International Investing

Soon private investors will be able to buy stakes in law firms in the UK. While not as broad as Australia’s rules, which allow for publicly traded law firms, it could be an initial step down in that direction. Besides cashing out their shares why would any law firm want to go public?

This Bloomberg article about Slater & Gordon, the first Australian firm to go public, bring up the main reason investment banks reluctance to go public was overcome:

`They were hesitant; it took awhile,” Geisst, a professor at Manhattan College in Riverdale, New York, said of the investment banks. “Law firms could go public for the same reason that the investment banks had to go public. The number of the transactions were increasing and it required them to have more capital and the partners couldn’t provide it.”

Fair enough for investment banks who participate in the underwriting process and invest their own capital, but why would law firms need to tap the capital markets? What they do isn’t capital intensive. The same article mentions only one reason:

“Anyone that’s been a leader of a law firm has thought about how we raise capital,” Orrick’s Baxter said. “It takes millions and millions of dollars.”

Law firms are not leveraged companies; no matter how smart they are or how hard they work, for the most part, billable hours rule. The only way to increase margins is to cut costs or increase billable hours. There isn’t much room for capital appreciation but they could be steady dividend payers.

This chart from Adam Smith Esq, an economic law blog, shows the tradeoffs between number of employees and profits per employee, essentially it’s brains vs brawn. Wal-Mart turns bodies into profit; Microsoft uses smarts. Where would law firms fall on this chart? For profit reasons, efficiency isn’t a priority at big law if you care about billable hours:

Most firms won’t have a reason to tap capital markets, but there are some exceptions that could use hedge fund or PE capital: the firms who do a lot of high-risk, high-payoff litigation where billables aren’t important and there is a big gap between wins.