The ABS Experiment

Would you invest in a legal business? My analysis of the share prices of law-related businesses that are listed in the United Kingdom shows that during 2015 they performed better in the main than the market as a whole – spectacularly so, in some cases.

Listed legal businesses, of course, are a relatively new phenomenon, even though Slater & Gordon was the first law firm in the world to take the plunge back in 2007.

Shortly after S&G, Integrated Legal Holdings also listed in Australia, but unfortunately it went into voluntary administration at the end of 2014. Shine Lawyers, a specialist personal injury firm, is the third listed Australian practice.

In the UK, there has been more activity since the introduction of non-lawyer ownership in 2011, although only one “pure” law firm has listed – a national commercial practice called Gateley, in June 2015, which plans to grow both organically and by acquisition.

With a market capitalization of £100-million ($207-million), based on the placing price, the firm raised 30 per cent from institutional and other investors, with 5 per cent going back into the company and 25 per cent to the selling shareholders. Around 10 per cent of the proceeds were investments by Gateley clients, while the firm plans to distribute up to 70 per cent of post-tax profits to shareholders. Its share price has inched upward, and is now 7 per cent ahead of where it was on listing.

After a series of acquisitions, publicly traded Fairpoint Group, once known for its debt management services, has now become a predominantly consumer legal services business. Redde, an accident management company, bought a law firm in 2014 and saw its share price more than double in 2015.

There are downsides to going public. When the UK government announced reforms to personal injury litigation in 2015 that didn’t favour plaintiff lawyers, the share prices of Redde, Fairpoint and legal marketing business NAHL – which mainly focuses on the personal injury sector – all fell. S&G was also hit hard. This no doubt reflected the panic felt by the partners of private law firms, but at least they could keep it quiet.

Most battered is Quindell, a non-legal company that grew rapidly in a bid to offer an outsourced personal injury claims-handling service to insurance companies, buying three law firms and many other related businesses along the way. Major questions about Quindell’s accounting practices emerged in 2014 and its share price crumbled; it is now subject to several investigations.

Nonetheless S&G bought Quindell’s legal for a whopping £637-million ($1.3-billion) last summer, insisting that it had done its due diligence. However, S&G’s share price fell nearly 90 per cent during 2015, and what was once a sure-footed business has suddenly become accident-prone in other ways.

Private equity investments have also met some turbulence. Recently, the first law firm to receive private equity investment, Parabis Group, collapsed in part as a result of legislative reforms to costs in civil litigation.

But other private equity investments appear to have fared better, and last year saw the first backing for a High Street law firm – a general practice offering advice to consumers from local offices – so that it could open new offices. McMillian Williams went for private equity after its bank refused to back its ambitions.

It’s hard to judge the overall impact of these developments. Liberalization of the legal market in England and Wales is still recent. There are now around 500 alternative business structures (ABSs) among some 10,000 law firms. Research indicates that they are more innovative than traditional practices, although whether they are increasing the size of the market or just competing for existing market share has not yet been researched.

Regardless, new competitors are eager to get in. Three of the Big Four accountants now have ABS licences (Deloitte is the exception) and are moving up the food chain rapidly, while smaller firms of accountants are following suit, albeit more cautiously. Other entities such as the British Medical Association, which represents 150,000 doctors, are setting up their own law firms.

So the experiment continues. Until now, there has been no evidence that outside ownership has compromised the integrity of the law firms, the main objection many lawyers have to the whole concept. As businesses, plenty of law firms fail. To that extent, ABSs are no different.