Growing New Law in partnership with private equity

The market for New Law is growing rapidly as the legal services industry continues to modernise in response to evolving client and lawyer needs. This provides opportunities for innovative businesses to develop and grow market share. According to Thomson Reuters, the alternative legal services (ALS) market was worth $10.7 billion globally in 2017, having grown at 13% per annum over the preceding two years. During the same period, the overall legal services market grew at around 3.5% per year.

New Law providers are performing many of the tasks traditionally carried out by law firms, but are deploying more nimble, cost-efficient and flexible business models that incorporate both talent and technology. These firms typically benefit from both early-mover and scale advantages.

Corporate activity in this area has increased, attracted by the sector’s strong fundamentals of growth, strong cash generation and repeating revenue. Ambitious management teams have access to a variety of financing options including debt, private capital or the public markets. For example, in May 2018, Bowmark invested in Lawyers on Demand (LOD), a leading international New Law provider.

Growing market penetration

New Law’s penetration of the $635 billion global legal industry is forecast to increase from just over 1% today to 10% by 2025, buoyed by robust underlying legal spend and an increasing propensity for general counsel to adopt new services.

With corporates under pressure to reduce operating costs and in-house legal departments challenged to do more with less, many are seeking to modularise workstreams to cut costs. At the same time, the UK legal market has liberalised since the Legal Services Act of 2007, enabling innovators to enter the market.

Meeting these changing demands for legal services has driven LOD’s market-beating growth to date. To stay ahead, the company has extended its services, invested in business development and expanded its operational delivery capability. The acquisition of lexvoco, an innovative Australasian legal services business, has also helped to consolidate LOD’s already significant international presence.

As LOD has proven, there are opportunities to provide an ever greater range of services to general counsel across legal services, consulting, technology and resourcing in a flexible and cost-effective way, with clients increasingly seeking end-to-end solutions.

Scaling-up New Law poses challenges

Despite the attractive market opportunity, the sector has its challenges. New Law providers have to conceive, design and develop value-added service propositions that can complement, and in some cases replace, traditional offerings. The process of developing products and services demands time and investment upfront.

These alternative providers typically require capital to fund the talent and technology needed to scale up new services, invest in sales capability and onboard delivery capacity. Persuading general counsel to adopt new ways of working sometimes requires a consulting-led sales approach, which can result in long sales cycles, especially for end-to-end solutions. These efforts generally come before new services begin to generate material revenue, creating the need for upfront investment.

Growth therefore carries execution risk which is the reason why some New Law providers, including LOD, were initially set-up and funded within larger professional services groups.

Securing external funding and experience is key

The level of growth and opportunity in the sector over the past few years has piqued investor interest, unlocking a myriad of options for high-growth companies seeking capital. For example, in the past 18 months, each of LOD and Axiom decided to partner with private equity, whereas Halebury and Mindcrest were acquired by Elevate and DWF respectively. Additionally, since the Legal Services Act was introduced, seven law firms have listed on the public markets, highlighting growing investor appetite in the sector.

Identifying the right funding solution depends on management’s objectives, as well as the optimal financing solution. Whilst an exit to a strategic acquirer usually provides liquidity and synergies across the enlarged group, it often results in a loss of control or autonomy.

Private equity can provide capital for growth while enabling founders and managers to remain involved in leadership. Private equity also takes a long-term view, enabling New Law companies to pursue product development agendas and invest for growth, without the short-term focus on results demanded by public equity reporting cycles.

There are also softer – but equally important – benefits to having a private equity backer, including the ability to leverage prior experience, access new skills and knowledge, and benefit from support to enter new markets or grow internationally.

We are supporting LOD’s global growth ambitions through the development and roll-out of new services such as LOD Legal, a flexible law firm offering; expansion of the group’s sales and marketing capability; and the enhancement of the technology platform to deliver scale. We also continue to actively review acquisition opportunities.

Private equity: a value-added partner

While the New Law market is young, it is growing rapidly and presents a huge market opportunity with tangible scale benefits, meaning there is a genuine early-mover advantage. Alternative providers are increasingly partnering with investors to achieve their growth ambitions and capitalise on the opportunities on offer. Private equity can provide the investment, operational support and long-term approach required to unlock innovation and accelerate New Law providers’ performance.