When Knights announced their decision to float on the London Stock Exchange this month with a valuation of more than £100million, they were undoubtedly excited to become the largest ever IPO by a law firm in the UK.
So one might have felt sympathy for them last week when The Times revealed that international law firm DWF is planning to list later in the year with a valuation that could reach £1billion. Much like the team behind the Shard (which held the title of Europe's tallest building for less than a year before that crown was taken by Moscow's Mercury City Tower) you would forgive Knights for feeling a little overshadowed.
Of course, Knights won't care about the snub as long as the move delivers the growth and profits that they desire.
Who else has made the transition?
The first law firm in the world to go public were Slater & Gordon, who listed on the Australian Stock Exchange in 2007. Nobody in the UK followed suit, seemingly content to wait and see if the move paid off.
In 2015 that Gateley's became the first UK firm to make the move. Gordon Dadds were second to the plate in July 2017, followed by Keystone in November 2017. Rosenblatt became number four when they floated on the AIM this month and they will soon be followed by Knights.
Why are firms going public?
The traditional partnership structure of the law firm has started to face challenges from newer, more innovative models:
Alternative resource firms such as Peerpoint and Lawyers on Demand are growing in popularity. These firms do not employ lawyers on a salary, instead they offer clients access to a roster of lawyers willing to work on short-term contracts. They are changing the way that many clients want to resource legal transactions, as well as the way that lawyers want to work.
Young lawyers aren't as interested in following the conventional route to partnership as they once were. Where partnership used to be attainable in around 7 years, it could now take anywhere from 8 – 14 years. This is understandably a deterrent, especially for those millennials who have become accustomed to instant gratification.
Firms are locked in a technological arms race as they seek to integrate AI into their working practices
Businesses once outside the traditional legal market, like PWC and the other members of the big four, are starting to muscle in on the action thanks to the advent of the ABS structure
In particular, it is the mid-sized firms in particular that are struggling to keep pace in the new age; as the larger firms are better able to fund new advances in technology and continue growing. For the mid-size firms, mergers may offer the quickest way to achieve rapid growth but integrating businesses always comes with challenges.
Going public offers a route to raising large amounts of equity funding rather than the debt funding favoured by the traditional partnership structure. These funds give the firms the opportunity to acquire other firms and swell their ranks. For instance, as part of its admission document to the AIM, Knights has stated that it intends to increase its number of fee earners by more than 200 in the next two years.
The funds raised are also giving firms the opportunity to diversify their offering through the provision of new 'bolt-on' services. Rosenblatt intend to use at least £5million of the £31.8million they raised to create a separate 'third party litigation funding' enterprise. Gateley has been making acquisitions in a number of different areas including tax advisors (Capitus, acquired in April 2016), property specialists (Gateley Hamer in September 2016 and GCL Solicitors LLP in May 2018) and human capital consultants (Kiddy & Partners, July 2018).
What are the risks of going public?
Losing key players at the partnership level
Some partners might not be willing to adapt to the new world order, watching profits that would once have belonged to them go to the shareholders instead. They might also find their influence diminished under the new corporate structure.
If that is so, these partners might prefer to take a big payday at the floating of the company and retire in comfort. In a talent-centric business such as a law firm, this could have a devastating impact on the firm's revenue stream and bottom line. Firms should consider locking key players into fixed term contracts in the event of a planned listing.
Pressure to perform
Some law firms may not enjoy the scrutiny that publicly traded share prices are subject to. With external investors to answer to, the pressure to deliver strong financial results is amplified.
Share prices are notoriously sensitive to scandal. A prime example of this is Slater & Gordon, who acquired the professional services division of insurance claims processor Quindell in 2012. In 2015 the FCA launched an investigation into Quindell's accounting practices, which had a devastating impact on the share prices of Quindell and Slater & Gordon.
News of a referral to the SRA could have a massive impact on the share price of a firm, even if they eventually escape without facing disciplinary action.
How has it worked out so far for them?
The firms that have listed so far were all able to raise funds ranging from £15million (Keystone) up to £50million (Knights).
Their share prices have generally performed satisfactorily as well:
Gateley has seen its share price increase by roughly 70% since listing;
Keystone's price has increased by around 55%
Gordon Dadds have seen a comparatively modest, but still healthy, increase of circa 20%
Gateley and Gordon Dadds both reported sharp increases in profits in the first set of accounts following the IPO. Gateley has been able to keep their momentum going, posting at least a 10% increase in revenue every year since the IPO.
Given these numbers it seems highly likely that more firms from the middle bracket will take the plunge over the coming years.