From Former Client to Prospective Buyer: the Expansion of Private Equity's Investment in the UK Legal Industry

By Ekin Hizli

Lloyds Development Capital's acquisition of mid-market law firm Harper James serves as a typical case of law firm acquisition by private equity, a growing trend in the UK legal market.

Private Equity in the Legal Sector

In recent years, private equity investment has been rising in the UK legal sector. Inspired by a Financial Times article titled ‘How to buy a law firm if you’re not allowed to buy a law firm’ focused on the US sector, this article revisits the characteristics of the UK legal sector that has attracted private equity investment. It also provides an outline related to opportunities and risks for law firms associated with such investment. The article notes divergences in regulation on the ownership of legal entities by non-legal investors across jurisdictions, including how these give rise to distinct changes in ownership structures.

A Comparison in Regulation: The UK, US, and EU

The Legal Services Act 2007 allowed for ‘outside investment in law firms in England and Wales’ with the Solicitors Regulation Authority (SRA) licensing ‘alternative business structures’ in 2012, as outlined by Cross, Livesey, and Grimshaw in a Hogan Lovells news update. While the initial investment in the sector grew slowly, the 5 years leading up to 2024 saw £1.2 billion worth of investment according to an Acquira Professional Services report.

In the US and the EU, there is a different story.

Regarding the majority of US states, Foley and Wiggins note that non-legal investors are prohibited from becoming owners in law firms. This regulation is rooted in a professional ethics concern that commercial priorities might influence legal advice. The Financial Times article concludes that investors and law firms find a way around this regulation through establishing a ‘managed services organisation’ (MSO), allowing for separate ownership from the lawyer-owned legal advisory function of the law firm.

Similarly in the EU, the European Court of Justice authorised EU countries in 2024 to decide for themselves whether to permit such financial investment in the legal sector. These exemplary regulations show how risks related to private equity ownership in law firms are interpreted and navigated differently in the respective jurisdictions.

Opportunities for Private Equity Firms: Why do they invest?

It is worth considering why the professional services sector last introduced to substantial private equity investment – the legal sector – has eventually gained this attraction.

Important reasons for investment include the resilient earnings maintained by UK law firms, even in economic fluctuations. Even more significant in the private equity context, Daniel Brecker notes that recurring income and long-standing client relationships in the legal sector translate to high margins. As described by Sabahipour and White, these high margins contribute to the growth of fund value and hence allow for private equity firms to ‘make money by acquiring law firms’. The large and growing character of the legal services market similarly supports this private equity interest. In addition, an increasing potential to improve operational efficiencies through innovation in the legal sector also indicates profitability for private equity firms.

Opportunities for Law Firms: Why do they seek the investment?

In return, law firms are able to benefit from the increased scale and efficiencies that can accompany private equity investment. Within the present legal market, the ability to fund innovation in areas such as ‘AI, legal tech, and cyber security’ at scale is particularly attractive for law firms. This opportunity to secure capital is important to facilitate workflow automation, improve ‘case management systems’, and ‘client-facing platforms’. More generally, the expertise of private equity investors might benefit law firms in optimisation and business development. Considering the UK legal market as a fragmented one, Tom Cox suggests that private equity investors might improve ‘acquisitive growth’ for law firms.

Potential Setbacks

While these opportunities remain, the majority of private equity investment has been focused in the mid-market, as well as in consumer services rather than corporate law firms.

Sabahipour and White elaborate on potential challenges to private equity investment in larger global corporate UK law firms. In this process, the bureaucratic work associated with registering ‘as an Alternative Legal Service Provider’ with the SRA might deter large traditional firms. Other implications of private equity investment concern profit distribution, as less profit available for distribution among partners might pose difficulties for law firms in retaining ‘top global talent’. Finally, Sabahipour and White emphasise that private equity investors would also be involved in decision-making, which many partners (as ‘lawyer-owners’) might not readily accept.

While such an uprising trend in investment has been observed in recent years, the manner in which private equity firms will continue to approach the UK legal sector is yet to be observed. Sabahipour and White imply that with sufficient compensation for law firm partners and maintenance of their central role in decision-making, this trend could be sustained moving forward.

Edited by Artyom Timofeev

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