Guest post by Paul Joyce, a partner at LAVA Advisory Partners
Joyce: Alignment of hold periods
Private equity (PE) invested over half a billion pounds in the UK legal sector in 2024, signalling that investor appetite for law firms is stronger than ever. Increasingly, that interest is being driven by US private equity houses, which see UK firms as an attractive route to growth in Europe’s mature professional services (PS) market.
For firms considering whether to seize this opportunity, it‘s important to understand both the potential rewards, as well as the possible risks that come with it.
Why are US PE firms so interested in the UK legal sector?
Firstly, differing rules mean that US private equity can’t invest in US legal firms due to a restriction on non-lawyer ownership in most states, whereas of course that is not the case in England and Wales.
In addition, the PS sector has been particularly resilient to a challenging economic climate. Law firms, like others in the PS space, often rely on well-established, long-term client relationships that bring with them stable, recurring revenues.
The legal sector also remains one of the most significant contributors to the UK economy, generating over £40bn annually. For this reason, PS firms are more attractive than those in say, consumer, retail and leisure, which typically feel the effects of an economic downturn more keenly.
Alongside its financial resilience, the legal sector also remains heavily fragmented, with over 9,000 firms active in England and Wales.
This potential for consolidation is attractive to US PE houses, which see an opportunity to implement their buy-and-build strategy, combining complementary firms with those they’ve acquired to build a cohesive platform and achieve fast growth.
Lastly, UK firms can be seen as a springboard for EU operations, with both geographic proximity and a broadly similar regulatory environment adding to the appeal.
A joined-up transatlantic market
Even those firms that are already owned by private equity are part of the trend, as opportunities for refinancings and secondary buyouts become apparent.
There has been a gradual alignment of hold periods over recent years; UK PE firms now generally operate on a cycle that’s roughly five to seven years, which reflects that of their US counterparts. This convergence means US firms are more comfortable executing a secondary buyout from UK PE houses.
Interestingly, the PE investment trend is extending beyond law firms themselves and into companies that provide services to those law firms, including tech-enabled platforms, dedicated support services and legal costs services companies. For example, Burford Capital recently made a minority investment in legal industry advisory firm Kindleworth.
One purpose of the partnership is to give Burford the opportunity to invest in law firms advised by Kindleworth, giving those firms the reassurance of working with an investor that already has a blueprint in the sector, and potentially providing easier access to Burford-backed adjacent services.
Nevertheless, there are a number of challenges for US investors that also impact founders.
What founders need to know
The good news is that the legal sector can look to other areas of professional services, like accountancy, where US PE activity is already prevalent.
For example, at the end of 2024, New York-based Lee Equity announced its investment in accountancy firm Cooper Parry. Lee Equity’s investment followed a period of rapid growth as a result of previous investment by Europe-focused Waterland Private Equity, characterised by 11 acquisitions in two years.
In many cases, such growth can be positively transformative. However, firms need to ensure that US PE methods are compatible with the trust and quality on which they are built. Here, the ‘move fast and scale’ mindset brings the potential for damage to the very core of what makes the business successful.
To manage this, founders need to be clear on their priorities and targets in advance of any partnership or investment to ensure that ambition for growth is balanced with protecting its foundation.
The cultural fit of a company is also a major factor. As mentioned, law firms often rely heavily on long-term relationships and client loyalty. An investment approach that prioritises growth above all else can threaten those relationships, and with them the legacy of the firm that’s been built.
For this reason, having a clear plan to onboard, support and develop the acquired team is crucial.
Regulation is another factor to consider. The legal sector, unsurprisingly, is highly regulated. US firms might not be familiar with the UK and EU landscape and steering through that can be tricky.
Equally, this applies to deal structures, which also require specific, cross-border advisor expertise. Founders need to set clear priorities ahead of any sale or investment activity to ensure they’re not tied into lengthy, restrictive covenants as a result of the long earnouts and complex terms that are sometimes favoured by US PE houses.
A sector worth investing in
US investor interest in the legal sector is a testament to its resilience, and indeed to that of the broader professional services sector, and it brings both opportunities and challenges for founders.
Only by understanding the context of US interest and motivation, and by ensuring that they choose the right partner to preserve their legacy, can they forge partnerships that will deliver lasting value.