DWF Goes Public: Anatomy of a Law Firm IPO
As international law firm DWF goes from private to public ownership via the London Stock Exchange, Leaders League looks at how an IPO that was years in the making unfolded, and considers the benefits and risks of this bold move.
On Monday 11 March, international law firm DWF went public, raising £95 million in an initial public offering (IPO). It was then admitted to the main board of the London Stock Exchange (LSE) on Friday 15 March after issuing 300,000 shares. With a valuation of £366 million, DWF is the largest law firm in the world to have listed. It is also the first and only law firm to do so on the LSE’s main board.
From Gateley plc to DWF: Four years of law firm IPOs in the UK
In the UK, law firms have technically been allowed to go public since January 2012 when the Solicitors Regulation Authority (SRA) started accepting applications to become Alternative Business Structures (ABSs), a business model that allows for non-lawyer ownership of law firms. In the seven years that have followed, only six law firms have taken the plunge and floated on the stock market:
- 8 June 2015: Gateley is the first law firm to become a public limited company, or plc. This IPO valued Gateley plc at £100 million and raised £30 million for the firm.
- 4 August 2017: Gordon Dadds becomes the second UK law firm to go public. Its IPO raised £20 million, giving the firm a market capitalisation of around £40 million.
- 27 November 2017: Keystone Law is the third firm to float on the open market, raising £15 million. The IPO valued Keystone at £50 million.
- 8 May 2018: Rosenblatt Solicitors becomes Rosenblatt Group plc through its IPO, raising £43 million in the process. The float gave it a market capitalisation of around £76 million.
- 14 June 2018: DWF announces its intention to float.
- 26 June 2018: Knights goes public. The IPO raised £50 million and valued the firm at £103.5 million.
- 15 March 2019: DWF is officially admitted to the main board of the LSE after issuing 300,000 shares. The IPO valued the company at £366 million and raised £95 million.
DWF’s much anticipated IPO stands out as not only the latest in this list, but also the biggest by far in valuation and money raised. Leaders League outlines below the key stages of getting a law firm ready for market, considers the benefits of going public, and tells a few cautionary tales of how it can all go wrong for professional services providers when they get involved in stock market dealmaking.
‘Make sure the management team has the bandwidth’
When asked what advice he would give to any law firm considering a listing Bruno Fatier, consultant solicitor at Keystone, responds: ‘the whole process is extremely time-consuming, so make sure that the management team has the bandwidth to deal with that as well as running the firm’. A law firm IPO is years in the making because going public means completely changing the way the firm is governed and the way its partners are remunerated.
‘It is no longer a "one man, one vote" model’
Neil Matthews, corporate partner at Fieldfisher who acted for Cantor Fitzgerald as nominated adviser (NOMAD) on the Gateley IPO, explains:
“You have to accept that your governance model will change with a listing. On most structures, partners typically become employees and shareholders, and that creates a different relationship between colleagues. You have ceded control on the big strategic decisions to the plc board of directors, so it is no longer a 'one man, one vote’ model.”
The bulk of the currently listed law firms had already ditched the traditional partnership model of governance by consensus well before coming to market. Rosenblatt had been led by its sole founder Ian Rosenblatt since 1989, but in 2016 he paved the way for an IPO by hiring a new CEO with experience in running a public company. Gordon Dadds was acquired in 2013 by a consortium structured as an ABS and led by now managing partner Adrian Biles. Knights was acquired in 2012 by its now chief executive David Beech and well-known investor James Caan; it promptly swapped a traditional partnership formed of seven equity partners for a plc model run by five board members. Keystone is led by a board of directors and as Fatier explains, ‘lawyers… have no equity interest and as such… were not directly involved [in the IPO]. The management team led the process.’
For Gateley and DWF, things were slightly different. To get the deal over the line, their respective chief executives Michael Ward and Andrew Leaitherland had to rely on their negotiating abilities to convince a much wider group of decision-makers. It took Ward a year of internal discussions to convince 75% of the equity partnership to vote for going public. That meant getting at least 61 of the 81 partners on board. At DWF, Leaitherland had been working with US investment bank Stifel since October 2017 on implementing the IPO but he and the rest of the management team, which includes former DLA Piper chairman Sir Nigel Knowles, had to convince over 300 partners and partner equivalents, including 70 equity partners, to sign up to going public.
