Are law firms ripe for Private Equity investment

In this episode, Alex Rawlings speaks with Adil Taha, a private equity operator specialising in the UK legal sector. They explore why private equity has struggled to scale law firms, the challenges of buy-and-build strategies, and why many legal businesses are weaker than they appear financially.

Adil shares lessons from rescuing and rebuilding Child & Child, explains why consumer legal services are attracting the most PE interest, and discusses how law firms differ from other professional services businesses. The conversation also covers the impact of AI, rising salary costs, partnership structures, and why the US legal market may offer bigger opportunities for investors.

Topics Covered

•  PE investment trends in legal services 
•  The Child & Child turnaround 
•  Why law firms are difficult to scale 
•  Problems with traditional partnership models 
•  Why buy-and-build strategies are struggling 
•  Consumer legal services vs full-service firms 
•  The role of AI and rising costs in legal 
•  Why the US market is attracting PE attention 

Timestamp Highlights

• 00:00 – Introduction to Adil Taha 
• 02:29 – Child & Child acquisition and turnaround 
• 09:11 – Where PE is investing in legal 
• 14:55 – The hidden weaknesses in law firms 
• 26:51 – Why professional services are hard to scale 
• 35:23 – Investment strategies that may work in legal 
• 45:05 – Why PE is looking toward the US market 

Raw Selection partners with Private Equity firms and their portfolio companies to secure exceptional executive talent. We focus on de-risking executive recruitment through meticulous search and selection processes, ensuring top-tier performance and long-term success.

🔗 Connect with Alex Rawlings on LinkedIn https://www.linkedin.com/in/alexrawlings/
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Transcript

00:00
Welcome back to the Royal Selection Private Equity Podcast. Joining us today is Adil Taha, a private equity operator within the legal sector. Guys, we are really going to go deep into professional services industry, focused on law, focused on the acquisitions, focused on what's going happening, in the US, a lot in the UK. Is private equity...

00:28
right to start investing in the legal sector. Let's answer the question.

00:36
Adil, show us a briefing sign to you, Yeah, thanks, Alex. So Adil Taha, as you said, private equity executive, been operating inside UK Legal now for almost a decade. Before that, got a brief stint in investment banking, came over to private equity about eight, nine years ago. And then since then, sort of straggled across equity and UK Legal. Well, so talk to us about

01:06
You're, let's start with something really open. Just talk to us about your experience within and give us a bit of an overview of what you've been doing with regards to investments in the law sector. Um, and then we can dive into some of the deals that you've done, et cetera. Yeah. So I was always based in operations in the investment banks to date. nine years there came across into PE. I wasn't given the title operating partner at the time, but it was definitely a sort of.

01:35
On the tools type role, it was very hands on. was, was diving into portfolio companies, representing the investor back then. We were a bit green and a bit new to it, I guess. But as the sort of, as private equity has evolved on looking back, it was kind of that investment manager role where you'd go into, into a firm and you'd be the sort of touch point for the investment committee back at base of the fund.

02:00
And that's how I started in terms of cutting my teeth in UK Legal. I was parachuted in as a COO into a London law firm. And then from then on, managed to find different roles and gigs in UK Legal, know, representing a private equity fund or being hired directly by law firms who could see my skillset as a COO or an operating partner is something that they needed due to the

02:29
you know, the operating model in UK legal not evolving as much over the last decade as maybe other sectors have. OK, we're going to dive into that. So talk to us first about the kind of journey. So Child and Child is one of your your projects. Talk to us about our journey. Yeah, that was the first one. So joined Omni Partners at the back end of 2018 and then through early 2019, we became aware of

02:57
A uh London law firm called child and child, which had basically trained itself into, into quite a bit of trouble. They, they had uh quite a poor management team who had taken the firm down one set and Ruth in terms of their commercial lease. And it was an unsustainable lease that ultimately the moment that revenue or demand for their services shown any sign of slowing, they would end up in quite a cashflow issue. And that's exactly what happened.

03:26
and as a classic private equity fund, we pounced on that. We provided them with a rescue strategy, which was ultimately a pre-packed administration. We took them, looped their staff, we bought the debts, the pennies on the pound, and we relaunched them after a few months of dealing with insolent practitioners. If I remember right, nobody lost their job. We managed to save everyone, and we kind of opened the doors on the new child and child a couple of months after.

03:55
ultimately crashed and we then ran them for about 18 months and I stepped away. I think at the beginning of 2021, we were supposed to actually start to sort of wind down in the middle of 2020, but then COVID came and the firm was not equipped to handle the whole work from home policies and everything that was required. There was a slight capital need as well and we managed to hold them through that and then exit reasonably well.

