News focus: As Inflexion targets DWF, is it 'game on' for private equity?

Law’s much-touted ‘Big Bang’ – the introduction of alternative business structures – turned out to be more of a discreet ‘pop’. But this week’s proposed private equity buyout of DWF, the largest law firm listed on the stock market, rightly made the City pages for what it just might portend. This is the first instance of private equity looking to take a major interest in a corporate and commercial practice, as distinct from the commodity providers in which private equity has hitherto bought stakes (albeit with distinctly mixed results). 

DWF raised around £95m through the sale of 61.5m new shares when it went public four years ago. Shares were set at 122p when trading began, valuing the company at £366m. But following a series of financial problems and management changes, the share price plunged as low as 48p last month.

Inflexion Private Equity Partners has offered an attractive 100p per share, to include a cash payment of 97p per share and a dividend of 3p per share to be paid six months after the deal is concluded.

Following Monday’s announcement, made in agreement with Inflexion, the share price bounced 34% to 87.8p.

DWF stressed that any firm offer remains subject to a number of pre-conditions, but the company has unsurprisingly confirmed to Inflexion that it would be minded to recommend a bid on these terms to shareholders. Dozens of DWF lawyers are set to net more than £1m each if the deal goes ahead, according to reports, though in the City £1m is hardly an outlandish gain.

London-based Inflexion was founded in 1999 and provides capital from £10m-£400m for a minority or majority stake in businesses across all sectors. It is no stranger to the legal market: Inflexion led the buyout of legal directories outfit Chambers and Partners in 2018 and bought into conveyancing firm O’Neill Patient in 2019. It previously invested in National Accident Helpline.

Sector analysts believe the sale could spark further private equity interest in quoted legal businesses, amid relatively poor stock market performance.

'DWF has got this beast of a private equity firm ready to spend money on IT and other growth projects. [Rivals] would not be able to compete on that scale'

Jeff Zindani, Acquira Professional Services

Jeff Zindani, managing director at Acquira Professional Services and an adviser to law firms on mergers and acquisitions, stressed that this is the first time that private equity has entered the ‘corporate commercial marketplace’, as distinct from consumer services such as personal injury.

Speaking about DWF, Zindani said: ‘This puts probably more of an impetus on the part of those law firms looking at an IPO or external investment. It is actually “game on” almost with private equity in the corporate/commercial space.’

Zindani said the acquisition could ‘power up’ DWF’s growth, which could prove a ‘real worry’ to rival firms. ‘They have got this beast of a private equity firm ready to spend money on IT and other growth projects,’ he said. ‘[Rivals] would not be able to compete on that scale.’

DWF’s mooted buyout could also encourage investors to buy shares in law firms,

Zindani suggested. ‘They might think at some point that you are going to get a private equity [firm] that is going to buy shares, so it is worth keeping them. This seems to me almost like a formula. Firms thinking “we are going to go for an IPO and then, a few years down the line, we are going to sell out further to private equity”. It is quite a potential bonanza.’

Tony Williams, principal of Jomati Consultants LLP and a former managing partner at Clifford Chance, noted that the financial performance of some law firms shows the market ‘punishes companies very hard that provide any negative surprises, any profit warnings, any poor performance’ via a drop in the share price.

Share prices can remain low for a ‘very long time’, Williams added. ‘There is not a high level of liquidity in those shares. When the share price is low – and low over a consistent period – private equity starts to look and think, “is there value here to be realised?”.’

Asked whether the sale could give DWF a competitive advantage, Williams cautioned that private equity investment ‘comes at a very high cost’.

‘Private equity investments in law firms do not have an unblemished track record,’ he added. ‘The rationale for investing is these are good, steady, well-run businesses. The profit warnings are not consistent with that. The fact that the DWF share price bounced the minute that was announced shows that investors very much hope a deal like this will go ahead.’

Inflexion has until 5 August to announce a firm intention to make an offer for DWF, although this deadline can be extended.

This article is now closed for comment.