Changing the governance model is only half the battle. Ward and Leaitherland had to expend considerable energy convincing their partners to also take a pay cut.
‘Capitalising your future profit share’
Most law firms are run as limited liability partnerships (LLPs) in which, in broad terms, two different categories of people work. The first group, which forms a large majority, are salaried employees of the LLP and their remuneration is a fixed yearly cost. The second, smaller, group is comprised of equity partners: those members that have bought in to the partnership by exchanging some of their capital for ownership of a portion of the partnership’s assets. Equity partners are remunerated by drawing on the profit pool of the partnership; this remuneration is measured as profit per equity partner, or PEP. Close to the entirety of an LLP’s profit pool is effectively reallocated to the partnership’s equity partners every year. But investors assess profitability, not revenue, so any LLP wishing to attract external investment must create some form of profit pool from which their business can be valued.
As John Llewellyn-Lloyd of Arden Partners, the NOMAD on the Gordon Dadds IPO, puts it:
“You go from a model where you paid 100% of profits back every year to a model where part of that profit has to be retained into the business to build its value. Going from one model to another requires quite a lot of discussion.”
This means that if an LLP, which is what DWF and Gateley were prior to floating, wishes to go public and attract external shareholders, its equity partners cannot take out the entirety of that LLP’s profits as their PEP because they must leave a portion of it in the business. DWF’s pre-admission prospectus (the Prospectus) details what that meant specifically for its partners:
“[Admission to the LSE] will result in Members who are equity partners having their total partner compensation reduced by 60% and all other partners having their total partner compensation reduced by 10%, except for the revised compensation model exceptions, in order to generate net proﬁts for all Shareholders (rather than retaining the existing approach where partners are allocated nearly all of the proﬁts through their drawings).”
How then do you then convince your partners to take drastic pay cuts? Matthews answers the question thus:
“At the very basic level, partners will earn less per year, but in return they will receive shares which potentially have significant value that they will hope to cash in over time. They benefit from capitalising their future profit share, but the trade-off will be a drop in their annual remuneration.”
The Prospectus illustrates this further by explaining how DWF partners can expect to make money from now on:
“In the event of Admission, most partners would be self-employed Members of both DWF Law LLP and DWF LLP. Their compensation would comprise:
(a) an annual ﬁxed proﬁt share;
(b) dividend income derived from a holding of Ordinary Shares;
(c) participation in a partner annual bonus pool anticipated to be equivalent to up to 5% of the Group’s proﬁt before tax for the relevant ﬁnancial year, which may be paid 50% in cash and 50% in shares…and recorded as a direct cost;
(d) for Members of DWF Law LLP based in England, a nominal salary as an employee of a Connected Services entity; and
(e) subject to meeting the relevant eligibility requirements, participation in the Share Incentive Plans.”
What this boils down to is partners gambling that their short-term loss in remuneration will be more than offset by future gains in their law firm’s share price. The next question then becomes: how do listed law firms ensure their share prices keep rising?
‘A real need for capital’
The best way for a firm to create demand for its shares is to ‘have a real need for capital and be able to articulate this need clearly’, according to Llewellyn-Lloyd. Each of the six listed firms has different needs for capital, although Gateley, Knights and Gordon Dadds have adopted a broadly similar growth strategy.
Since going public Gateley has made four acquisitions, expanding into new geographies but also new areas of business. The only law firm it has purchased is South-East-based GCL Solicitors, which it took over in March 2018 for £4.15 million – £1.87 million of which was financed through the issuance of new shares. Its other investments span the tax, consultancy and property industries. As of 20 March 2019, the firm’s market capitalisation had hit close to £170 million and its shares sold for 151 pence each, up from 100 pence on listing.
Led by CEO David Beech, who has a background in private equity, Knights had already made big splashes prior to its listing by snapping up the Chester office of Hill Dickinson and swallowing up Darbys Solicitors. Opening itself up to external shareholders has enabled the firm to scale up its ambitions, however, and it has taken over three more legal practices in less than a year, including Leicester-based Spearing Waite in an £8.5 million deal.
Gordon Dadds has been the most active of the listed firms so far and it has deployed, not always but often, a very specific tactic that has allowed it to obtain valuable assets at a discount. Insolvency procedures in the UK allow for the appointment of insolvency practitioners as administrators of a struggling business. During a formal administration process, which generally lasts a few weeks, the administrators will try and generate as much value from the business they are administering by selling off its assets to repay creditors. In April 2014, for example, Gordon Dadds acquired most of the assets of then larger firm Davenport Lyons from its administrators.
