In July, the board of DWF Group Plc confirmed market reports that it was planning to delist from the London Stock Exchange in a buyout by private equity firm Inflexion. Having floated in 2019, the fanfare of a record £95m IPO and a valuation of £366m to make DWF the UK’s largest listed law firm has arguably not lived up to the hype.
In the four years since, the firm’s fortunes have been chequered, with its highest valuation recorded just before the pandemic hit at 141.4 pence per share in February 2020, with a drop to 90 pence per share in March 2020 and an all-time low in June 2020 of 53 pence per share.
It’s fair to say that timing has not been on DWF’s side. Notwithstanding listing only a year before Covid struck, the public markets have since been battered by a catalogue of unfortunate events – Russia’s invasion of Ukraine and the ensuing energy crisis, supply chain problems, rampant inflation and high interest rates.
As stated in the recommended cash acquisition document released on the LSE last month, Inflexion intends to use its capital to ‘support DWF in continuing its strategy of acquiring bolt-on businesses,’ as well as work closely with DWF’s management team to ‘accelerate DWF’s organic and inorganic growth.’
Speaking to Legal Business, Sir Nigel Knowles, CEO of DWF, is sanguine about the firm’s position and the take-private: ‘DWF has a strategy that has proven to be a good one, which is delivering. A private owner will help us execute our strategy to give us the best opportunity to achieve this, including for our people and our clients. The same rationale for listing applies to this transaction, just with a private owner.’
Culture clash?
So, how will DWF’s prospects change under private ownership? ‘A lot of the discussion about professional services firms taking external investment is about the cultural impact,’ asserts partnerships specialist Jonathan Cheney at Addleshaw Goddard.
While the most significant cultural transformation would have occurred when DWF decided to list on the stock exchange, there remains the risk that private ownership will drive the company’s culture further away from its traditional law firm origins, due to the perceived reputation of private equity investment and its focus on fast returns.
Cheney explains: ‘If the focus is purely on short-term financial gain, the risk is that there will be lots of redundancies and many roles outsourced to lower-cost regions. That is never going to work for a people business like a law firm, as the people define the culture. Disenfranchising a large proportion of your work force, who are the main asset of the business, isn’t going to work for anyone.’
McCarthy Denning’s partnership and LLP partner, Tina Williams, voices a similar view: ‘The law is a people business, so lock-ins or incentivisation to make people stay will be incredibly important for the success of the transaction. If they haven’t got the people, they have nothing.’
On the potential risks for DWF posed by private equity ownership, Gowling WLG chief executive David Fennell, argues: ‘It will lead to more partner scrutiny and accountability. The partners, who are the key assets of the business, may not want to be in that sort of environment.’
Indeed, several market commentators flag the need to counter the impact of a culture clash and discussed the importance of locking in partners with incentives.
Gemma Phillips, an M&A partner at Addleshaw Goddard who has advised Inflexion on past acquisitions, is more optimistic about the deal: ‘There have been private equity investments into partnerships, particularly in the insurance space, where there have been some mixed results. Inflexion, however, has an incredible track record, and if anyone was going to make a success out of it, I’d expect Inflexion to.’
Meanwhile, another City pundit puts the transaction into context: ‘The law firm businesses that have been successful, like Setfords which is owned by Phoenix, are the types of firms that were already run like businesses to begin with, without a big partner base for example, or with a lot of employees that don’t have the same partnership focus.
‘DWF is different because it still feels more like the traditional type of law firm, which is where the challenge lies – ensuring that they are getting the balance right between keeping the aspects that work for a partnership and making the business work for a third-party investor.’
The war for talent in a PE buyout
‘Inevitably, it does become difficult to attract new talent when the promised land of partnership is no longer on offer,’ reflects Fox & Partners partnerships expert, Dean Fuller.
Indeed, Fuller’s observation arguably applied to the time DWF listed, albeit to a lesser extent, since partners were still able to be minority shareholders in the holding company of the firm.
Although partners will still be able to own private shares in DWF, Inflexion will expect to receive a return on its invested capital first, and the investment agreement will restrict the ability for shareholders to sell their shares more than a public company is subject to. These differences will likely make it harder than it already was under public ownership for the firm to attract high-quality solicitors and retain them in the long term as a private company.
The recommended cash agreement posted to the LSE outlines Inflexion’s intention to pay DWF’s existing shareholders 97p per share, with at least four shareholders set to receive a financial windfall of over a £1m. While this is excellent news for DWF’s current partners, what does the future look like for the next generations of DWF solicitors?
Fuller notes: ‘If you are a current partner, then who cares? But how will the firm retain its staff and motivate the best talent to join it when the proprietary route is gone? You could do it through salaries, allocating shares, and bonuses, but you can’t say: “One day son, this firm will be yours”. There is a war for talent so they will have to be competitive in their salaries.’
On the key considerations from an incentives perspective when taking a listed law firm private, Williams observes: ‘The structure of partner or employee remuneration need not necessarily change at all. The partners/employees may get a remuneration increase, but I should be surprised as this would be a long-term burden for Inflexion. A well-constructed bonus plan, however, provides one-off payments and can incentivise the right kind of performance year on year.’
Fuller adds: ‘Once the partners sell the family silver, what is in the long term for the future generations of solicitors who devote time to developing business for the firm, but never acquire a proprietary interest in it? This will affect the loyalty of partners to the firm.’
He warns: ‘Investors and staff will quickly see through a transaction that is motivated just by financial gain for a small number of people. If you miss out on the windfall, you might be tempted to move on to another firm.’
Does hope float for DWF under private equity?
Sceptics argue that the decision to delist may be a short-term solution for DWF’s existing shareholders to make back money lost during the firm’s floatation, possibly at the expense of its future. Is there a way DWF could flourish under new ownership?
Cheney says: ‘You can have external investment, successful growth of the value of the business and retain your culture, but you need the right investor and the right strategy to achieve that. If cash is reinvested in the business and shares are available for employees, private equity can benefit everyone. It can be advantageous.’
He adds that a private equity house can provide the capital needed to pay rent and staff, as well as invest in technology. Private equity can help finance longer working capital cycles in certain sectors.
‘Fletchers Solicitors has private equity money,’ Cheney explains, drawing on his experience with law firm clients. ‘This has enabled them to make acquisitions and invest in technology, so having access to external capital has been really helpful for them.’
On why more law firms don’t opt for private equity investment, Cheney notes: ‘The traditional law firm model has generally been effective at generating cash quite quickly. If you are working on advisory matters or an M&A transaction, you might be billing your clients on a monthly or quarterly basis, converting work in progress into cash more quickly than a litigation matter subject to a conditional fee arrangement (CFA). So, firms that are not reliant on CFA work are able to generate the cash they need more easily to pay the main overheads.’
‘Selling the family silver?’ Cheney adds: ‘It is a fair analogy, but my response would be that the family silver can increase in value with the support of external investment.’
Inflexion also owns law firm rankings provider Chambers and Partners, albeit that the private equity house is understood to be looking to sell that business. We ask commentators if owning Chambers could present a stumbling block for Inflexion’s acquisition of DWF.
One City corporate partner states: ‘The team that does the ranking and rating stuff at Chambers is incredibly separate from the private equity side. I would be very surprised if there was an issue.’
While another City corporate partner asserts: Inflexion and Chambers are both sensible organisations’, they added: ‘There could possibly be a conflict of interest. Chambers isn’t doing anything regulated. If Chambers isn’t sold by the time DWF is sold – you would take any rankings of DWF with a pinch of salt, but there are no rules regarding what Chambers can do. There are examples in the real world – like food reviewers owning shares in the restaurants they are tipping.’
