A survey by Thompson Reuters Sweet & Maxwell has revealed that as many as 77% of law firms do not think that private equity is an 'appropriate' source of funding for their businesses.
The market for the provision of legal services has been altered dramatically by the implementation of the Legal Services Act 2007, known as Tesco Law, which has opened up the industry to investment from non-legal businesses.
The legal services market is worth £25bn each year; however, the anticipation that private investors would rush into the market has proved wrong, as many major players have reacted slowly to the changes and law firms have shown reluctance to accept outside investment.
So far 33 applications have been approved by the Solicitors Regulatory Authority to run Alternative Business Structures, the legal name given to the new law companies with non-law ownership or investment. Of these 33, only one, Parabis, has accepted funding from private equity, opting to receive investment from Duke Street.
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Teri Hawksworth is managing director of Thompson Reuters Sweet & Maxwell.
She said: "Some partners feel that pressure from shareholders to deliver short-term returns would radically alter the culture at their firms."
Private equity funding is viewed with some suspicion, as the investors usually buy struggling or underperforming businesses, then improve them solely to sell on at a profit. This pure-breed capitalism is seen as dangerous to the fabric of traditional firms operating in an industry in which integrity is paramount.
The same survey has also shown that 88% of the top 100 law firms in the UK believed that selling shares on the stock market was also inappropriate. The changes implemented by the Legal Services Act also allow this practice.
Investment into the legal market has generally come so far in the form of bank loans and finance secured against future earnings. Both these modes of leveraging finance involve maintaining the management structure in a business and allow the existing partners to retain control, something which would be compromised if shareholders or equity investors were brought in.
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