04:25
back of that. then from then on, was approached by the owners of a very large sort of high street conveyancing firm who wanted to launch something a bit different to corporate boutique. They'd seen what I'd done with Child and Child. And I think they were actually in the market for Child and Child. And as the key for we beat them, we beat them to the asset. And I think they were

04:52
slightly impressed with some of the things that we did. And they actually brought me in to launch corporate boutique law firm in London from scratch, directly following child and child. So then I get into that and then, and then literally Alex from then on, it's just the snowball of job after job. think locally for me, there's not many private equity execs in UK legal who have managed to get a few successes around the belt. And if you have, and you can demonstrate that you can bring value to

05:22
to an operating model and you're not afraid to stand up to lawyers a little bit, then there'll always be a demand for you. What's your take on what the good... You see lots of different law firms. My take on law at the moment is it's quite a boring market and there's lots of turmoil, lots of challenges. So therefore people are turning to lawyers to resolve some of those. What's your take on what the of fastest growing and what I would say sustainable...

05:52
type law firms are doing that maybe the other guys are missing out on? you've illegal, over the last decade, has gone through this sort of rush to get to be a full service practice. think a lot of law firms wanted to be able to say that they can service any type of client. So they started to really open the doors on trying to become a full service practice. So that's all of the.

06:18
the business, all the B2B services, but then all the B2C as well, and also B2C. you know, there's law firms out there now that claim to be able to do every type of service in legal. They're the ones who I find tend to struggle when it comes to really growing the practice in a profitable way. Growing a law firm is quite easy. Most of, if not all of the top 200 firms have grown year on year for the last decade or two.

06:47
The issue is whether it's clean growth, whether it's profitable growth, and also the cost of that growth in terms of if you've got AAA rated clients and you start to take on sort of B's and C's, you're technically growing in terms of revenue, but the actual quality and the credibility of that client base is actually starting to be diluted and you start to see that in your credit control and how fast clients pay their bills and how often they challenge fees and so forth.

07:16
That full service model, I think, is starting to be found out a little. The best ones in terms of, from an economic point of view, the boutiques that stay in their lane. So if you're a litigation boutique or a corporate boutique, you look at some of the American firms like Quinn Emmanuel, who have came to London sort of 10 years ago, and they've managed to build up to 300 million pound business in that time, overtaking London law firms that have been around for centuries.

07:46
how do they do that? Because they know what they're doing, they know what they're good at, they know what they're not good at, and they kind of stick to, you know, stay in their lane and stick to what they're good at. And they manage to scale incredibly well when you're not looking to grow in every other area. If you're sticking to one or two practices that have a good sort of, a very belt of demand, which litigation does certainly in London, it's sort of the litigation capital of the world.

08:16
and then you're going to do really well. oh I would say the boutiques are probably where the really strong profit gains have been over the last decade, um which is why we're seeing as well quite an influx of US law firms into London with a few transatlantic majors of late, because obviously the American law firms are running the same way, which allows partners to be paid.

08:41
a of a lot more than UK partners and they're starting to bring those practices and those structures to London. Interesting. Same advice I keep giving to private equity and Arianish to broaden your appeal. The jack of all trades. oh what area of law as we look at the investment side, what area of law is attracting the most interest from PE currently? I would say

09:11
In terms of what's happening, you're seeing in my view, and I've got the data, I've built my own database, which has taken a lot of months to build. I don't think legal does data very well. So I kind of took it upon myself to build my own database. And from what I can see is that there's been a lot of very average deals in UK legal. 90 % of them have been by law firms that have a revenue of less than 30, 25, 30 million.

09:40
which puts them in that sort of regional space. In terms of what type of law firm is PE attracting, those regional law firms of late have been, 70 % of PE deals have been in that space. The rest have been in the consumer space. So family, personal injury, type of consumer services where you've got the biggest family firm in the UK is now private equity backed with Stowe.

10:09
the biggest person injury firms, the biggest two Fletchers and Express solicitors. They're both private equity backed as well. the signs that are starting to show is that the consumer play is, there's a much stronger investment thesis to the consumer play because it's less relied on rainmakers and partners. You take away vacuum and risk from a rainmaker or a partnership model.

10:39
Ultimately, there's going to be personal injury claims, there's going to be divorces and child arrangements, whether you buy a law firm or not. So if you buy one, you manage to then use your investment capital to build a lead generation type structure whereby you can source the work, price it and deliver it and execute it and then collect it really well. Then you can

11:04
It's very likely that a private equity fund working with the right legal people could build something quite special and get an exit in that. The only credible exit we've seen over the last five years has been with a family firm in the consumer space called Stowe. The other firms, Alex, the regional firms that we've seen a hell of a lot of activity, in my opinion, most of those equity deals have been

11:33
And certainly on the P side, a sort of positive idea of being able to do a buy and build where you, you know, you basically roll up a bunch of similar size firms and you build new amalgamate, I feel six or seven, 20 million pounds. And you get 150 million pound portfolio. And then you look to trade that to the next sort of bigger P investor who then wants to either keep building.

