Sarah Downey assesses Gateley’s audacious plans to become the UK’s first listed law firm
Following in the footsteps of Australia-listed Slater and Gordon, which demonstrated the benefits of using a share offer to part fund its recent £637m acquisition of Quindell’s professional services division, West Midlands firm Gateley confirmed in May it intends to float on AIM later this year.
The move would see the 380 fee-earner outfit become the first UK-listed law firm with an initial public offering (IPO) aimed at a valuation of £130m to £140m. Birmingham-headquartered Gateley had been scoping the possibility of an IPO since last year. Spearheaded by senior partner Michael Ward and London corporate head Nick Smith, the idea emerged during its strategy review before being sounded out with brokers and by holding focus groups to gauge client views.
Smith said: ‘It’s the natural next step for us. It’s been a well-managed business – good balance sheet, client roster, solid growth, putting us in the best position to exploit this. The legal industry has split into sub-groups and we’re mid-market UK. That means businesses in this space need to maintain high standards of service. We’ve scored highly on that but we need to move our business forward. A public corporate structure will enable us to differentiate ourselves.’
No stranger to taking advantage of a liberalised legal market under the Legal Services Act, the firm is currently configured as an alternative business structure (ABS) having secured a licence from the Solicitors Regulation Authority at the beginning of 2014, allowing it to appoint non-solicitors to its membership. The licence also allows the firm to use the float proceeds to acquire non-legal services – another key part of its strategy.
However, that means Gateley’s affiliated Scottish partner HBJ Gateley, which it joined forces with in 2006, will not be included in the IPO as the firm’s ABS licence is not recognised in Scotland.
Gateley is in good stead to stir potential shareholders’ interest; in 2014, the firm posted turnover of £53.8m up 6% from £50.7m, while profit rose from £17.1m in 2013 to £20.4m. The firm refused to provide its debt position for the latest financial year, however LLP accounts filed on Companies House for 2013/14 showed that cash at bank and in hand totalled over £1.9m, while net debt amounted to £1.5m. It also cleared an overdraft totalling £464,667. But stepping into such unknown territory can cause a spate of problems – a lesson learned by accountancy firms, which have tried and failed at market listing in recent years. These include RSM Tenon, which was swallowed up by Baker Tilly in 2013, while City firm Numerica was sold in a two-way £15.8m deal to BDO Stoy Hayward and Vantis in 2005. Vantis itself went into administration five years later.
‘There’s pressures in the industry to retain the best talent – our view is the traditional model is falling out of favour.’
Michael Ward, Gateley
Smith argues it is not a fair comparison and Gateley is structured to avoid any potential pitfalls. ‘We’re aware of those professional services businesses that failed. You can see there were problems in the businesses concerned. In many of those cases, those transactions were structured more as an exit or capital realisation rather than the desirable important next step in the business. This is the strategy you need to create value for investors moving forward.’
With hindsight on its side, steps taken by the firm to avoid repeating others’ mistakes include agreements made with current partners (who are selling shares and will all move to become salaried employees while retaining 50.1% of the firm’s share capital in aggregate) to not dispose of any shares for the first year. Senior partners are facing a five-year lock-in with claw-back provisions for cash received and retained shares.
Ward added key advantages to the structure include career flexibility. ‘There’s pressures in the industry to retain the best talent – our view is the traditional model is falling out of favour. The brightest people are worked into the ground and no-one knows where the finishing line is. Through employee shareholder participation we can get people that capital value much earlier on in their careers and the link between their day-to-day activity and their growing capital in the business.’
The pioneering move promises to be a test for the impact of outside capital on law firms, an issue that has continued to split the profession since the emergence of the Legal Services Act. A management figure from a rival firm comments: ‘Firms that sell out to private equity are selling the family silver and compromising the earnings of future partners. That will put future partners off from joining. If you’re a lateral and you have two offers, why would you join the firm where profits go to outside investors?’
‘It makes complete sense to Gateley, who’ve got a classy act, a nice spot in the market, have a lot of value in the business and, frankly, want to cash in their chips. This is the opposite of being a partner in a firm which is an institution where you feel an obligation that you’re holding your share on trust for future generations.’
sarah.downey@legalease.co.uk
For further analysis see: Coming Soon – assessing big forces that will be shaping the future of law