STILL WAITING FOR THE IMPACT – ABS TWO YEARS ON
The City had its Big Bang in 1986 with the de-regulation of financial markets leading to increased market activity and many of the old firms being taken over by foreign and domestic banks.
The Big Bang for lawyers was meant to be the Legal Services Act which opened the door to ABS applications in January 2012 but so far activity has been fairly limited and not across the whole marketplace.
The Professional Practices Group at accountants Baker Tilly have been looking into the reasons for this.
The legal services marketplace in England and Wales is large and about £30 bn in size. It is ripe for consolidation with change being driven by the regulator and consumer.
But the anticipated spate of PE dealflow and the first IPOs have not happened.
To date the activity that has taken place has primarily been at the top end of the market where the drive for globalisation and wider client service offerings has led a number of UK firms to tie up with larger players. Norton Rose and Fulbright &Jaworski and King & Wood Mallesons SJ Berwin are recent global mergers.
In the mid-market space there have been a number of mergers driven mostly by purely commercial rationale to address the issues of overcapacity in a sector where there are general commercial law firms without real differentiators.
Neither of these types of deal are really what either the PE marketplace or institutions are looking for.
The traditional partnership model where profits are paid out each year without the creation of capital value, the complexity of decision making and the lack of processes are big barriers. Businesses that can be made more efficient, can be scaled up by bolting on acquisitions and then sold are the drivers for institutional investment.
So, whilst the drivers for dealflow may not be there in certain parts of the legal marketplace and Big Bang has had little effect it has had a major impact at the consumer and volume end of the marketplace. Primarily personal injury.
PE firms have turned their attention to this area where the drivers they are looking for are more apparent. Here, a few PE deals have now been done but the real consolidation has been driven by the emergence in the UK of firms such as Slater & Gordon, the Australian quoted law firm, buying up firms in the personal injury sector to create a significant UK presence.
PE firms have been alive to this too. The largest investment so far being that of Duke Street in Parabis, a claims management firm and only last week JZ International acquired control of Winn solicitors, which provides legal and claims management services.
Going forward, the best targets have probably now been acquired in the personal injury space and those that are left are most likely to be swept up by one of the larger consolidators leaving PE and other potential investors to look for more innovative ways of gaining an entry point.
So Big Bang has had a dramatic impact but probably not in the way originally anticipated. Though, the return to the office after the New Year has brought with it a feeling that there may well be a second wave of ABS activity in 2014.