The LB100 results for 2023-24 are in, and while the demise of the mid-market has been long forecast, the numbers suggest it’s a good time to be a medium-sized law firm.
With average revenue growth of 10%, this firms in the 51-100 bracket are well up on last year’s equivalent performance of 6% and keeping pace with the overall average, while they are also are outpacing the top 20, which this year saw average growth of 8%.
The fastest-growing firm in this year’s LB100 is Fletchers Solicitors, with a 35% increase from £43m to £58m, and the North West personal injury and medical negligence practice is notable for being one of a growing number of law firms with private equity interest, after being acquired by an affiliate of Sun European Partners in 2021.
While external investment in law firms has been permitted for over a decade now, before 2023-24, PE interest in law has, in the main, been confined to smaller firms on the fringes of the LB100, with the notable exception of top 50 firm Keoghs, whose parent company, Davies Group was acquired in 2021 by BC Partners.
However, the bar was decisively raised last year with Inflexion’s £342m take-private of top 25 firm DWF, which completed in October – the largest PE buyout of a major law firm to date.
A recent surge of PE interest in the accountancy sector has also raised the question of whether that trend could be replicated in the law. Speaking to Legal Business, mid-market law firm leaders say that the DWF buyout and the flurry of deals involving accountants have come alongside a marked increase in enquiries from PE shops.
Wedlake Bell managing partner Martin Arnold is of the opinion that private equity has ‘definitely raised its interest in the legal profession recently,’ while Moore Barlow managing partner Ed Whittington (pictured above) also tells LB he is approached regularly approached by PE firms. Harbottle & Lewis co-managing partner Charles Leveque says he started receiving enquiries as soon as he moved into his management role two years ago, while Browne Jacobson managing partner Richard Medd says that: ‘There are lots of private equity people keen to have a conversation – and some cold calls as well.’
Inflexion point
So what is behind this increase in interest? One firm which is perhaps better placed than any other to offer a perspective is Dorsey & Whitney, which advised DWF on the Inflexion deal.
She also points out the ability for PE firms to broaden revenue streams using ‘the DWF model, where a firm becomes really an integrated legal business group’, given DWF’s acquisitions of ancillary offerings such as Australian claims management business Proclaim last year.
‘They’re looking at investing in other parts of the business beyond legal advice – small claims, insurance, consultancy, regulatory, ESG, and other complementary offerings,’ Francis explains. ‘There are opportunities which I suspect didn’t really exist five or six years ago.’
Fellow Dorsey London co-head Fabrizio Carpanini, who worked alongside Francis on the DWF deal, believes the legal sector’s traditional wariness of PE is starting to fade. ‘PE is now a much more familiar asset class to law firm partners’ he tells Legal Business, ‘Partners are more open to the fact that it could help.’
Carpanini and Francis both highlight a significant sweetener for reluctant partners: the fact that the change in structure to partnerships required by PE means that solicitors will be in line for a payout when the time comes to move on or retire. As Francis puts it. ‘If you, as a partner, leave a law firm, you don’t get any payout for what you might have contributed to building into the goodwill of that business. You just get back the money you put into the firm and even that usually doesn’t come back for a few years.’
While interest is on the rise, some remain unconvinced that the legal sector is on the brink of a brave new world. Moore Barlow’s Whittington is sceptical, suggesting there is a mismatch between what PE firms what and which law firms are open to a sale: ‘What I hear from the private equity people is that they’re interested in the businesses that aren’t interested in them.’
Arnold voices a typical objection: ‘There are no doubt attractions to receiving such investment, but there will, almost certainly, be a loss of some control and likely a change of culture.’ And as a partner at a US law firm, Carpanini also acknowledges that lawyers outside of the UK are even less open to the idea of third-party ownership: ‘Our colleagues in the States are horrified when they hear what’s going on over here.’
Disrupting the status quo
Carpanini (pictured), for his part, believes that opposition to PE investment is a mindset that partners have to adjust if they want accelerated growth at their firms: ‘PE houses can provide money to accelerate growth and make significant acquisitions without having to ask partners to take less. They can bring mid-market firms to a more international scale.’
