What recession? Slater & Gordon, the Australian firm, has been on a roll, buying up 10 firms over the last 3 years, realizing a 21% increase in revenues for 2009-2010, along with a 16% increase in PEP, both modest compared to the 27% increase in revenues and 42% increase in net profit achieved in 2008-2009.
How are they doing that? S&G was the first firm in the world to accept outside investors. In May 2007 it floated a $25million IPO and the rest, as they say, is history. The original 7 partners each got @ $3.6 million and have retained an ownership interest in the ongoing profits of the firm, which are turning out to be significant.
In the U.K., there is only one year left before the final stage of the Legal Services Act comes into force, permitting U.K. firms to accept equity investments from non-lawyers, and a number of investors are already lining up to invest. The law also allows corporations owned by non-lawyers to provide legal services, which raises the specter of "Tesco," a giant grocer, providing consumer legal advice boutiques at their various stores.
Although a number of firms seem ripe for investment, speculation abounds as to whether, after the cost cutting that many firms have recently undergone, there will still be room for private investors to realize a return–typically targeted at 20% within 3-5 years–from efficiency improvements and also whether partners can expect comparable compensation from what remains.
These issues are reminiscent of those raised in the transition in the US financial services industry from partnerships to corporations, which, as we know, provided both significant buy-outs to the existing partners at the time and continues to produce sizeable profits.
Will US law firms follow suit? Many firms, having managed to extract working capital from their partners and through credit lines in the past–even from the debt markets, as Clifford Chance’s $150 million debt issue demonstrated–will decide they won’t need to draw on outside investors. For those firms willing to make the plunge into outside investment, some question whether US law partners accustomed to managing their businesses in their own way are able or willing to admit outside investors to the firm management positions that they are likely to demand. And even if the specter rises of Finley Kumble and others inexpert in managing their own debt. The big question, of course, is whether the US and interested parties, including bar groups, will flex the political muscle to allow the legal industry here the option of following in the steps of the financial industry and their competitors abroad.
One of the more interesting developments in the global legal services market are moves to block or limit foreign law firms from some of the countries with the most explosive legal services growth. India has announced that it "has decided not to permit foreign lawyers into India" while Brazil’s more local restrictions are raising concerns about the future of many foreign practices there. Think France back two decades ago when foreign firms were trying to structure practices there consistent with local concerns.
These kinds of developments may put pressure on foreign firms to invest financially in local firms or the entities that own those local firms in order to participate in this era’s most flourishing markets. Investor-experienced law groups from countries like the UK or Australia may well turn out to be at an advantage in financing, structuring and/or managing those truly international practices.
What is certain is that all these developments are going to be carefully observed in the US and that they are adding fuel to the argument that other countries are permitting innovation that will put US law firms at a disadvantage internationally.