Analysis

Pressure to generate returns forces listed law firms to think outside the box

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Investors aren’t interested in how many offices firms have got or other traditional prestige metrics

While aspiring lawyers train their sights on securing training contracts with global mega firms, investors in the legal sector are rather more interested the low overhead model of new flexible lawyering firms.

It’s these outfits — that offer no training contracts, have minimal office space and employ more experienced lawyers on a freelance basis — that many reckon will enjoy the strongest growth over the next decade or so. So Irwin Mitchell and Mishcon de Reya, the latest law firms to be considering going public, should expect tough scrutiny of their more traditional approaches.

The flexible lawyering firm that anybody can buy into, thanks to its public listing on the stock exchange, is Keystone Law. Since the Legal Cheek fund bought shares in Keystone in January they have risen in value from 510p to 665p per share. Not a bad return for a few months, but small in comparison to the 250% rise Keystone shareholders have enjoyed since 2017 when the firm went public at 190p per share.

Other non-listed flexible lawyering services, such as Lawyers On Demand, Peerpoint and Re:link (all spun out of big law firms), are also thriving at the moment as the pandemic-induced WFH trend encourages lawyers to re think traditional ways of working.

Is the model really the only way to run a modern law firm, though? Investors get nervous about traditional ‘Big law’ firms, which they associate with bloated networks of international offices (some of which are barely profitable), excessive lawyer headcount and costly graduate training programmes. It’s one of the reasons they have been rather frosty towards DWF, the only firm among the handful of UK listed firms that fits into this category. Accordingly, DWF has seen its share price fall from 125p upon its initial public offering in 2019 to 83p today.

But ‘Big law’ also has its advantages — a pipeline of young talent constantly entering the firm, the associated loyalty this generates as trainees progress into senior positions within the firm or outside as in-house lawyers at client companies, as well as the strength of a brand that comes from being more than a collection of self-employed individuals.

And there is no doubt it can be done with high profit margins and low overheads — see elite US law firms, with their lower staff numbers, and top UK firms like Travers Smith and Macfarlanes that have foregone international offices in favour of ‘best friend’ referral relationships with overseas law firms.

The 2021 Legal Cheek Firms Most List

To thrive as a plc DWF knows that it needs to emulate aspects of these approaches. It’s no coincidence that it has been cutting back on support staff while pioneering a new Solicitors Qualifying Exam (SQE) graduate apprenticeship that allows new recruits to earn while they learn. What’s more, this month DWF confirmed that it’s going to be emulating the Travers Smith/Macfarlanes model of ‘best friend’ relationships with international firms — as it announced tie-ups with firms in countries where it had recently shuttered offices.

It will be fascinating to watch DWF over the next few years shift itself from the expansionary model it followed under previous chief Andrew Leaitherland to becoming something that appeals more to investor sensibilities under new boss Sir Nigel Knowles.

If the markets sense Knowles is starting to crack a new formula for success with DWF the firm’s fortunes could shift very quickly. No doubt those at DWF will have noted the recent performance of fellow listed law firm Rosenblatt Holdings whose share price is up over 100% this year alone after a bounceback in profits and recent acquisition of mid sized law firm Memery Crystal.

The Legal Cheek listed law firm fund

DWF Group: £90.91 fund value (83.4p per share)
Knights Group Holdings: £101.20 fund value (440p per share)
The Ince Group: £145.65 fund value (76p per share)
Keystone Law Group: £113.05 (665p per share)
Gateley Holdings: £113.40 (180p per share)
Rosenblatt Group Holdings: £218.96 (136p per share)
Total fund value: £783.17 (up from an original total of £600 invested in January this year)

This series is in no way intended to amount to financial and/or investment advice. And remember, shares can go up as well down and professional advice should always be sought before investing.

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