Legal services investment: Will the full-service law firm market follow in the footsteps of accounting services?
The thesis for investing in the UK accounting services market is now well-established, with over 20 private equity backed platforms (and counting) executing consolidation strategies, with a broad pool of larger cap investors actively looking to support a number of these on their next phase of growth.
On the back of this success, the law firm market is now rapidly coming on to the radar of investors. While the investment thesis is very similar in many ways, there are some important differences that will need to be carefully considered when looking at this market.
Legal services activity
Investment into the legal services market to date has most commonly been reserved for other specialist niches (such as IP, conveyancing, family law or claims management) or disruptive delivery models (such as Lawyers on Demand, Setfords or The Barrister Group). The three notable ‘first movers’ in the full service law firms market are as follows:
- Lawfront – backed by Blixt since 2021, Lawfront is a regional law firm consolidator that is looking to bring together local leaders that want to retain their own brand whilst benefiting from a central operating platform
- DWF – Inflexion private equity took DWF off the public market in 2023 in a deal valued at £342m
- Beyond Law – most recently, Beyond Law has secured investment from Waterland private equity in 2024 to consolidate specialist legal practices
Also, there is a widespread trend towards law firms moving away from the partnership structure to support their ability to raise funding. With over 2,500 partnerships (traditional and LLP) registered with the SRA, and a further 5,232 limited companies also registered, the activity to date is clearly only scratching the surface of the wider opportunity.
The investment thesis
There are numerous parallels with investment in the accounting services that will give investors a level of conviction over the opportunity:
- Highly fragmented landscape
There is an extensive landscape of small independent partnerships that supports an attractive buy-and-build thesis
- LLP model drawbacks
The LLP model is increasingly not seen as the right ownership structure in the legal services industry. Amid pressures to invest in compliance, people and technology in an increasingly competitive market, a corporate structure is seen as a more appropriate vehicle to stay ahead in the long term
- Trusted advisor delivering mission critical services
Lawyers tend to be an important partner for businesses and this creates a degree of stickiness and ability to cross sell relevant services
- Attractive financial profile
High value advisory services generate strong margins that all drop through to cash given the limited capex requirement
- Platform economies
Scale is holding a lot of smaller law firms back as the back office burden is disproportionately large. Increased scale through consolidation supports the thesis for efficiency investments in the operating platform that allows lawyers to spend more time servicing clients
- Technology
Technology (AI in particular) is moving very fast and most law firms would probably admit to not investing as much as they might like in this area. The partnership model and lack of access to capital is in part responsible for this. This therefore presents an enormous opportunity for technology first-movers to build a sustainable competitive advantage in the market
Potential challenges
Despite these attractive dynamics, there are two fundamental differences between law firms and accounting services firms that investors will need to consider:
- Legal work can be ‘lumpier’ than accounting services
Accounting services is often underpinned by a recurring requirement for periodic management accounts or tax filing (for example), underpinning a predictable and steady revenue profile. Legal work can sometimes be more ad hoc in nature, and linked to certain business events or activities – for example contract renewals, M&A or litigation.
From an investment perspective, it is therefore important to understand the profile of each service line, and get comfortable that whilst there could be some ebb and flow across the client base and services lines, the portfolio effect means the overall profile is that of resilience. Importantly, evidencing that clients are sticky over the long term is important, so even if a client drops off in one year, they will return when their activities so require.
At the smaller end of the SME market, legal support tends to be higher volume and lower value, and this profile can create a more predictable and resilient revenue profile.
- Clients often buy the lawyer over the brand
The accounting services market benefits from an inherent stickiness as clients tend to buy the brand as opposed to a single accountant. Across law firms, it is more common for clients to be loyal to an individual lawyer that they trust. This creates a more acute key man risk for investors. There are a number of ways to mitigate this:
- A number of SME full service law firms consciously cross sell multiple service lines to clients and ensure clients interact with multiple teams – this underpins a more enduring client relationship
- Ensuring an ownership structure facilitates strong incentives for high performing lawyers to stay and be rewarded commensurately is important to reduce any flight risk
- Creating a culture where lawyers want to work, and investing in an operating platform and technologies that reduce the non-client facing burden on lawyers, will underpin retention and attraction of valuable talent
On the other side of the coin, this dynamic means that attracting new lawyers can drive strong growth if they can bring their book of clients with them. Therefore, creating an attractive place to work can support senior hires and team lifts that could prove a very effective growth strategy.
Despite it being inevitable that a number of investors are put off by these challenges, we feel the overall thesis remains very strong. We expect that once a few more deals are announced, we will see a marked acceleration in external capital moving into the full-service law firm market as all firms start considering how they can stay competitive and future proof their businesses.
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