Hot investment tip? Try a law firm

The Anglo-Scottish firm Gateley intends to float and is likely to be the first of many, reports Jonathan Ames.

“’Ave a look at these lovely tomatoes, ladies and gents. Check out those gorgeous caulies, my darlin’. And what about this pukka firm of solicitors — get a slice now.” Soon, any member of the great British share-buying public will be able to stroll down the virtual market and pick up a slice of at least one home-grown law firm, the Anglo-Scottish practice, Gateley.

Under two weeks ago, the firm, which last year recorded a £7.4 million profit on revenues of £54.6 million, announced it would make an initial public offering on the London Stock Exchange’s Alternative Investment Market. In other words, it is going to float and become a publicly listed company, making English legal history in the process.

The product of a 2006 merger between Birmingham’s Gateley Waring and Edinburgh’s Henderson Boyd Jackson, Gateley will be the first UK legal practice to offer shares to the public since English and Welsh law firms were allowed to do so under provisions of the Legal Services Act 2007. That legalisation created alternative business structures and jettisoned some 200 years of legal profession partnership history by allowing solicitors’ practices to accept outside — non-lawyer — investment.

But Gateley will not be the first publicly quoted law firm in England. That honour went three years ago to the Australian consumer law practice Slater & Gordon, when it bought London firm Russell Jones & Walker. In 2007, S&G floated on its home exchange in Sydney. A glance at that firm’s share history provides a clue as to why other firms may follow Gateley.

According to the Australian stocks newsletter, The Bull, Slater & Gordon is something of a market star. “With a one-year return of 50.98 per cent and a three year return of 76.34 per cent,” it reports, “[the] personal injury and commercial litigation specialist . . . has richly rewarded investors.”

Indeed, S&G shares have significantly outperformed the wider Australian All Ordinaries Index, which over the same period was up a mere 2.6 per cent for the past year and down nearly15.7 per cent over the past three years.

Gateley’s management team will be delighted if their firm performs anything like that. Its chief executive, Michael Ward, says that Gateley aims to raise a relatively modest £10 million in the first offering, which will be used in part for “strategic acquisitions”.

“Being a PLC will give us a platform from which we can execute our strategic plans in a more efficient way,” he says, already sounding like a man reading from a share prospectus. “It will make it easier for us to acquire, differentiate, incentivise and, where sensible, diversify.” Commentators agree that the move is bold, but they warn that Gateley is a different type of firm from Slater & Gordon and is by no means guaranteed to have the same market success.

“Listing allows for the rapid building up of scale,” says the legal profession business consultant Richard Tromans. “And what kind of law firms want to build scale? Usually those that have practices devoted significantly to commoditised work. But Gateley is not that type of firm. It is going for company-commercial clients and that is a very different proposition.”

The core issue with public listing in the solicitors’ profession is that it instantly brings to bear external oversight of a law firm’s finances. The new co-owners, who will mostly not be lawyers, will hold the partners to account over a much shorter timeframe. They will want a return on investment and they are likely to want it annually.

“Some suggest that is a bad thing,” said Tromans, “because it will force those law firms to boost margins through increased efficiency. But others suggest that it will have a positive influence, as it likewise forces firms to encourage good business practices. And that could be good for everyone involved — the lawyers, staff and clients. If the firm grows, it will provide more jobs.”

The legal market is undeniably evolving. As well as publicly listed law firms, alternative business structures are also being used by global accountancy practices that are gearing up to threaten traditional solicitors’ partnerships. Three of the “big four” — Ernst & Young (EY), PricewaterhouseCoopers (PwC) and KPMG — have received ABS licences from the Solicitors Regulation Authority. That means they can all now effectively launch law firms.

They are already adopting a predatory approach to law firm competitors. Last week, EY swooped on the London offices of global law firms Baker & McKenzie and Weil Gotshal & Manges to poach whole financial regulatory teams.

Matthew Kellett, EY’s head of UK financial services law, is unambiguous about his businesses aggressive plans. “We’ve got big ambitions for the growth of our team,” he says.

“Since being awarded our ABS licence in December, we’ve already grown to a team of more than 25 people in the UK. Providing we continue to attract this high calibre of talent, we expect this figure to increase significantly over the next two years.”

His colleague, Philip Goodstone, EY’s overall head of UK law, elaborates on the proposed benefits to corporate clients. “We are offering something completely new,” he says. “We go in as one team, rather than as just the lawyers or the accountants, so that clients have a single point of contact for their professional services and benefit from a team who have a rounded view of their business issue.”

With competition to traditional law firms increasing almost daily, will more firms follow Gateley’s lead and aim to enhance their fortunes by going public? “It is inevitable,” predicts Gateley chief executive Ward.

However Tromans reckons that the City’s “magic circle” of five global firms — and even the top 20 — will continue to resist structural change. “I’d be very surprised if we ever saw a top-end firm list,” he says. “There is no benefit for them. These are multimillion-pound operations and they can self-finance everything they want to do.”