Is this the end of law firm IPOs?
British law firms have traditionally stayed away from public markets. Yet following a series of IPOs over the past eight years, there are now six UK law firms listed on the stock exchange.
Gateley became the first UK law firm to launch an IPO in 2015 after floating on London’s alternative investment market (AIM). In the following years, five other British law firms listed on the stock exchange.
However, since DWF’s float in 2019, not a single UK law firm has floated on public markets. Mishcon de Reya’s decision to shelve its IPO plans for the “foreseeable future” due to “volatile” market conditions seemed to scupper the last major hope for a significant law firm float.
The Silver Circle firm later revealed it spent £11.7m on its shelved IPO plans, before calling it off following conversations with investors.
The situation is made worse by the fact that just two of the UK’s six listed law firms’ share prices currently sit above the prices achieved during their initial public offerings – Gateley and Keystone Law. All six of Britain’s listed firms have, however, experienced significant drops in their share prices over the previous year.
Legal sector M&A broker Jeff Zindani said there was much “optimism” and “lot of positive noises” around law firm IPOs in the first half of 2022, adding that some smaller firms had even started to become “delusional” about launching IPOs.
The broker, however, noted that law firms are now “waiting to see how the market plays out this year.”
Simon Olsen, a partner in Deloitte’s Equity Capital Markets Group, noted that UK markets “haven’t seen many IPOs full stop” in recent months as the looming downturn has killed any appetite to float on London’s stock exchanges.
James Knight, founder & chief executive of Keystone Law, agreed in stating that since Gateley 2015 IPO, the “market has never looked as bad as it currently does”.
Olsen, however, argued that “as some of the economic conditions stabilize and become more certain… we may see an IPO window open in the Autumn of this year.”
Those in favour of law firm IPOs argue listing on the stock exchange gives publicly floated firms new access to cash that can be used to grow via M&A activity.
Advocates of IPOs argue that, particularly in the current climate, law firms will have to expand in order to compete, as mid-market law firms face increasing competition from larger rivals including the Big Four accounting firms.
IPO supporters also argue M&A offers a means of hedging law firms’ business by letting them expand into a breadth of areas, while at the same time giving them a new means of poaching talent.
Fenton Burgin, the head of Deloitte’s M&A advisory business, explained “that in an increasingly competitive environment” firms will need “scale” to win the most lucrative work. He explained law firms are increasingly opting to either become “niche” specialists in a particular area of the law or instead become “large, gorilla players” able to win top tier work.
“Where you don’t want to be is in that middle ground,” Burgin said, as he noted it’s the medium sized firms that are “likely to IPO”.
Zindani noted that private equity funds are also driving a push for legal sector IPOs as he explained some funds have begun employing “buy-to-build” strategies. The strategy sees PE funds pick up law firms with a view to expanding them through M&A activity in a bid to eventually cash-out via an IPO.
For investors, listed law firms offer predictable returns that are resilient against economic volatility.
Knight, however, warned that IPOs are not without their risks. He noted that “unless you’re going to build up and become much bigger and more profitable than you were before, then you’ve basically sold the family silver.”
The Keystone boss warned that the fact law firms’ main assets are its lawyers leaves them vulnerable, particularly if top partners leave. He noted that partner exits pose a particular threat to M&A expansion plans, as he warned that lawyers leaving acquired law firms have the potential to hollow out the value of acquisitions.
He explained that “if you buy a 20-partner law firm for £20m and two years later those 20 partners decide to go their separate ways” the acquisition is made almost worthless.
Burgin said this is a real risk noting how big US law firms have been “aggressively poaching” partners in the London market.
Olsen said that “investors are going to be keen to understand what’s put in place to retain key staff” as he noted many listed law firms use “lock up mechanisms” to keep hold of top partners.
Olsen, however, remained bullish on the prospect of more law firm IPOs, as he argued we will inevitably see more mid-market listings.
Knight said the outlook was uncertain as he warned that many “conventional law firms” are simply not suited to launching an IPO.
He explained that tech-driven, highly scalable, “factory type law firms” that carry out high volumes of low value work have the most to gain through listing on public markets.
In Zindani’s view, we’re likely to see a “few black swans… particularly on the consumer facing side,” while Burgin took a similar line in arguing law firms in the mid-market will “face inevitable pressure to grow.”
Thus, while the legal sector IPO market is currently in the doldrums, there is still significant potential for law firms to list on public markets. The question now is who will be willing to take the jump.