Lawyers tend to think that they follow rather than lead the accountancy sector in terms of trends and opportunities. Since the introduction of the Legal Services Act 2007 and the concept of alternative business structures, one of the most radical opportunities has been the ability of law firms to have external ownership and, as a result, external investment. After something of a slow-burn, there are now three publicly listed UK law firms, Gately, Gordon Dadds and Keystone. Each firm is quite a different proposition but at this stage, one would have to say that their listings have been successful. We have, of course, seen one listed law firm falter, Slater & Gordon, although they were listed in Australia. A significant contributor to Slater & Gordon’s problems was the acquisition of Quindell, itself an AIM listed company, which had ventured into the legal market, acquiring law firms such as Silverbeck Rymer.
There has been limited appetite in the legal sector for private equity investments, although one of the early adopters was Parabis into which Duke Street Capital invested. Parabis collapsed, went into administration and has since been broken up. Interestingly, the latest law firm IPO which was Keystone had taken a private equity investment from Root Capital, some three years before its flotation.
Some of you may be thinking, “Haven’t we been here before?” It was back in the early 2000s that the listed accountancy consolidator appeared on the scene in the form of Tenon, Numerica and Vantis. Despite or, possibly because of their rapid growth strategies, each business ultimately failed with Tenon and Vantis going into administration. It would be easy to conclude that those experiences have left little appetite in the accounting world for further stock market listings. However, we should not forget that Begbies Traynor is a successful listed company, albeit its focus is on business recovery.
Why would firms consider listing on a stock market or taking external investment? There are a number of reasons why any business could see the advantages in this. They include gaining access to new funds, rather than traditional bank or other borrowing, which can be used for investments such as IT systems or new offices or to buy other businesses. The company’s shares can also be used as part of the consideration to acquire those other businesses.
One of the principal attractions is to monetise the partners’ investment in the firm if the shares are publicly traded. Compare this with a typical structure of “naked in, naked out” where partners invest capital in the firm on admission (to be used as working capital and is typically funded by bank loans) which is returned when they leave without any accretion. It is unusual for any goodwill payment to be made so partners rely upon maximising profits during their tenure.
Some firms include a company within their structure to create an internal market for their shares but this is by no means common place. Supporters of the traditional partnership model tend to think that partners will enjoy higher remuneration, career prospects and influence than their counterparts at listed accounting firms would. Influence will inevitably be diluted on a listing or an external investment as the firm will be subject to increased scrutiny as a listed company or controls over decision making by the investor.
Perhaps the most noteworthy recent development was the creation of the CogitalGroup by the private equity firm, Hg Capital, with its investments in UK accounting firms, Blick Rothenberg and Baldwins, and a Scandinavian firm, Visma, in late 2016. Interestingly, no significant acquisitions have followed suggesting that a period of integration is better than the more aggressive strategies adopted by the first wave of consolidators. It will be interesting to see what the group’s longer term strategy and whether an IPO is a realistic exit strategy.
What else can we expect? It is hard to believe that the Big Four would be attracted to the public markets in the same way that no-one anticipates that magic circle law firms would do so. They also have no obvious need for investment with relatively easy access to finance, should it be required. It is easier to see firms being subsumed into a larger offering which may go beyond traditional accounting services. Under the Legal Services Act accountancy firms can now merge with law firms to create a business providing combined financial and legal services. The benefits of full mergers of the two professions are largely unproven, although the Big Four are continuing to expand their legal services.
If one views the previous failures of listed accounting firms as a result of strategy, rather than any inherent incompatibility with stock markets, then maybe accountants will follow the lawyers’ lead for once. A case of never saying never?
Fergus Payne, partner and head of the Partnerships and LLPs legal practice group at law firm Lewis Silkin LLP.