12:02
you know, change it internally or take it international or whatever they want to do with it. But the data tells me that that in build play in the regional space is not working for PE. They're hitting a lot of roadblocks with partners. I think they've overpaid on a lot of deals as well, and they've paid partners a fortune on the entry when paying off pretty partners with day one consideration and then an out and then they're struggling struggling to get.

12:30
a tune out of those partners over the next three, four, five years when, your value creation plan kicks in. And ultimately, I think a lot of the firms that have been bought have been more distressed than the investor thoughts at the time. Law firms are incredibly resilient. As in they don't go bust quickly. They, it can take years for a very obvious law firm that's going bust to actually go bust. If you've got a management team that

12:59
that knows their way around sort of credit control and paying suppliers and all these other sort of dark art that comes to keeping your business going. you know, unless you know the signs and the cracks and where to look and maybe you have a bit of trade intel, law firm can appear quite fine from the outside and it's only doing a forensic view of their books or knowing if someone in the firm, do you actually then...

13:27
become aware of the fact that it's actually a lot more distressed than you think. And I think a lot of the law firms that have been acquired by PE are slightly more distressed than they thought. And they're now struggling to get a tune out of them or certainly struggling to justify the extra price that they will need to make two or three times their money. you know, there's a few firms now, there's a few PE investors who have firms that are hitting years four, five and six.

13:56
And they're into that area now of they, are they going to be able to find that secondary? Are they going to be able to find that exit? And the signs so far have been, that there's no obvious sort of exit there for them. Right. So there's quite a lot to unpack on that. Firstly, you mentioned when you say average deals, on the investment side, on the actual going in rather than the exit, as you mentioned, which we'll dive into, but.

14:26
When you say that average deals, are you measuring the average and you kind of kind of framed it as all these are kind of average acquisitions or average platforms. Just how are you measuring that from an average perspective? Are you saying that's because the revenue is small? Are you saying that because the business growth potential for that law firm based on their foundations and how those scales difficult? What are you putting that kind of phrase around? Yeah. So the database that I've built, it kind of ranks.

14:55
every firm in the top 200 across about 60 performance metrics, commercial and operational. So it gives you a complete deep dive on the top 200 and how they're doing. And you'd be quite shocked to see in terms of the regression over the last few years when it comes to some of the core metrics. So lot of the legal press talk about revenue, profit and PEP, which is Profit Pair Equity Partner.

15:25
Revenue, as I said before, everyone's growing. So revenue is going up year on year. It's quite a, if you kind of measure a law firm by revenue, it's a bit of a false economy. Profit again, operating profit can seem OK in terms of, know, if profit is grown by 5 or 10 % from last year, that might sound like it's OK. But then if you then look at the operating model and they've, you know, they've sort of

15:53
salaries by 12%. They've paid partners more over that period of time. Their IT costs have gone through the roof. They've actually had a uh claim that they had set aside in case it went wrong and it has gone wrong and then they've had to pay the claim out. So there's a number of things that can disguise, that can make a law firm seem better than it actually is. And PEP is the most manipulated metric in UK legal. It's ultimately equity partners.

16:22
finding a really easy way to justify the eye drawings and for them to justify their last year of trading. If you keep the equity door closed, which is happening in UK legal, there's less equity partners coming through the ranks over the last 12, 18 months and then sort of ever before, then it's quite easy then to manipulate PEP because that

16:49
lower number that you're dividing by in terms of the number of equity partners is staying consistent or it's hardly improving. what I've done, revenue per lawyer and profit per lawyer, probably the two key metrics to look at in terms of trending. What's the revenue per lawyer over the last decade? What's that journey been like when you map it to inflation, which a lot of people don't do? All my metrics are mapped to inflation. We have a couple really high inflation years post-COVID.

17:19
sort of 7%, 8%, 9%, 10%. So if the law firm has grown by 5 % during those years, it might seem quite good. But in reality, if you actually look at it from a purchasing PowerPoint of you in terms of inflation, they've actually gone backwards. So revenue per lawyer and profit per lawyer have decreased in 70 % of the top 200 over the last 10 years, which surprises a lot of people.

17:47
Basically what's happened is law firms have grown incredibly well in terms of Whether they're merging or they're hiring or they're new roles, there has been a huge influx of uh jobs into UK legal. So law firms now are bigger than they've ever been. Their salary bills are bigger than they've ever been. And they're kind of banking on the fact that they can keep

18:15
going back to the well every year and coming up with the goods to obviously meet the high costs. But what we've seen over the last couple of years is a lot of these law firms actually start to blow down where they finally get more difficult to drive revenue via price. Clients are now starting to push back on price, certainly in the wake of AI. And also just the incredible cost of people, whether it's the US law firms, whether it's London,

18:45
There's been a huge drive in the cost of people in legal, both the fee earners and the operational staff. And it's really easy nowadays to end up with a salary bill that is quite unsustainable. And unfortunately, a lot of the regional firms, as we discussed before, those firms that are being targeted by PE, they do have quite high salary costs. They have quite a tight equity door.