But a struggling business can also decide to appoint an insolvency practitioner to sell its assets before entering into formal administration; this is what is known as a pre-pack administration. Gordon Dadds has made several investments this way, including, in a very high-profile move made on New Year’s Eve 2018, some of the assets of international firm Ince & Co.
Litigation funding and disruptive business models
In the case of Rosenblatt, its founder’s personal fortune soared to £24 million after the firm raised £43 million. The firm kept roughly £5 million for acquisitions and a significant amount was also used to establish a litigation funding arm, a move that will be closely watched: third-party funding has been generating a lot of interest.
For Keystone, investors were not sold a fast-expanding acquisitive law firm; rather, they were invited to invest into what Fatier refers to as ‘a disruptive business model’. Keystone Law was founded in 2002 as an alternative to the traditional law firm model, with a focus on efficient use of technology and the development of flexible working methods. It is effectively a platform on which lawyers operate as entrepreneurs, and its shareholders benefit from the optimisation and growth of this platform. Fatier describes its appeal:
“Keystone has been successfully growing rapidly as more and more lawyers seek to develop their practice in an alternative environment… which allows lawyers the freedom to focus exclusively on developing their practice and delivering client legal work.”
Growth through "Connected Services" and international expansion at DWF
A recurring theme in DWF's 254-page Prospectus is the fact that the firm is pinning a lot of its hopes for growth on two specific areas: further international expansion and the development of its Connected Services line of business.
Put simply, Connected Services is one of the firm’s four divisions and comprises a series of independent businesses that include, among others, DWF 360, which is a software provider; DWF Adjusting, which investigates claims for insurers and corporates; DWF Claims, which is a global insurance claims handling manager; and DWF Advocacy, which is a barristers’ chambers of sorts and is regulated by the Bar Standards Board. The division is run by Jason Ford, formerly the chief operating officer of Triton Global, which DWF bought out of administration for £1.1 million in 2017. The Connected Services division had net revenues of £9.1 million over the six months ending October 2018 (6.9% of DWF’s overall revenue over that period) and it employs just over 300 people. In the Prospectus, DWF has identified a series of trends it believes will increase demand for the Connected Services businesses, namely that as the legal sector becomes increasingly complex and competitive, as law firm clients look to consolidate their service supply chains and have fewer advisers, and as clients become ever more cost-conscious, ‘the ability of legal service providers to be able to offer a wide range of integrated and related services can be a key differentiator’. It is targeting revenue growth of between 20% and 30% for this division over the medium term, although it does not specify exactly what that medium-term timeframe is.
DWF started expanding outside of the UK in 2014 and its International Division now has, after a series of acquisitions, offices across 12 jurisdictions. This division brought close to £26 million in revenue in the six months ending October 2018, equivalent to just under 20% of DWF’s total revenue for that period. This represents a growth in revenue of 131.6% compared to the six months ended October 2017. The firm expects between 35% and 40% revenue growth for the international division over the medium-term and it is partly counting on organic growth to do so, as the newly purchased offices settle in and start to mature as businesses. It is also counting on inorganic growth through acquisition, particularly, if the Prospectus is to be believed, in Spain, Poland and Hong Kong. The Prospectus fleshes out in detail the selection criteria it expects to use to target international acquisitions; these include whether the acquisition target has work that can be divided into complex legal services and managed services as well as how closely its values match DWF’s core values. Interestingly, final approval for any acquisition has shifted from the equity partners to the board of directors.
‘Very good publicity’
A less obvious, harder to measure benefit of going public is the way it can affect the market recognition of the listed firm. As Fatier proudly states, ‘the IPO was very good publicity. Clients read the FT and they see Keystone: it's impressive’. Ward has spoken in the past of how opting for an IPO led to Gateley ‘going viral’. Any purchase Knights and Gordon Dadds have made since listing has generated a lot of columns in the press and chatter among lawyers. These firms are all now squarely on the map, and as their share prices rise, so does their profile.
