Considering alternative funding? Time to weigh up the options
07 December 2018
Every year, PwC’s Law Firms’ Survey provides a great snapshot of the “state of the nation” in the legal services market. This year’s report – our 27th – reveals a challenging environment in which firms are seeing income growth but margins under pressure.
Within this overall picture, some of the most interesting findings are around funding. In particular, we’re seeing heightened interest across the sector in alternative sources of finance.
This is certainly reflected in our everyday work, which in recent months has included a number of conversations with law firms about an IPO. Since 2015, five UK law firms have successfully completed IPOs on the London Stock Exchange’s AIM that have raised amounts ranging between £10m and £50m.
There’s also been wider deal activity in the legal services sector. Private equity investors have undertaken a number of acquisitions, focusing particularly on technology-enabled disruptors. And consolidation in the sector via mergers has continued, especially among mid-sized firms seeking to expand their expertise, geographical coverage and clients to compete with national and international players.
The core reason why firms are considering alternatives to traditional capital from partners is clear: by moving to external sources of funding, they can increase the funds available for investment and acquisitions and reward their partners’ efforts more fully. But it’s important to remember that a law firm is very different from a corporate – structurally and culturally – meaning the considerations when seeking external funding are different as well.
What options are available? While IPOs tend to grab the headlines, the IPO route is not the only one on offer – with other options open to law firms noted above, including private equity and corporate mergers.
An IPO provides advantages including liquidity and access to capital, opportunities to incentivise employees through options, and the ability to use shares as a currency for future acquisitions. It’s important, however, to be aware that converting from an LLP to a corporate in preparation for the IPO raises major implications around group structure, tax and partner remuneration.
At the same time, the private equity community – currently awash with cash – offers ready availability of capital to inject into the development of the business, and the potential for follow-on funding or cash-out. Some law firms may decide to run a dual-track process of private equity versus IPO, choosing whichever deal turns out to meet their strategic objectives the best.
Finally, corporate mergers enable the continuation of the partnership culture, and offer the potential for significant synergies and economies of scale. New opportunities for investment through being part of a larger group may also open up.
Any one of these options could be most appropriate for a particular law firm at a particular point in time. But what doesn’t change is the need to consider a wide array of factors to reach the right choice.
These range from external factors like the current economic outlook and market conditions; to industry considerations such as the current prospects and dynamics in the legal services market; to internal issues like the degree of alignment between the partners’ objectives, the potential need for a change in organisational culture and governance, and the fit between the proposed funding method and the firm’s strategy for growth and value realisation.
Given these diverse factors, it’s clear that – for any law firm – the decision to go for an alternative funding method such as an IPO is a complex and multifaceted choice. But if the IPO route does emerge as the most attractive option, what steps should you take? I’ll discuss that in further detail in my next blog post. Stay tuned!