19:14
A lot of them, I believe we're looking for a way out over the last couple of years in terms of if they can get a big paycheck from a private equity investor to come in and share this problem with, then let's do it. And I think that's what we've seen a lot of. I don't think we've seen many sorts of young, hungry, proactive equity partnerships that are looking at a private equity investor as a way to table charge their business. I think a lot of it has been

19:43
bit of white flag moment by equity partners whereby they kind of know the game is up to some extent and they can dress it up as a we're proud to announce that we've taken investment on the next stage of our journey. You it sounds really good, but when you when you study their economics and the books of these businesses, which I have, and you really start to see that this was a business going nowhere.

20:10
A lot of these firms have seen revenue per lawyer, profit per lawyer decline and a rate of knots over the last few years, certainly since COVID when salary inflations really hit UK legal. And the way it works, Alex, which I think is a really important point, is if you're not in legal, you might not know this. The way it works in most traditional law firms is they empty the tank. So there's no retained earnings in law firms the way there are in a bunch of other firms. Yeah.

20:38
So they empty the tank and they use working capital via bank debt or some other revolving credit facility to start the year to make sure they can pay the bills in those early months when cash hasn't built up yet. But they empty the tank and the one thing private equity like when they acquire firms is being able to demonstrate to an investment committee that there is real equity value in this business. And there's a really clean way of valuing this business.

21:09
When there's, equity partners are taking every penny out every year, there's basically no balance sheet to a law firm. So the normal sort of checks and balances that PE do, you can't do with a law firm. So what they try to do is they try to normalize the EBITDA of a law firm by looking at the equity partners, shifting them to a lesser, salary type pay. So let's say an equity partner has taken 500,000, they shift them to 250.

21:38
And that 250 that they saved, they then put that into an EBITDA. And they basically do that across the entire equity partnership. And they can say, these equity partners that are taking home in total 20 million, we've actually adjusted their drawings to a salary. And that's dropped different 20 to 12. And we've now got, from what we believe is an adjusted normalized EBITDA of 8 million.

22:06
the multiple we're willing to pay is this, there's this much cash, this much debt, and they then come up with evaluation via that way. The problem is one, it's completely alien to lawyers going through that process. Even corporate lawyers that are trained in the corporate world, I've seen them really struggle to grasp a private equity process when acquiring the law firm. But you do have sort of that.

22:32
unstoppable force and a movable object type scenario where you've got P trying to get into this sector. If they can see the play, it's highly fragmented. All the money's been taken out every year. So the operating models will stop the real investment. AI is knocking on the door. Demand for legal services has never been this high. You know, a good private equity firm that knows professional services could come in and make a real difference in the right

23:00
law firm under the right strategy. The problem is, I think a lot of them have come into the more desperate law firms. I think a lot of them aren't employing the right strategy. This buy and build play is a very difficult play. I don't believe any private equity backed law firm has done it right yet. The only firm that I know has done it right is actually a PLC law firm called Knight, who um

23:28
acquired 17 law firms since COVID. The biggest consolidator in UK legal that's PE back that I think has done 12. So they're being outbought a firm like Knight, which is a pure PLC law firm. There's no prime and equity to it. But they're not just being outbought, they're being outthought as well. Because the way Knight work is they acquire law firms. They are very open about what they do. They don't take all the high cost.

23:57
deal, they strip out the firm of all of the cost and the debt and the sort of toxic nature of law firms. And they bring through the sort of the cream of the law firm. They bring in the fee earners, the really strong operational staff who add a lot of value to the operating model. But they do leave a fair bit behind. Whereas I think what private equity are doing are trying to buy many law firms not entirely knowing

24:26
How much can be let go? How much can be retained? And they're bringing a little bit too much with them. And then that's kind of stopping those businesses from really driving on. And then you end up in that position where you've probably overpaid slightly for these assets. And then you're at years four, five, and six, looking for an exit. There's a couple of players in the market who are there who I know are currently looking for exits. Some will be okay.

24:55
but some will struggle because they've overpaid and they haven't done enough whilst having the assets to demonstrate to the next buyer that this is worth buying because what we've done, you can then go and do even further over the next investment cycle. A quick break from the podcast to introduce Chief Outsiders. Chief Outsiders help private equity firms and their portfolio companies accelerate revenue and increase enterprise value fast. Their bench of seasoned growth executives

25:25
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25:53
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26:22
visit chiefoutsiders.com. The Chief Outsiders growth starts here. Interesting, there is so many similarities between what you're sharing and the executive search and recruitment industry, which m has also had a similar turmoil with regards to private equity and continues to do so. em So let's just, you've given us some indications of this already, but I want to dive into it little bit more detail.