This increased brand awareness, combined with the novelty of being a lawyer-shareholder, has arguably made it easier to hire. This is apparent at Gateley, which has gone from recruiting a couple of partners a year prior to listing to attracting close to 40 in the four years or so since. Just this week, on 19 March, it launched a London-based private client service by snagging Irwin Mitchell’s former London private client team head Richard Jordan and his colleague Mark Pearce. DWF is banking on benefiting from a similar recruitment dividend: ‘the group estimates it will have 15 to 25 net partner joiners per year in the medium term’. This would be quite the step up from the current average of nine lateral hires per year seen over the past three years.
Overall, the five law firms to have listed before DWF have bettered expectations and there is much to be optimistic about. However, if you look back a little further than June 2015 and the Gateley float, the history of listed professional service providers in the UK is a chequered one.
Isolated strategic mistakes or a case of stock market incompatibility?
There isn’t much of a track record to analyse when it comes to the performance of LSE-admitted law firms. As the eldest, Gateley has seen share price and profits grow well as it continues to scale up, but it hasn’t even celebrated its fourth year as a public company yet. The story of the only listed law firm in the world to have really come of age highlights the risks that come with stock market dealmaking.
What happened to the world’s first-ever law firm to float?
Melbourne-headquartered Slater & Gordon made history in 2007 by listing on the Australian Securities Exchange (ASX), becoming the first-ever law firm in the world to go public. The 12 years that have followed have been the subject of much writing and analysis.
Slater & Gordon is a storied law firm, founded in Melbourne in 1935 to provide legal advice to Australia’s large and powerful unions. Its early history intertwines with that of Australia’s Communist Party. It then evolved into a sizeable domestic law firm focusing on consumer-led areas of practice including employment disputes and personal injury. Former Labor Prime Minister Julia Gillard worked there from 1988 to 1995. After switching from a partnership to a private company in 2001, the firm started expanding outside of its home state of Victoria through several small acquisitions and by mid-2007 it had 21 branches spread across the country, acting for close to 20,000 clients.
On 21 May 2007 Slater & Gordon officially listed, raising A$35 million. Its shares closed their first day of trading at A$1.40 each. What followed was a frenzy of acquisitions, including an international expansion into the UK in 2012. The vision was to serve a core of 200,000 clients through a fast-expanding network of offices. This purchasing spree culminated in March 2015, at a time when shares in the firm were trading for close to A$8 a piece, with the acquisition for £637 million of the professional services division of then AIM-listed Quindell plc, effectively acquiring a portfolio of noise-induced hearing loss claims. Over the course of the 18 months that followed, the entire value of the Quindell assets evaporated, in large part due to FCA and SFO investigations which shone a light on the dodgy accounting practices in place at the company prior to the Slater & Gordon acquisition. Changes to the law surrounding personal injury claim limits in the UK also hit hard, as did the bad publicity that comes with the shareholder class actions brought against the law firm at the end of 2015. Today, Slater & Gordon’s shares trade for a handful of cents.
The failed £637 million gamble
One law firm’s debacle does not provide nearly big enough a sample size from which to predict anything with certainty. But some of the details around the Quindell purchase provide some interesting insights into how a law firm management team with a track record of success in dealmaking got it spectacularly wrong in one big gamble.
Prior to its Quindell acquisition, the management team at Slater & Gordon, led by Managing Director Andrew Grech, had been successfully buying up and integrating consumer-focused legal practices, first across Australia and then in the UK. Grech won plaudits, and even awards, for having grown the firm and delivered impressive returns to investors. With every new deal came more growth, and the share price kept climbing. Quindell represented an opportunity to scale this success up. The purchase made Slater & Gordon the largest provider of consumer-focused legal services in the UK.
Hindsight is a wonderful thing, but the Quindell acquisition could and arguably should have been avoided. In the year leading up to the purchase, Quindell’s “aggressive” accounting practices had come under scrutiny. In April 2014, short-seller Gotham City Research had published a scathing attack on Quindell, claiming that 80% of the business’s profits were suspect, leading to a huge drop in Quindell’s share price.
Slater & Gordon publicly stated, through a spokeswoman in 2015, that it had ‘always been of the view that the accounting policies of Quindell plc were aggressive’ but that ‘Quindell’s historic accounting policies were irrelevant to our valuation of the professional services division’. Slater & Gordon’s management team saw an opportunity to snap up a new line of business at a discount, gambling that Quindell’s accounting issues did not affect the specific chunk of the business they were acquiring; ‘our assessment of the professional services division was not based on their historical financial statements, but on a detailed bottom-up assessment of the key drivers of the business applying our own accounting policies’.
