Last week, Dutch firm Waterland Private Equity announced an investment in Beyond Law Group, a 100-person collection of UK specialist legal practices, including Beyond Corporate, McAlister Family Law, and Home Property Law. With Waterland's backing, Beyond Law plans to launch a series of additional practices as well as kickstart an inorganic growth effort.
It sounds like the typical private equity-backed playbook, but the legal industry, traditionally dominated by partnership-led firms, has remained largely insulated from the type of widespread investment seen in areas like medical provider practices or other professional services verticals.
In the last few years, however, that's started to change in a handful of geographies: Sun European Partners acquired UK-based consumer law firm Fletchers in late 2021, Allegro Funds acquired a stake in Australian firm Slater & Gordon in 2022, and Australian investor Straight Bat purchased a 30 percent stake in insurance law firm Wotton + Kearney, also in 2022.
Facilitated by a peeling back of regulations governing non-lawyer ownership in Australia and parts of Europe, investors now have access to a large, fragmented market that has been cut off from outside growth capital.
Though it still has greater regulatory hurdles than other geographies, the $400 billion U.S. legal services market may be headed in a similar direction. Most U.S. jurisdictions prohibit non-lawyer ownership of law firms under American Bar Association Rule 5.4, which attempts to preserve lawyer independence from outside influence. A growing number of states, however, are relaxing these restrictions: more than 30 states now allow some form of Alternative Business Structures (ABS), a non-lawyer ownership arrangement.
In Arizona, which enacted ABS legislation in 2021, as many as 40 percent of newly approved legal businesses are backed by private equity or hedge funds, according to one state administrator's estimate provided to the WSJ. Around one-third of the new firms specialize in personal injury claims and mass tort litigation, areas which have historically received the most investor attention thanks to their embrace of litigation financing. Many of Arizona's new law firms have also launched national marketing campaigns to recruit potential clients, partnering with law firms outside the state via fee sharing or co-counsel arrangements.
As more opportunities for investment open up, some general themes have started to emerge. The most attractive targets are likely to be mid-sized firms with strong regional footprints or niche practices. Without the scale of their Big Law peers, there’s a perception that these firms may present the best opportunity for tech-driven productivity gains and operational improvements. They may also have less key-person risk than smaller boutique practices.
The founding partner of a similar firm shared his thoughts at the International Legal Finance Association annual conference: “Outside investment in terms of growing a firm and in helping you to deliver upon your vision and strategy at times will be really important. For example, if I want to make some star lateral hires it will enable me to do that sooner . . . rather than having to wait a number of years. If I want to make a particular investment in technology, again which is really important for a modern law firm, access to capital will be important.”
Another attractive industry trait for would-be financial backers is legal’s relatively non-cyclical nature. Some practice areas, such as personal injury, are particularly well-insulated from broader economic conditions (though self-driving cars may prove a novel headwind at some point in the future).
Opponents of non-lawyer ownership question whether outside backing raises the risk of lapses in client confidentiality (e.g. non-lawyers have board seats) or other ethical concerns. Some jurisdictions that allow ABS have imposed strict firewalls and safeguards, but no standardized guidelines exist. For now, the American Bar Association has formed a working group to study the issue, while state bar associations have been developing their own ABS-specific licensing and compliance rules.
Sponsors with the stomach to participate as an early market entrant may notch the biggest wins, though there's every chance that an investment could end up on the wrong side of uncertain licensing or regulatory developments. Absent regulatory risk, there's always the question of exit planning — if other investors remain on the sidelines and competitive law firms don't have the scale, ability, or appetite to get a deal done, what options are left at the end of the hold period?
In the UK, at least, plenty of firms seem to be actively pursuing new legal deals. Speaking with industry publication Legal Futures, Beyond Law founder Matt Fleetwood shared that multiple other private equity buyers had approached him with acquisition interest, though he turned down those offers in favor of Waterland's financing deal.
For the twelve-month period ending March 31st, Beyond Law booked £13.8 million in revenue (up from £10.5m the year before) and £4.0 million in EBITDA (up from £2.5 million)—figures Fleetwood says he hopes to double within the next couple of years.