26:51
So my take on the professional services industry in a whole is it's hard to scale from private equity lens due to the nature of the businesses. Now you've referenced a lot around the, clearly just taking cash off the table and the kind of, I think that comes down to a little bit of the unprofessionalized executive team, but I'd like to dive into that. And obviously there's been law changes with regards to who can own now, which has opened up the door to private equity.

27:20
We've seen something similar in the US at the moment, which is a of a frenzy around residential commercial services and that interest in acquisitions of those industries, which is your plumbing businesses, your age-factor businesses, which are so people-intensive. You think it's a service business, but it's not. You need somebody to come in. You need somebody to have it. And that brings a level of risk from a key man perspective. Now, the professional services industry, obviously law has that.

27:48
additional risk where the rainmakers are individuals who can be bringing in a considerable amount. We think about customer key concentration risk, where we're talking about who's bringing in the business. If they walk away, there's no guarantee that the business remains with the company. And suddenly you've lost a lot of revenue and obviously subsequently a lot of data, but maybe not the case with what you just shared with them not having achieved that. But what's your take on...

28:16
Like the infrastructure of these businesses, which is preventing private equity from being able to scale them because the model is scalable. It just sounds to me like it's not maybe quite the right operating model for buy and build and growth, which that kind of leads to me to say, well, it's the wrong people leading it and it's the wrong structures. Is that as simple as that or is there more complexity to it? Yeah, a little bit. think for decades, lawyers have had it their way.

28:46
you know, traditional partnerships, I've kind of ruled the roost and, and predominantly, you know, legal was a, was a very male orientated sort of arena. And over the last few years that, you know, that is changing, but certainly not changing at a rate of knots. And there's still an element of that today. And, and I think there's a real struggle for the top lawyers at these firms. When I say top lawyers in the management roles,

29:15
to kind of admit that it's going to take someone from a private equity or from a finance background to come in and start to really show them how to scale this business. I think uh there's a huge political ego thing in legal that is very real. People talk about it quite flippantly, but it's very real and it prevents some very commercial decisions from happening. It also prolongs a lack of decision making as well.

29:44
And, you know, there's the, I've sat in, I've sat at board tables or in partnerships where partners will take five or six meetings to make a decision that I know for a fact, the private equity board would make within five minutes of one meeting. And that isn't me trying to play on words or sort of, you know, amuse anyone that, you know, that is a true statement that I've seen play out. And I think the biggest

30:12
sort of hurdle here is a real lack of understanding on both sides. I I think lawyers in the management roles don't entirely appreciate or understand what private equity can bring to your business. And that's partly on them, but it's partly on private equity as well. I don't think they've done a great job of telling the story to these managing partners and CEOs in terms of what we can do. I think it's a little bit vague. I've sat in some beauty parades where I'm listening to investors pitch to

30:41
managing partner of a CEO. And sometimes I'm winting at, you shouldn't say that in terms of, you know, that's not what this or management managing partner wants to hear at this point. So there's an element of being quite green when it comes to legal. think a few people went in with the idea of we've just done accountancy. amount of times I've met a private equity investor and they told me, well, we've just done this in accountancy. And I tell them,

31:09
So that's the worst thing to say to a lawyer or to a law firm. It's like saying, you know, I can play Premier League football because I used to be a rugby player. It's like, no, no, they both are sport with a ball and then that's the end of it. And it's very much similar in accountancy and legal. They might charge for their time. There might be some similarities in terms of. Are they engaging into aqua clients and how they bill a client?

31:34
the fundamentals, the characteristics, the culture, the DNA of these firms, these partnerships, vary so much. Legal is so much more complicated, so much more political, insecure, egotistical. I think a lot of private equity are starting to realise that it's probably not worth the fight. There's been a few deals, there's been somewhere between 40 and 50 deals. Some are really not worth talking about, but

32:03
you know, we'll throw them into the total. But over the last six months, there's been quite a slowdown in deals, which is not the main thing. The biggest thing is that there's been a lot of deals that have got to a point and then fell through. And I've heard of that, you know, a dozen times this year where a private equity investor or an agent or advisor has kind of gave me the elbow to say, just so you know, we were this close to getting this over the line and it fell through because of this reason.

32:33
And those big reasons tend to be around valuation and what partners are going to get paid on day one. Control elements of the deal in terms of who can decide what is, you know, is a big one as well. But ultimately, you know, I think there's been quite a lazy investment thesis when it comes to PA. I think they've thought it's very fragmented. We'll just buy a load of fairs, build them together and then sell the, you know, sell a bigger j-j-j-j-

33:03
Jigsaw piece. Unfortunately, ironically, I think that might have worked a bit better 10 years ago when private equity was still very able to buy law firms, they just chose not to. I think the market and the sectors moved on quite a lot since then post-COVID. think COVID really forced a lot of law firms to make some quite severe changes.

