Law Firm IPOs: Pricing on a Wing and a Prayer (first published on Validatum)

The topic of law firm IPOs has attracted a lot of attention recently with the inevitably polarised perspectives that it represents a new golden age of law firm restructuring and capitalisation or the latest hot air, hyperbole and rhetoric that will soon pass. [For an excellent analysis of the state of the law firm IPO market, read Legal Business’s recent article, No free lunch – will law firm IPOs be the next big thing?]

As the article notes:

‘the turnover of the top 100 UK law firms alone was more than £24bn last year. These firms generate a lot of cash, usually at high margins, and are resilient to downturns. At the same time, the world is awash with money looking for a lucrative home. Investors see a legal market rife with opportunity, whether for consolidation, New Law offerings, or just different ways of working.

But only five UK law firms have gone all the way to IPO since regulations were relaxed more than a decade ago, raising a meagre £158m between them. Four of those, however, have come in the past 15 months. Market observers believe only a third of those that have seriously considered coming to market so far have done so and that the time is ripe for a top-30 firm to go public’.

Unsurprisingly, a great deal of preparation precedes a successful law firm IPO and the business of convincing potential investors is not for the fainthearted or for those lacking in stamina. As Michael Ward of Gately commented, ‘It’s not a straightforward process. The physicality is not the most difficult bit; mentally, it’s tougher. You’re presenting your wares 61 times and you don’t know if anyone’s interested.’

A rough rule of thumb for the roadshow process is a firm needs to present to at least 40 institutions to raise between £20m and £40m, ultimately landing about a quarter of those, including two or three core shareholders. Keystone chief executive James Knight commented in the Legal Business article on selling to 50 institutions: ‘It’s very, very intense. It’s seven hours of seven different places and buildings you’ve never been to, day in, day out, for two weeks.’

One thing that the successful law firm floats to date share in common is that they have brought a highly ‘corporatised’ model to market.

Central to this approach has been a much more sophisticated approach by some to the way in which the law firms looking to secure external investment price their services. Most savvy investors are only too well aware of an uncomfortable truth and that is that with notable isolated exceptions, when it comes to pricing its services, the legal profession remains one of the most unsophisticated sectors of the economy.

Investors have been looking for evidence of a completely reimagined approach to pricing, not only for its own sake and on its own merits but as a proxy for evidence of firms’ wider commerciality.

This was particularly apparent to seasoned and entrepreneurial Nicola Foulston, (Gazette interview 2016), who was brought on board by Rosenblatt specifically for the purpose of making the firm listing-ready.

Within weeks she’d identified law firm pricing as a critical issue she needed to tackle. She called in globally renowned legal pricing consultancy Validatum a matter of weeks later, to help the firm revolutionise its approach to pricing – applying the kind of behavioural economics approach that would be understood in most corporate boardrooms but remains alien to most in the legal sector.

Rosenblatt’s new pricing model was put in place immediately, in time for the full 2017 financial year. Institutional investors were able to see the results of the new model in early 2018 – ahead of the IPO.

Nicky recently commented:

‘When I joined Rosenblatt, I immediately identified pricing as a weakness in the legal sector. I called Richard Burcher in to help us completely remodel our approach to pricing within weeks. We implemented his advice and training immediately, ensuring our new pricing model shaped our income and margins for the full 2017 financial year. City investors could see this was a fundamental shift – and it was undoubtedly a factor in increasing the value of the firm and therefore the success of the IPO’.

‘Lawyers think in words. Pricing is a numerate discipline, backed by an ability to read human behaviour. While some lawyers are good at this, it is by no means a majority. Richard has helped us to develop a pricing model rooted in behavioural economics. That’s still revolutionary in the legal sector. But it is normal and expected in the way many corporate clients and institutional investors view the world. Law is still playing catch up with the customers it serves. That’s why customers are driving change in legal pricing – with demands like fixed pricing – rather than law firms being in control of pricing their own product’.

‘I used to work in the motor racing industry. Now I work in law. Both are very product-led sectors. The firms understand their own product and speak their own language. But they’re not always connecting with customer and investor needs and expectations’.

‘Quality legal services are a premium product. We shouldn’t be afraid to price them accordingly. But a traditional, completely hourly-rate-based approach can look uncompetitive when compared to premium services outside of law. Clients are willing to pay for expert resolution of their legal needs. But a £500 hourly rate – starkly stated – looks more expensive than a top Michelin starred meal. We need to get savvier about the way our pricing looks to sophisticated, modern businesses.’