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‘Sleepy’ legal market not embracing external investment

Investors attracted by stable revenues and profit margins but facing cultural barriers

14 June 2017

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Cultural barriers are deterring alternative business structures from seeking external investment from investors who are ready to wake up the ‘sleepy’ legal market and exploit opportunities for growth, new research has found.

A study by the Legal Services Board into ABSs and investment in legal services since licences were first granted in 2011 revealed law firms’ abilities to boost profits were held back by low levels of external investment.

Although two-thirds of ABS firms have already invested – mainly in new staff, increased marketing, and technology – or are planning to do so, only 12 per cent have used external finance.

‘The investors we spoke to told us that they see opportunities for investment in the legal services market to improve efficiency, to fund innovation, and to increase productivity. External capital is, however, not yet used as much in the legal services sector as might have been expected,' said LSB chief executive Neil Buckley (pictured).

‘The research shows that there are no significant regulatory barriers to investment in the legal services market. Nor does the cost of legal services regulation seem to be a barrier. Instead the key challenges are cultural – lawyers are reluctant to cede control of their businesses, preferring instead to rely on profits and reserves, or bank lending.’

Few respondents to the super-regulator's survey regarded regulation and instability in the personal injury market as major barriers to further investment (6 and 1.5 per cent respectively), but 42 per cent agreed that keeping control was more important than growth, suggesting a reluctance to seek external investment.

The legal market has caught the attention of investors ‘driven by an impression that the legal sector was a “sleepy” market that was inefficient and therefore attractive for outside investment that can induce growth and deliver cost savings’.

One investment adviser said the market attracted investors because most firms have stable or higher year-on-year revenues, impressive profit margins, and the sector can potentially perform well when the economy contracts.

Another view on the lack of investment was that many firms do not present financial information in ways investors expect or have a weak grasp of the value of their businesses.

Although the overall size of the market and the scale of businesses operating within it may limit opportunities for some investors, the LSB concluded that cultural norms, governance, and non-commercial financial management practices in some businesses were likely to be more important factors.

The oversight regulator suggested that the low level of external investment to date may be symbolic of weak competition in the market overall, which was inhibiting innovation and the potential for lower costs and prices. In the absence of strong competition, firms were more likely to take a risk-averse approach and avoid using external capital.

Matthew Rogers is a reporter at Solicitors Journal | @lex_progress

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Business development & Strategy Regulation

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Legal Services Board alternative business structures ABSs External investment LSB