33:26
And there's been an influx over the last few years as well of American firms and there's been a lot of movement in the in the lateral partner market as well, which again drives salaries and costs. um So it's quite difficult to pinpoint one reason why this hasn't taken off and because, as you said on paper, there's a number of reasons why this could could and should work. But I think the biggest I honestly think the biggest reason is down to

33:54
a lack of understanding on both sides. When PA have gone into other sectors and they really sort of hone in on a sector and they kind of give it everything, they tend to do their homework really well. I think the problem with legal is it's so closed and so guarded unless you're in a law firm and in a partnership. know, it takes you probably a good two years to really understand a law firm in terms of sitting in back to back partnership meetings, board meetings and

34:23
seeing how they make decisions, know, where are their priorities? How do they value their staff? What's their performance culture? What's their blame culture? All these things that really come into it when can we scale this firm? And I just don't think PE have been able to do that, to do that DD, you know, they do commercial DD very well, obviously, and they build all the data models to prove that if this and this and this happens, then we can certainly make this work. But there's an imperfectness

34:53
And there's a very sort of organic living organism to law firms. That's really difficult to financially engineer. And you need to have done times in these firms. know, fortunately, fortunate for me, you know, I've done almost a decade in UK legal as a PE guy, a kind of city and now understanding the sector probably better than any other PE guy or girl. em

35:23
If anything, it just kind of highlights even more how hard it's going to be for someone to get this right. It's starting to look like the two key ways to, PE to make a real splash in UK legal. One is the consumer play, which is what Stowe have done, what Fletcher's have done, what Express are likely to do, which is basically use a constant demand, like a family, like a personal injury, demand is out there. Can we build an operating model?

35:52
via a tech stock, via the right people, via lead generation, via AI and pricing and all these things. Can we build something that allows us to capture that work?

36:03
There's not many big firms in that space as well. So there's a real good opportunity to kind of be the market leader. And then the other one is I think, forget about the buy and build play. It's going to be too difficult, certainly in a full service model. If I was a private equity investor and I could get the ear of the bigger firms, firms in the north of a hundred million and actually start to give them a minority patient capital play.

36:30
which is we're not interested in coming in and ripping everything up and telling you what to do. We actually think you're a really good business. You've proven it over the last few years and there's not many of these law firms by the way. You really have to do your homework to find out which ones are worth it. But we'd like to acquire 10, 15, 20 % of your equity points. Kind of sit in the corner as a super equity partner. Take a drawing like everyone else at the table every year. That will be sort of our minimum.

36:58
coupon hurdle rate that we take every year to justify the investment. And then we want to kind of ride with you over the next 10, 15 years in a, you know, on a, an equity bill journey, which will involve some M &A. It will involve a lot of lateral hymen from competitors. It might involve expanding internationally into Europe, the UAE, Saudi. We're seeing a lot of firms do that, but what we're not going to do is come in and try and do everything in five years. Law firms,

37:28
It's incredibly difficult to turn to change. And I think doing it on the general life cycle or investment cycle is too much. think stretch it out as less a slice of the pie, but really align on that vision in terms of where we think this business can go. Take your hurdle race every year, and then find a way to then.

37:56
Execute a credit event in 10, 15 years time when a firm's gone from a hundred million pound firm that you invested in today is now is looking at 350 or 400 million revenue in 10 or 15 years time. And yes, it's not the quick turn that most sort of LPs want. Yes, it's going to be quite a big lock up period in terms of

38:23
So it's probably more favored towards family offices, pension funds, sovereign wealth funds, perhaps. But I do think if you stripped away all emotion from it, think that would be the key investment thesis. And if you pick the right law firm, and there's a few really good law firms in that big sort of mid-market to upper mid-market, who have consistently proven that they can drive their firm forward.

38:53
I would rather own 15, 20 % of that than own 70 % or have full control of a 30 million pound regional firm. But I'm not convinced, has the legs in it, that they really get me to two or three times my money in sort of four or five years, which is what obviously private equity aim to do. Everyone likes Simple and I know more than that, no different than that. If we just look at the M &A play, because that would be obvious.

39:22
That would be really obvious. Right. And it's the same. have actually, I have the same opinion as you with trying to require recruiting businesses. M &A is just not. Um, and I know my reasons for it, but if you were to say there's two reasons why you don't think M &A works, what do you think of those two reasons? So the two big reasons I would say.