That assessment, no doubt based on the £31.7 million the firm spent on due diligence into Quindell, was the wrong one. The gamble failed, leaving Slater & Gordon saddled with debt and near-worthless shares. In 2017, New York-based hedge fund Anchorage Capital swooped in to take control of the firm and led a recapitalisation under which all the directors, including Grech, resigned.
The rise and fall of the consolidators
There is also a body of anecdotal evidence that shows how risky an aggressive growth strategy can be for a listed professional services provider when you consider, summarised here briefly, what happened to three accounting firms that floated on the LSE in the early 2000s. Tenon, Vantis and Numerica were the UK poster boys of what was known in the accountancy world as consolidators; they were corporate structures set up to acquire small, regional accountancy practices and consolidate them into sizeable nationwide practices. To do so, they all went public and started spending money to scale up their operations.
Numerica was the first to fall. After two solid years of growth through acquisitions, the company started posting losses, the share price dropped steadily, its energetic chief executive Tony Sarin stepped down and in June 2005 Numerica was carved up between Vantis and BDO Stoy Hayward.
That deal propelled Vantis up the ranks of the Accountancy Top 60, but it seems the consolidator dreamed too big when it decided to handle the liquidation of Stanford International Bank, the bank run by convicted fraudster Allen Stanford. That mandate stretched the company’s resources to breaking point and in June 2009 it was placed into administration while its shares were suspended.
The last consolidator standing, Tenon became RSM Tenon through a £76 million merger with RSM Bentley Jennison in December 2009. It then acquired the advisory arm of Vantis in an £11 million deal concluded in June 2010. However, in August 2013 following a tumultuous couple of years which saw high-profile resignations and unexpected losses being posted, shares in RSM Tenon Group plc were suspended and the company went into insolvent administration, to be purchased by what was then Baker Tilly LLP. The consolidators were no more, leaving many of their shareholders nursing significant losses.
All eyes on DWF
DWF’s IPO may spur more law firms to follow suit and its ranking as one of the top 25 law firms in the country by revenue makes it quite the influencer. As one managing partner Leaders League spoke to put it, ‘right now I will wait and see what happens; of course, if going public then becomes the norm, I will seriously consider it’. But some questions may need to be addressed before a wave of major law firm IPOs hits the stock market.
DWF is banking on the growth of its international offices to help boost its share price, yet a lack of certainty remains around local bar restrictions on listed law firms in most of the jurisdictions it operates in. As the Prospectus points out:
“None of the [relevant local] Legal Services Regulators provided formal written approval of the proposed structure and governance arrangements as such (as they are not required to do so under relevant regulation and a number of the regulators noted that as a matter of policy they do not provide such formal approvals).”
There are also questions about investor appetite and desire for more listed law firms. Give or take a couple of exceptions, major law firms have proven themselves to be resilient to, and able to effectively weather, uncertain economic conditions. Per data from The Lawyer, the total revenue of the 100 largest UK-headquartered law firms nearly doubled between 2007 and 2018, going from £12.39 billion to £24.09 billion. This growth in turnover has been accompanied by a growth in PEP, which has risen from £459,000 to £571,000 over the same period. It is this ability to deliver steady revenue and profit growth over a period spanning several economic crises which makes law firms an interesting asset class for investors. But how many different law firms do you need in this asset class? Matthews summarises it as such:
“There is a natural saturation point in the markets, which you see across all sectors. Law firms coming to market in the future will have to distinguish themselves from others that have already listed in the sector and that are performing well. Investors – who are likely to be restricted in how much they can invest in the sector – will need compelling reasons to back a different horse! DWF likely sought to differentiate themselves by opting to be the first firm to obtain a premium listing on the main market.”
Another currently unanswered yet crucial question: what happens when partners are released from their lock-ins? Close attention will be paid to developments at Gateley in 2020, by which time its former equity partners will be free to cash in on the totality of their shares and leave the firm without suffering any losses. Whatever happens then could provide insight into what DWF can expect in 2024 when its own restrictions are lifted.
DWF has much to gain from going public, but its path to success is not a well-trodden one. The legal sector will be watching closely as this pioneer heads off in pursuit of stock market success.
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