In Focus: Private equity in the law - 'it's not like Pretty Woman'

Blixt principal Rachel Reddy admits it can take a while to explain why private equity investors should be welcomed and not feared by the legal profession.

‘People have said it’s like Pretty Woman, where Richard Gere rips apart companies, taking costs out and letting go of lots of people,’ says Reddy. ‘That is not how we see it at all. We know it’s a people-based business and fundamentally the key is developing a proposition that works for people.

‘We don’t go into a people-based business and destroy everything about it by cutting costs.’

Blixt is one of a handful of private equity investors taking a serious interest in the legal sector, and the opportunities that come from a fragmented market and a host of ageing partners looking for an exit strategy.

Through its holding company Lawfront, the investor has now snapped up Essex firm FJG, north-west practice Farleys and East Midlands outfit Nelsons. The idea is to create regional hubs through these existing brands while they each grow through smaller acquisitions.  

More deals are already in the pipeline, with the aim of increasing Lawfront’s collective turnover from £40m to £100m.

‘What we saw is this incredibly fragmented market,’ adds Reddy. ‘There are 9,500 law firms in the country and so many are 1-2 partner firms. Most operate in a partnership model which is so heavily dependent on those partners being willing to invest in the business.  

‘Younger partners might want to invest in technology, new offices or to grow the business, but generally older partners are more concerned with getting the cash out. These dynamics are really difficult to deal with.’

Sun European Partners LLP has similarly opted to expand its investment portfolio into the legal sector. Sun European opted to buy Fletchers, a personal injury and medical negligence specialist, and grow that brand with new offices in Leeds and Manchester.

Sun European principal Alex Wyndham said it was a deliberate policy to target a PI firm rather than one with a multitude of services. ‘We are looking for highly resilient businesses,’ he says. ‘Personal injury and medical negligence markets are not impacted by the economic movements at all. Private equity is not looking at something that will be distressed in a financial crisis.’

Wyndham baulks at the suggestion that private equity investors are interested only in asset-stripping – not least because law firms tend not to have assets beyond their staff and the work in progress, both of which will be lost elsewhere without appropriate investment and care.

‘We are not the type of owner that sits back and watches a business deleverage into the sunset,’ he adds. ‘There is an enormous amount you can get involved with, from getting cases in the first place, assessment of those cases in the most efficient way possible and the selection of the right cases.  

‘This is a very fragmented market with lots of people who have built great businesses. But [they] don’t necessarily have the ability to exit them and [have] very long case times. A consolidator like us can come along and offer a good home for that business.’

Peter Haden, hired by Sun European as chief executive, says he is tasked with creating a more valuable business. That means having the potential to be bigger at the point Sun European decides to sell. ‘That also means spending more on salary and bonuses than we ever have and supporting people through our foundation. If we attract more people then the business is more valuable.’

The elephant in every private equity-backed boardroom is, of course, the investor’s exit strategy. Both Blixt and Sun European generally sell businesses on within five years (ironically, some serious injury cases might outlast the investors).

Both are open about the end game here. Haden says: ‘There is no hiding that is the way this community works. From my point of view, as you get bigger what happens is the people who might buy you get increasingly sophisticated. You need to provide a future that is more attractive than it is now.’  

Wyndham adds : ‘We want the next people to see a wonderful runway going forward. Our thesis has been to focus on PI and medical negligence and become very good at that because it is a huge market.’

Private equity is keen to stress that investment must be found from somewhere, emphasising that this option is better than the short-termism of going public or the waste of partners frittering away their retirement nest-eggs.

Reddy adds: ‘It needs to be a great investment for the next owner should we choose to sell. In quoted business it is harder to manage as investors are in and out very quickly – here there is a longer-term structure and you are not relying on the next financial results always being better.’