39:46
One is that PE have never done it before. And over the years, there's not been a huge amount of M &A in legal. What you have in legal is one part, the bigger partnerships swallowing the other. And what happens is they basically, the smaller partnership join the new part, the bigger partnership. The other staff come over, they very much continue to work in the same offices. There's some integration, there's some work referral, you know, but to do it in a way that

40:15
will ripple your investment. That M &A play needs to look completely different to the usual sort of much sort of slower absorbing M &A play that's happened in UK legal. So for it to work. And I agree with you, Alex, it should work. It's so fragmented that it's you should be able to buy businesses and build value. And you're right. And as I said before, night.

40:44
is the only firm I know who are doing it. Knight is a law firm that's owned publicly. It's got external shareholders. It's a PLC. So it is doable. What Knight do, very much similar to a P-back firm, when they spot an acquisition or they smell that there's an opportunity, which they're very good at, they can go to the public market to raise funds to be able to get the capital to do these deals. Whereas a normal law firm,

41:14
would never pay for another law firm. A sort of privately owned law firm, is run by a bunch of equity partners. They would never go and put their money in or go to the bank and half a pound actually pay the incoming firm a bunch of money to join them. These trade acquisitions are basically cashless. It's a partnership swallowing another. So what you've got, you've got

41:44
very little experience on the legal side of the M &A play. said, nights oh are the exception. And then on the other side, you've got PE who have no experience in buying law firms, obviously. So this consolidation play, which works on paper, it takes quite a experienced skill set to go in. And it also takes a lot of tough decisions to make it work, to get two or three times your money in five years. Not only do you need to buy

42:14
a number of firms, you need to buy them in a way whereby you're taking nothing but the commercial valuable part of those firms. You need to be prepared to make very, very tough decisions of we are as part of this acquisition, we're going to actually make 10, 20, 50, 100 people redundant because they're not part of our plan. And we don't need those people in the upside or the paralegals or the secretaries or whatever it may be.

42:43
Because the, jigsaw they're, they're joining, we actually already have enough of those. And that's exactly what Knight's do. Knight's have, they have for every four fee earners, they have one support staff and they, they keep that ratio quite strong. So when they're bringing firms in, what they're not doing is, is reversing the side of that ratio whereby because of acquisitions, they end up with actually it's gone from four to one to three to one.

43:12
And then to two to one. So they're quite strict in that decision making. And we're just not seeing that in private equity. you go and look at, example, Blikst, they're the biggest consolidated and private equity backlog firms. If you go and look at the support staff in those businesses when they were acquired by Blikst some four or five years ago, and you look at that journey over the next three, four, five years to today,

43:39
You don't see that tough decision making that you see at a night, for example, which allows nights to go on and actually build real equity value, albeit they're a PLC. I do think they're massively mispriced on the A market. And I do expect that to change quite quickly. But what you will have is, you know, private equity law firms hoping that through integration and some referral across all these different poor codes,

44:09
maybe some pricing pull as well. They will be able to drive the profitability and the size of those firms to a point where secondary investor will look at that and think, right, OK, they've done enough in phase one for us to be excited about taking them to the next step. We're yet to see that in UK Legal. The only exit we saw was with Stowe, which is basically a family boutique.

44:37
on that's been national. We're yet to see it with a buying build where ABAC firm has used PE money to buy a load of businesses, build up a platform style play and then take that to market as a look what we've built. Would you like to buy it? Nobody's done that yet. Blix are the closest. They're at years five, five or six right now.

45:05
My understanding is that they're looking to refi that investment, whether that's because they can't find the buyer or whether because they think there's a bit more building to do. I'm not too sure. But what is certain is that there's no obvious buyer at the moment. And I do think PE is slowly starting to back out of UK legal. think they look across the pond and see the US players a much cleaner play because it solves the two big issues in the UK, which is

45:34
UK market is not that big. only around 300 law firms in the, there's 9,000 registered UK law firms with the SRA. Only around 300 of those are actually investable, given the size. So, you know, there's 9,000, but 8,700 are not investable. In the US, there's 60,000 personal injury firms. Yeah, so it

46:03
the consolidation play, the fragmented play that you talk about that works so well on paper, which you're right. In the US, you could go around and hoover up these SLINGERY firms, which are

46:21
To be fair, making the load of money. I've just come back from Miami this week. A few days ago, I went to the F1 in Miami. Every law firm that I saw advertised on a billboard, was a tremendous amount, where personal injury firms, know, almost ambulance chasers who have managed to build a very, very credible presence as the go-to personal injury firm.

46:49
in the U S obviously given the state of their, of their healthcare and the lack of free healthcare. Um, there's a huge market for that. and, you know, you, you have personal injury lawyers driving around in Ferraris and Lamborghini is because they've obviously that the market's big enough. There's enough work out there. Most 90 % of these PI cases they settle before they go to court anyway. And that means the lawyers get paid and lawyers rack up a huge amount of fees.

