Hey, big spenders: US private equity targeting UK law firms
November 29, 2021
3 min read
What's going on here?
A private equity boss has predicted big investment of US private equity capital into UK law firms in the coming years.
What does this mean?
Steve Din, founder of Doorway Capital, a private equity firm, spoke to the Legal Futures Innovation Conference, predicting that US private equity would make significant moves into the market from next year. Doorway Capital already owns the national law firm Simpson Millar. The main targets, he said, would be large commercial firms, particularly those using damages-based agreements, where the firm only earns a fee if the claim is successful, and then takes a percentage of the total damages awarded (think the no win, no fee adverts on the TV).
In October, the top-100 firm Fletchers Solicitors was bought by private equity house Sun European Partners, an arm of US-based Sun Capital, for an undisclosed sum. A condition of this sale was that Sun intended to build the firm rather than break it up. Fletchers has made its reputation in serious injury, clinical negligence and motorbike accidents claims, but recently branched out into data breach and diesel emissions. Sun sees Fletchers as a five-year project, according to Fletchers founder, Rob Fletcher. The equity house intends to both consolidate the firm’s areas of specialism and expand into others.
What's the big picture effect?
The history of private equity’s involvement in the legal services industry is mixed. In 2014, ScaleUp Capital, a UK private equity house, took a 35% stake in Keystone Law, which it has been steadily selling off since. It now owns just 0.84% of the firm, but has reported achieving returns on investment of 11 times, far greater than the six it usually aims for. However, on the other end of the scale, NorthEdge Capital invested £15m in personal injury firm Roberts Jackson in 2014. NorthEdge ultimately had to swallow a £22.5m loss on their investment after the company went into insolvency.
The coming influx seems to stem from the excess of “dry powder” (private equity terminology for unused capital), which has increased over the last year or so, as Covid-relief payments made by the US government has resulted in a huge increase in consumer savings. These savings, unable to be spent on overseas holidays and live events, have been invested by many. There is only so much money that can be invested in the fast-growing sectors, such as technology, which leaves investors looking for new, untapped areas. Din, talking to the legal futures conference, said he had been inundated with meetings from US-based private equity houses exploring how their capital can best be utilised in the UK legal services market.
In litigation heavy areas, this wave of investment has the potential to accelerate the changes that have already begun in the sector. Private equity houses will invest heavily in technology in order to improve law firms’ selection of which cases to take on. They hope this will allow the law firms to choose cases which have the greatest returns on investment, i.e.which have the highest chance of being successful. This technology will also increase the efficiency of the work done in this sector, accelerating the “race to the bottom” noted in the cost of litigation in these areas.
Rob Fletcher, speaking on Sun’s purchase of the firm he founded, said “there are a lot of acquisitions going on in our industry at the moment as people realise that the future is firms that have the size to compete”.
Could this be the beginning of a complete reshaping and consolidation of a traditionally fragmented industry, where technology and efficiency gains become the yard-stick by which firms measure themselves?
Report written by Joshua White
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