Twenty-two down, 167 to go – the ABS revolution is coming, but with more of a rumble than a big bang
If the lengthy and complicated alternative business structure (ABS) applications of Irwin Mitchell and Parabis have been a blockage in the SRA pipeline, perhaps there will be a more steady flow of licenses granted from now on.
The SRA has a team working on 167 ‘stage two’ detailed applications following 267 ‘stage one’ expressions of interest submitted since the start of the year. But, with few hints as to when the regulatory authority will lay another golden ABS egg, timing remains a guessing game – even for the firms involved.
There has been criticism of the time it has taken for the SRA to sign off applications, especially those with added complexities such as the private equity tie-up of Parabis-Duke Street and the multiple-licence approval for Irwin Mitchell. SRA chief executive Antony Townsend insists that his team “makes no apology” for being thorough, while Legal Services Board chairman David Edmonds says he is satisfied with the speed of ABS implementation.
Looking at the process through the cold eyes of the regulator, it clearly has to be comfortable with a private equity house – in this case, Duke Street – being a fit and proper owner of a law firm. The SRA has to be satisfied that the individuals behind the private equity group are credible, understand who the investors are, what their investment approach is, how they propose to deal with their portfolio and, most importantly in a post-Halliwells world, how they would deal with any financial difficulties.
In theory, external investors in law firms should reassure the SRA. They are more able – and likely, with the backing of banks as is the case with Duke Street – to stump up capital to see off financial difficulties than are partners, who may head for the hills at the first sniff of trouble.
However, as the Parabis-Duke Street deal was the first ABS involving a private equity house to receive approval, it required a robust approach. What approval gives Parabis, with Duke Street’s £50m cash injection, is a jump-start on its rivals. Unless they are merging, the firm’s competitors are having to run just to stand still. Commentators believe it will be knocking on the door of the top 20 before long, thanks to imminent investments in infrastructure and acquisitions.
Duke Street partner Iain Kennedy has outlined a “buy-and-build” model to transform the professional services structure into one of a business process outsourcer. On the menu to sate Kennedy’s appetite are a selection of firms valued at between £10m and £30m, all with a claims management industry flavour.
One source claims it is unlikely that another private equity house will venture into a similar tie-up for now, although James Caan’s Hamilton Bradshaw is awaiting SRA approval for a smaller deal with Midlands firm Knights, but that there may be scope for investment in niche firms offering commoditised services.
In the meantime, Parabis will drive forward with its ambitious plans, bringing Duke Street operating partners Paul Lester and Bob Scott into the fold as non-executive board members.
Parabis chief executive Tim Oliver admitted to frustration with the lengthy approval process as the initial thinking was to go live in February and begin making acquisitions to build its blue-chip client base 12 years after its launch. Now that is possible and Parabis, parent firm of claimant specialist Cogent Law, defendant firm Plexus Law, Parabis Claims Solutions and health and safety group Argent, is already valued at between £150m and £200m.
Irwin Mitchell bosses had been eagerly awaiting the go-ahead for the firm’s ABS conversion after restructuring the business in anticipation.
Glyn Barker, the former vice-chairman UK of PricewaterhouseCoopers, was brought in as executive chairman, replacing Michael Napier while Alison Eddy took on the London managing partner role. Barker has now been approved as chairman of IMCO Holdings, the firm’s parent company, with ex-KPMG partner Mel Egglenton as a second non-executive director and audit committee chair. Paul Firth joined in October to develop the business services side, working closely with head of business Niall Baker. Along with group chief executive John Pickering, the new-look management team will now forge ahead with its stated ambition of attracting outside investment.
The firm is staying tight-lipped about who will provide the much-vaunted £50m warchest, but it would surely be naive to think that Pickering and co have not been beavering away compiling a shopping list while waiting for multi-licence approval.
Irwin Mitchell was not shy about announcing its plans as far back as April 2011, and muscled to the front of the queue with its application in the first week of January this year. As far back as May 2010 it converted to Legal Disciplinary Practice status and promoted non-lawyers to its equity structure for the first time.
Already a top 20 firm with a strong top 10 litigation practice that brings in 85 per cent of its total £183.7m turnover, Irwin Mitchell will use outside investment to pave the way for an assault on the mid-tier corporate market through merger and acquisition. Expect a busy 2012-13 at Irwin Mitchell HQ.
The SRA says Irwin Mitchell was the first business to be granted multiple licences for the range of businesses. Pickering welcomes this “milestone” and, like Parabis, believes it will give his firm an early lead over its competitors in embracing the “changing legal landscape”.
Townsend claims the two big approvals mean the ABS bandwagon is “gathering pace” and that the size and variety of organisations involved shows the SRA’s authorisation system is “flexible” and “robust” enough to deal with a variety of corporate structures, using the same “stringent suitability criteria”.
With what may be a nod towards the length of time it took with the applications of Parabis and Irwin Mitchell, Townsend adds that he accepts the SRA is “continuing to make improvements to the process” as it gains experience.