47:19
Um, so if a, if they, if an investor can acquire the right amount of personal injury firms in the U S where they have, you know, the average position cost of a case is X amount. And then the average settlement value of that case is Y. And the sense of cases end up settling and the rest go through the litigation. And if you can make the maths and the numbers work in that sense, then you know, you can scale something.

47:48
quite quickly and you can be the first one to do it. There's obviously a few investors now who are looking to do it in the US. m

47:59
It's huge. know, there's nine thousand, think there's four hundred thousand law firms in the U S and there's nine thousand here. So, you you're talking an incredible amounts, you know, 50 times almost in terms of the size of the UK market. So the, the, the fragmentation on the ability to buy in scale and do the whole buy and build plays is, is, is much better. And I think that's what we're going to see investors shift to the U S.

48:26
the buying build in the consumer space. Of course, there'll be some in the UK, but there'll be a lot more in the US. think in the UK, what we're going to see is a caliber of investors, family officers, maybe pension funds, sovereign wealth funds, who go and target the really big law firms and manage to get a very small piece of their pie, minority patient capital that we talked about earlier.

48:55
riding a longer investment wave with them because they, they back them to be, to be one of the key growers over the next decade or two in UK legal and obviously internationally as well. That's very interesting. a lot of synergies there between what you're sharing and the executive search industry. And even as we see the kind of why I call the professionalization of industries and as things are going through enough, it sounds to me like private equity has got some professionalization to do.

49:25
Law's got some professionalization. Don't get me wrong, private equity has also got some professionalization. It's an early asset class. And we've seen marketing coming into private equity. And obviously with law, there's some serious work to be done from a UK perspective in the order for that to be attractive. Sounds like there's a lot more critical mass from a UF perspective, which will make that naturally have more options for growth and acquisitions, but just sounds like it's not really.

49:55
There's not really enough to go at. And you've got a hedge that you're going to be able to acquire X, Y, and Z and the pool's probably too small. The team to acquire to then do that is probably going be difficult because there isn't that many big firms. So who do you get to run it? And that would be going to exec search firms and exec search firms will be saying, Hey, you can just get any professional services executive to come and run that. It doesn't work. It's different. So, and a lot of these guys have found their owners, operators, et cetera, rather than.

50:23
you know, the typical professionalized executives. And that's coming from a guy who's also a founder and operator. Interesting. Very interesting. Well, thank you very much for your insights on that. What do you read, watch, listen to, do you recommend that others should check out, please?

50:42
Apart from this podcast, obviously, I would say that from a legal perspective, problem is with the UK legal data and the press reporting is quite poor. There's no sort of universal golden source for data. My database has been built by me reviewing accounts. So there's not a lot to listen to. I would say the best podcast out there is probably one called non-billable, which is uh

51:11
a guy called Oliver who seems to do a very good job of getting the right guests and hitting them on the right topics and pushing and prodding a bit more than others do to try and get them to give an actual opinion. There's a lot, I think we spoke about this before, Alex, before we started, there's a lot of people in legal who shy away from actually giving a bit of an opinion. I think it's just kind of sort of trained into them.

51:39
to be honest, in terms of not casting too much, in terms of a strong opinion. And you see that play out in UK Legal Day today in partnership meetings of people who talk about the fence.

51:53
Say non-villable. Yeah, there's a, um, uh, just talking about that. There's a guy on, um, I think it's called the black belt barrister or something like that. And he puts his content out there. Some of it's obviously it's not legal advice, but it kind of is kind of scenario and he talks his opinion. And, I think last time I listened to him, he was just kind of skin sick of the fact that he just keeps people keep coming after him for sharing his opinion and his perspective. And someone's just complained to the law society about him for not being a real lawyer. Um, well.

52:23
What's the law society going to do about somebody who's not a real lawyer? He is a real barrister. The difference between all barristers, lawyers, et cetera, and probably just defended him, but he is a real barrister. Somebody's complained to about it and it's like, well, if you're complaining to the society that manages these people, then he surely has to be one of those people. So it's a bit random, but it's just easy and obviously the litigation world and everybody wants to take a prom and a poke at it. If anybody wishes to reach out to you post this podcast, how best do they get in touch with you, please?

52:54
I'm quite active on LinkedIn. So you probably find me on there. There's just not many sort of adult stars knocking around. So it shouldn't be too hard to find. um Otherwise email is uh adult at Tahoe co.co.uk. And I'll always pick that up and get back to people. Well, thank you very much for coming onto the podcast. I've certainly learned a lot about the law sector and how that reflects with regards to executive search. This has been very fascinating.

53:22
m even for me, but thank you very much for your time. appreciate it. Cheers, Alex. Thanks for having me. And thank you very much for all of our listeners yet again, tuning into the Private Equity Podcast. Till the next time, keep smashing it.