One partner at an accountancy firm that has been acquired by PE evangelises about the effect it has had on the business, and believes that many mid-market firms could benefit from the hardheaded business sense that comes with PE investment – while also joking: ‘When you give accounts to lawyers, they come back with the grammar corrected, but you can put down any number you like.’
The rise of the machines
Unsolicited enquiries from potential investors are of course not the only concern facing mid-market law firms. Among the many other topics keeping them up at night, costs relating to technology and the rise of artificial intelligence are high up the agenda for most.
There is concern that the inexorable rise of AI will lead to clients demanding more for less, with one managing partner telling LB that they expect clients to refuse to pay for the work of junior lawyers within the space of five years. And the rapid development of technology means many firms are struggling to keep up, given the ongoing investment required.
‘I know for a fact that a lot of firms in the mid-market have an IT end-of-life situation where they’re going to have to invest in a new system,’ according to one mid-market managing partner. ‘This investment could prove tricky for some firms, he continues, as it would involve persuading partners to ‘give up a whole load of profit just before their retirement for an IT system that they won’t even use’.
One scenario presented by the rising costs of IT infrastructure is a potential increase in mid-market mergers. but in the words of a managing director at a global consultancy firm: ‘If you have two firms who have underinvested in technology for the last 10 years, I’m not sure that merging solves the problem.’
One alternative solution was presented this year with the launch of the new Broadfield network, which BDB Pitmans has joined as a founding member. The mid-market-focused venture, established by Alvarez & Marsal, gives member firms access to the US turnaround giant’s substantial resources including technology and back-office services.
Mid-market firms are also finding it more difficult to offset rising costs by raising their fees; while the top 10 UK firms in the UK have been able to increase fees by 40% in the last five years, according to a recent PwC report, firms in the top 51-100 bracket have had to make do with a relatively paltry increase of 23.5%.
Stevens & Bolton COO Doug Williams says the pace of change in the modern world is another challenge that is forcing mid-market firms to be ever more fleet of foot: ‘Operating pressures and market changes are nothing new, but what I feel shifting is the pace at which those changes are happening. Firms are having to adapt a lot faster to remain competitive, and it’s creating a significant change management challenge.’
Reasons to cheerful
Despite these challenges, optimism abounds on the back of a strong year. Williams is bullish on the prospects for further growth, after comfortably hitting the target set out in its most recent strategy plan. ‘It was our final year with our last strategy iteration, which was to get the firm up to or above £40m, and we blew past it’, he says, in reference to the firm’s 18% revenue hike to £42.3m.
‘We don’t see any reason why we can’t continue the trajectory we’re on, which is double-digit growth each year, Williams adds. ‘We think that growth affords us the best chance to continue with our independent strategy and we see ourselves pushing to be an £80m-plus business by 2030.’
Wedlake Bell’s Arnold is similarly positive on the back of double-digit revenue and profits growth, with turnover up 15% to £58.2m and PEP surging by 30% to £488,000.
‘We were delighted to post a very buoyant, record year for turnover and profit, Arnold says. ‘I think that was a product of the different practice areas all firing at once – including strong transactional M&A and real estate work, combined with a rise in litigation and insolvency: a perfect balance of transactional and contentious areas further enhanced by an outstanding private client offering, which created a great result.’
Moore Barlow’s Whittington describes 2024 as having been a ‘solid year’, despite ‘external economic challenges’. ‘We’re fortunate to have maintained strong relationships with existing clients whilst growing new, promising ones. In 2025, we will continue to get our people out there, compete with major players in the sector whilst maintaining and growing our pool of talented people.’
And Harbottle’s Leveque also has reasons to be cheerful after seeing his firm reach ‘a very pleasing milestone’, breaking through the £50m barrier for the first time with a 9% revenue hike to £51.9m.
‘We saw strong performances across all practice areas, reflecting a well-rounded and robust year for the firm. Key areas of strength included corporate, particularly corporate transactional work. Our contentious practices also remained high-performing, while private client services continued to show steady growth across various economic cycles. These three pillars were central to driving the firm’s financial success.’