pointed out another problem with traditional LLPs going public: equity dilution. Firms will have to issue additional inventory “out of necessity, I would have thought, in order to bring in new partners,” Knight said. Over the longer term, investors could therefore see their stocks weaken as companies seek to attract new blood.

Vying forr value

These issues could all be hypothetical, however. Companies may very well be interested in IPOs, but whether they actually realize them is another question, said Nicola Foulston, general manager of the Legal and Professional Services group. RBG Holdings (RBGP).

“The market will not necessarily attribute the value that these law firms think they have,” she said. “In general, the point of view of the partners is that [their firms] are worth more than they are worth. There will be a lot of interest in companies entering the market, but when values ​​stabilize – and the market decides what to pay – some IPOs will not take place.

If Foulston is right, this mismatch could cause many companies to steer clear of public markets and those that do get have a tough race at first. But IPOs are opportunities to develop innovative business models and ambitious expansion plans, and would currently be supported by a healthy legal sector.

Companies are moving further and further away from pure legal services, generating new sources of revenue. Most recently, Mishcon set up £ 150million litigation financing in partnership with a third party funder.

These developments could prove to be exciting for investors – but, given their untested nature, should be approached with legal caution.

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