Sat. Nov 27th, 2021

The £ 2.9 million pack against the law firm Mishcon de Reya over the acceptance of potentially “contaminated” money from a former client as payment for legal fees, comes at a bad time.

The well-known law firm, whose clients included Diana, Princess of Wales, is looking for a London stock market listing at a reported £ 750m valuation. But smaller peers did not fare well in public markets. Manchester-based DWF shares are about 12 percent lower than their shares presentation price two years ago.

Law firms, such as accountants and other professional services firms, are an unlikely fit with public investors. Capitalistically, with value largely tied to people, the historical partnership model has served them well. Allowing top attorneys to divide profits between them provides a built-in incentive and retention mechanism. Pre-Covid, Mishcon’s senior shareholders, took an average of £ 1 million a year from the profit pool. It worked for everyone. When dissatisfied top performers leave, they often take business relationships with them.

Becoming public means sharing this treat with shareholders, who obviously want their share of the pie. No problem for top-of-the-line lawyers selling out now. Less good for those who still work through the sausage factory.

Mishcon’s proposed structure takes some of this on board, in part by splitting off part of the profits as a cushion for bonuses. Partners, who will see a portion of their salary replaced with dividends, will be locked up in their possession for seven years. Other former partnerships have found alternative benefits. Goldman Sachs, listed in 1999, rewards its 440 partners with access to exclusive investment opportunities.

Profitability among law firms varies greatly. Mishcon’s elite customer base may be what has enabled it to enjoy much higher margins than DWF or Keystone, another UK listed firm. The assumption that normalized run rate revenue growth of 6 per cent to £ 180 million and 30 per cent margins would imply a price / profit of 13 times.

New risks need to be monitored. Partners will no doubt find it easier to spend public money. Yields are marked for expansion and having an acquisition currency in hand can be a temptation too far. Yet the swing to capital markets seems unstoppable. Investors need to be careful.

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