Private equity deepens its push into legal services
Investors are stepping up acquisitions of consumer-facing firms through alternative business structures, testing how far outside capital can reshape the profession.
Private equity’s interest in the legal sector shows little sign of cooling, with investors continuing to build platforms out of consumer-facing law firms through the alternative business structures that England and Wales opened up more than a decade ago. Backers see a fragmented market of profitable but sub-scale practices as ripe for consolidation, and they are betting that technology, shared services and professional management can lift margins in ways traditional partnerships have struggled to achieve.
The activity is concentrated in areas with high volumes of relatively standardised work, such as personal injury, conveyancing, wills and probate and clinical negligence. These are practices where investors believe process improvement and better use of data can drive efficiency, and where a recognisable brand can attract clients who might otherwise approach the market with little idea of which firm to choose. Roll-up strategies, in which a backed platform acquires a string of smaller firms, have become a familiar feature of the landscape.
The trend has not been without friction. Regulators have taken a close interest in how outside ownership sits alongside professional duties, and the Solicitors Regulation Authority has stressed that the obligations owed to clients do not change because a firm has taken investment. Some deals have run into difficulty when the economics of a target proved less robust than expected, a reminder that legal services can be more cyclical and more exposed to regulatory change than investors sometimes assume.
Supporters argue that capital brings much-needed investment in systems and training, and that consolidation can improve service in parts of the market long characterised by patchy quality. Critics worry that a focus on returns could sit uneasily with the interests of vulnerable clients, and that a wave of consolidation may reduce choice.
For dealmakers the appeal remains straightforward. A large, fragmented market, recurring demand and the scope to professionalise sleepy businesses offer exactly the profile that buyout houses look for, and advisers expect the flow of transactions to continue.