Victor Kaim’s catchphrase after he firstused an electric shaver from Remington Products was "I liked it so much, I bought the company" and it is an investment strategy used by customers of other companies, including legal services.
Last year, Matthew Hudson (pictured) set up UK-based law frm MJ Hudson to raise and transact for private funds and deals with the backing of clients from his previous practices at SJ Berwin, O’Melveny & Myers and Proskauer Rose.
The clients-turned-owners invested in a bid to shake up a model of billing by the hour for legal services and ahead of the UK’s Legal Services Act coming into force in October.
Before the act comes into force, the investment in MJ Hudson has been structured as debt that can be converted into equity.
The act will enable the 10,000 law firms in the UK to operate a partnership culture within a modern corporate structure – retaining earnings, paying dividends and attracting external capital from clients and other bodies, but also allowing non-lawyers to own shares.
In Australia, where there have been similar reforms, Slater & Gordon, a personal injury law firm, has floatedon the country’s stock exchange and bought 30 peers to help it double turnover in four years.
Smith & Williamson, a UK-based accountancy and professional services group, said a fifth of the 121 firmsit surveyed would consider flotation to raise external finance and 43% would look at private equity backing.
Hudson, who is the only UK lawyer to be ranked by Chambers as a leader in both private equity fund formation and merger and acquisition transactions, said: "This structure brings out the benefits of traditional advisory partnership while adding superior 21st-century service and pricing. It is an idea whose time has come."
Hudson said a traditional law firm was effectively an annual cashflow business bringing in fees and then distributing it all to the partners every year, whereas a company had a legal personality to encourage retained earnings.
He said: "A company model brings in the discipline of retained earnings, annuity earnings and long-term client relationships rather than the last two months of a law firms financialy ear, which is a frenetic cashflow grab.
"By bringing in equity from clients’ funds and deals, it adds an even greater alignment of interests with our clients."
Retained, predictable earnings and a corporate structure offer a business model to which leverage can then be applied by private equity firms.
Hudson said there were five potential models under the new act:
The specialist firm – high end and niche
The bulge bracket – global world-beater
Supermarket law – providing a cheaper service to the consumer
Buy and build – buying up smaller mid-market players and reducing costs
The Capita model – where large companies could spin out their legal departments and outsource counsel.
Rather than traditional fee structures, Hudson said its investors and clients could negotiate payment based on the size of fund raised rather than the number of hours worked on their behalf.
And, in turn, MJ Hudson has been set up on a limited liability partnership basis, which enable it to invest its own equity in its clients’ funds, rather than being paid in cash.
The model has proved successful, with the firmexpanded to three partners, including John Dyson, a former senior associate at both the Clifford Chance and Simmons & Simmons’ funds teams, in September, and nearly 15 staff, and closing two funds covering venture capital and private equity in December last year.
Last month, Chamonix Private Equity acquired five businesses in a leveraged buyout from the UK-based Linpac Group with legal advice from MJ Hudson and corporate counsel by Olswang.