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External Capital and Ownership Structures

Outside of the magic circle and the top international firms, many law firms suffer from weak balance

sheets and a lack of retained capital in the business. They are therefore restricted in terms of

obtaining additional funding, and often struggle to match their assets with sensible funding options.

The structure of the firm can also have an impact on what funding is available – as lenders can be

reluctant to lend where capital is quickly drawn out of the business by the partners. As new entrants

enter the market without such constraints, the attractiveness of firms to external investors and the

structure of the firm will be important strategic issues.

The opinion of partners on the impact of external capital is also mixed. While most acknowledge that

it will have some effect, views about where in the market investment will be concentrated varied

widely.

Some believe that the only attractive level would be the top national and international firms. Clive

Vernon, Head of the Property and Private Client Department at Midlands firm Buller Jeffries,

believes that the larger players are at the front of the queue to be bought up. Others share his view

that smaller firms will not be of interest to third party investors, because the opportunity to exit with

a capital return in a specified time frame will not be possible in a business where the primary assets

are people and knowledge.

Chris Marston believes that the impact of external investment will be limited. “Private equity firms

want to double their money in three years with certainty. They will be more attracted to the

businesses supporting the legal profession, such as outsourcing.”

From the other side of the fence, a number of participants felt that partners would fiercely resist

external investors’ advances. As Richard Pennington, Finance Partner at Norfolk firm Ward Gethin,

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