The legal sector still waiting for the ‘Big Bang’ after ABS

Tony Pierre, head of transaction services at Baker Tilly, which has offices in Leeds, said that 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 (alternative business structure) applications in January 2012 but so far activity has been fairly limited and not across the whole marketplace,” said Mr Pierre in a blog for Baker Tilly.

Mr Pierre said the anticipated spate of PE (private equity) dealflow and the first IPOs has not happened.

He said that the activity that has taken place has primarily been at the top end of the market.

“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 differentia- tors.

“Neither of these types of deal are really what either the PE marketplace or institutions are looking for,” said Mr Pierre.

Mr Pierre said that 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, he added.

Mr Pierre said that the area which has seen an impact is the consumer and volume end of the legal marketplace, particularly personal injury.

Steve Carter, head of the professional practices group for the North at Baker Tilly, suggested that firms in the personal injury space have sought to redesign their business model via ABS applications so they are not falling foul of new regulations.

“What we’ve not had is what people thought might happen which is outsiders buying into traditional law firms.

“That just doesn’t seem to have been of great appeal to anyone,” said Mr Carter.

He suggested that pressures on law firms’ profit margins in recent times may mean they are less attractive to investors.

John Pickering, group CEO at Irwin Mitchell, a Yorkshire-headquartered law firm which was awarded ABS licences in 2012, said that the impact of ABS has been “a powerful driver for change”, enabling new entrants into the market, increasing competition.

He said that ABS has facilitated “a major transformation” within Irwin Mitchell.

“We have established a strong corporate structure and been able to attract high quality people from outside the legal sector to our senior management team.”

Mr Pickering added that becoming an ABS has allowed the firm to instigate its strategic acquisition programme.