The UK legal service sector looks intrinsically attractive to investors, with its inherent high added-value, resilient growth through all but the very worst of economic times and fragmented nature. Five companies representing about 1% of the huge UK legal sector are all we have seen so far on the UK stock market and this is clearly going to grow, as listed law firms drive home their advantages and expand.
UK legal services businesses generate over £30bn of turnover per annum and yet at the time of writing the stock market only has access to five firms with total current revenues of less than £300m, operating in a mid-market sector with up to £6bn in annual turnover. Commercial legal services are a necessity for most business activity. They are not an optional purchase. The value-added is substantial and if delivered correctly, an enduring reputation and loyal relationship is built. These characteristics are inherently highly attractive to investors if they can be harnessed in a business model that generates sustainable profits with an ability to grow.
We see listed law firms as having significant advantages over private partnerships and expect to see those companies operating sensible strategies growing market share through their superior ability to attract and retain talent. A significant factor in this is the power of permanent equity in listed firms to improve longer-term decision-making and to provide visible and flexible incentive structures. Permanent equity looks a superior driving force than the temporary equity that drives private partnerships.
We also see listed law firms taking advantage of their access to capital to execute acquisitive growth strategies, either within the sector, where there are many subscale entities, or by adding complementary add-on businesses and becoming more diversified law-led professional services groups.
The listed law sector is rich in opportunity to grow, although performance will of course vary according to strategy and execution. Given the evidence of success so far we consider it inevitable that more law firms will seek a listing.
In the note we initiated formal coverage of Gateley, a corporate client, which has consistently matched or exceeded expectations for shareholders since its IPO over three and a half years ago. The business has counter-cyclic elements and is not reliant on any one area of law, business sector, geographic region or client. A good track record of attracting lateral hires and training young lawyers, coupled with a judicious strategy of acquiring complementary businesses to build a law-led professional services group means the company has many opportunities to grow.
The sector note also included reports/commentary on Burford Capital, Driver Group, Gordon Dadds, Keystone Law, Murgitroyd Group and Rosenblatt Group.
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