Evaluation: ABS and investment in legal services
This research looks at the investment activity by Alternative Business Structures (ABS). A major aim of the introduction of ABS was to allow new forms of capital into regulated law firms to improve market efficiency. However, investment remains an under-explored area of research. In our 2016/17 business plan we committed to investigating whether there were any regulatory barriers to investment.
All relevant material can be found via the following links:
What new information did this research provide?
This research provides information to address four key questions:
1. What kind of investment activity has there been in ABS?
Our research shows that the majority of ABS firms (66%) either have already invested or are planning to do so, since they gained their ABS license. These investments have mainly been made to hire more staff, increase marketing activity or to purchase IT. We see this as evidence of the increased scale that allowing non-lawyer ownership was designed to enable. There are statistically significant links between higher levels of non-lawyer ownership and having made an investment. Larger organisations are also more likely to have invested in their business. The levels of investment activity also vary by the type of organisational structure. For all types of ABS, 70% of limited liability partnerships surveyed have made an investment, compared to 40% of limited companies
2. Are ABS attractive to all sources of finance?
Our research shows ABS firms accessing a wide range of sources of finance, and only a small proportion of ABS indicated difficulties in accessing finance. The most frequent source of funding for investments made was business profits or cash reserves, which were used by 49% of those who had invested in their business. External sources of equity finance accounted for only a minority of investment funding sources.
3. What do investors think of the legal services market?
According to the investors we spoke to, the legal sector is seen as a ‘sleepy’ market with opportunities for investors to grow their investment capital by improving efficiency within the business itself. They appear to have concerns about the ability to exit the legal sector once their investment has matured, although there are some examples of private equity investors having sold on their investment and exited the sector.
4. Are there any regulatory barriers to investment?
Only 6% of ABS indicated that they found legal services regulation was acting as a barrier to them accessing long term sources of finance. Nor does the cost of legal services regulation appear to be a barrier. Further, while there have been issues in the past with the SRA’s licensing process these seem to be historical, and do not currently appear to be acting as a barrier to external investment.
How are we going to use this research?
We undertook this research to seek to understand whether there were any regulatory barriers to investment in legal services, following on from the slow change in outcomes identified in our Market Evaluation. Given the level of investment activity, the low incidence of reporting of any barriers to investment, and the wider context of the CMA’s findings around low levels of competition in the sector our conclusion is that regulation is not a barrier to investment. We therefore do not intend to explore specific legal services regulations in greater detail in relation to their impact on investment. Our ongoing emphasis on deregulation and increasing competition is expected to lead to more investment activity in time. Further, we will continue to monitor changes to market outcomes through our triennial market evaluation exercise – next due in 2018/19.