LittleLaw looks at… Law Firm IPOs

How law firms are keeping "afloat" using IPOs

October 24, 2019

5 min read

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What's going on here?

The legal services industry is undergoing significant disruption in a variety of areas. As pressure builds on firms to cut fees on low-value work, mergers between mid-market firms have shaken up the traditional City hierarchy. The boom in legal technology has irreversibly altered the legal landscape and it continues to demand unprecedented volumes of investment. Clients increasingly expect firms to automate lower-level work and focus their fee-earners on higher-value services.1 All of these developments necessitate significant up-front capital. Some firms, in their experiments with different business models, are choosing to go public.

What is an IPO?

In order to expand, companies often require fresh capital. This can be done in one of two ways: equity finance or debt finance. Equity finance is a method of raising money, or capital, by selling shares in a company. Often, companies decide to raise equity finance from friends and family, angel investors and venture capitalists. However, these sources of investment are often not enough. In order to access more potential investors, a company may contemplate an initial public offering (IPO). An IPO is a type of share offering in which the stocks of a company are sold to the public at large

The whole process, which is also known as “floating” or “going public”, means that a company becomes a listed public company. Its shares will then be traded on a stock exchange. Often, IPOs are underwritten by investment banks, who also arrange for the shares to be listed on one or more stock exchanges. IPOs can be used to raise new equity capital, to monetise the investments of shareholders, and to enable the easy trading of existing holdings or future capital.

What is the history of law firm IPOs?

Twelve years ago, Australia’s Slater & Gordon became the first law firm to float on a stock exchange, setting a precedent for other firms around the world.2 In the UK, law firms have technically been allowed to go public since January 2012, when the Solicitors Regulation Authority began accepting applications to become “alternative business structures” (under the Legal Services Act 2007).3 An alternative business structure is a business model which allows for non-lawyer ownership of law firms.

Since then, only six law firms have floated on the stock market. 2015 saw Gately plc become the first law firm to become a publicly listed company. This IPO valued Gateley plc at £100 million and raised £30 million for the firm. In 2017, Gordon Dadds and Keystone Law listed, followed by Rosenblatt and Knights in 2018.4 DWF announced its intention to float in June 2018, and earlier this year the firm debuted on the London Stock Exchange (LSE) in what was hailed to be a landmark listing.5

Why would a law firm want to go public?

An IPO means that a law firm is able to raise a substantial amount of capital without relying on a cash injection from existing partners. The money can be used for many things, for example when Keystone Law listed they used some of the equity finance to pay off debts.

There is a certain prestige and a host of benefits entailed in being listed on a stock market. It mainly provides excellent publicity for firms, while simultaneously holding them to greater levels of accountability. There are many disclosure and regulatory rules for listed companies, which often leads to greater transparency.

However, IPOs are extremely expensive – in terms of both time and money. They require significant internal restructuring, compliance with many onerous regulations, and also the employment of many advisors. Listed firms face scrutiny from existing shareholders and consequently, an IPO could lead to tensions in the day-to-day running of a firm.6

Does an IPO work for all firms?

IPOs are not necessarily a golden ticket for law firms of all sizes. “There are some firms that are very profitable and function very well as they are. But there are others for which [an initial public offering makes] more sense” says Robin Mann, head of investment banking at Stifel Europe, which brought DWF to market.7 It follows that highly established and successful firms have no real need to become publicly listed, whereas mid-tier firms are the most likely to benefit from an IPO as they have the greatest opportunities for growth.8

The increasing need to experiment with business models does not always mean an IPO is necessary. The legal services market is undergoing significant liberalisation, and some firms have been trialling consultancy services. In August, Dentons, the world’s largest law firm by number of lawyers, launched a risk consulting business to provide advisory, assurance and remediation services to its clients.9 Fieldfisher has also stepped in the consulting arena10, as well as Pinsent Masons who have formed a tax team of lawyers and accountants. Some firms have even partnered with consultancy agencies, for example, Bird & Bird have partnered with ASE Consulting, a management consultancy, to create Baseline, which offers IT transformational programmes.11

On a more global level, in the Netherlands, NautaDIutilh has developed a “legal maturity model” to advise clients how to get the most out of their legal function, while Kennedy Van der Laan has launched a legal tech consultancy to differentiate itself. Furthermore, polish firm SSW Pragmatic Solutions has shifted from being a traditional law firm, towards becoming a business advisor by offering a plethora of non-legal services, including financial advice, accounting and project management.12 Ultimately, each firm will need to evaluate their need for an IPO on a case-by-case basis.

LittleLaw’s verdict: Promise for going public

IPOs present a modern challenge for the legal industry. For forward-thinking law firms contemplating listing, there is an existential tension between the need for long-term stability and the short-term, passive investing that the stock market facilitates.13 In spite of this, the six UK law firms that have floated seem to have found success. 

DWF’s IPO made it the most significant UK law firm to list over the past two years – it raised £95 million at a valuation of £366 million. Mike Allen, head of research at Zeus Capital which advised on DWF’s flotation, says that if the firm continues to perform well, others could follow suit and go public. Its current position as one of the top 25 law firms in the country has made the firm one to watch.14

It remains to be seen whether more firms will choose to go public. Many firms are waiting to see what will happen to the value of already listed firms. Depending on their success, who knows, maybe one day the LSE might have a standalone market for legal service industry firms.

Report written by Sarina Johal

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Footnotes

  1. Cat Rutter Pooley, ‘DWF’s landmark IPO seen as a potential blueprint’ (Financial Times, 13 September 2019).
  2. Ibid.
  3. Alternative business structures: Legal Services Act 2007, Part 5.
  4. Jonathan Armstrong, ‘DWF Goes Public: Anatomy of a Law Firm IPO’ (Leaders League, 21 March 2019).
  5. See (n 1).
  6. Anon, ‘What is an IPO? Why are law firms floating on the stock market?’ (The Corporate Law Academy).
  7. See (n 1).
  8. Colin White, ‘Law firms and IPOs: floating away’ (Thomson Reuters Practical Law, 29 March 2019).
  9. Sam Denison, ‘Risky Business: Dentons bite back with launch of risk consulting business’ (LittleLaw, 16 August 2019).
  10. Anon, ‘Consulting’ (Fieldfisher).
  11. Jane Croft, ‘Law firms delve into accounting and consultancy services’ (Financial Times, 2 October 2015).
  12. See (n 1).
  13. See (n 8).
  14. See (n 1).

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