House calls

The SRA’s outcomes-focused regulations will take a bit of getting used to

Dominic Stuttaford
Dominic Stuttaford

However, we are still waiting to hear about the final details of potential alternative business structures (ABSs).

The structure of such ownership has until recently been based on the premise that an IPO and a listing on the stock market would be the ­preferred way to go.

With this model the directors of the listing vehicle would be expected to be the current management team of the firm, with the introduction of a couple of non-executive directors, who would contribute their expertise to the strategic direction and ­management of the firm but would generally not be expected to get ­involved too heavily in its conduct on a day-to-day basis.

However, the slowdown in the ­equity markets over the past 12 months or so is likely to raise questions for those firms seeking external investment. Some commentators have raised what a traditional and conservative law firm might see as an uncomfortable prospect – private ­equity investment.

This would involve rejecting the stereotypical – and inaccurate – ­characterisation of private equity ­investors as short-term investors, whose aim is to make a quick capital gain to benefit themselves and the present generation of managers.

With the changes in the equity markets, private equity funds are now faced with a longer timeframe within which to realise their investments – a timeframe that may allow for the markets to open up again.

More importantly, it would offer an opportunity for the representatives of the private equity fund to bring their expertise to bear. This, however, is one area of their involvement
that may be initially treated with ­suspicion by the typical UK partner and is thus likely to involve a harder sell to the partnership.

Private equity investment also ­offers the opportunity to tailor the structure to one that best suits the firm, rather than simply having one class of shares.

Would, for example, the existing partners or members prefer a mixture of equity or debt-like investment? Should it be both short- and long-term?

Private equity investment can be implemented quickly and efficiently, and more importantly without the requirement for an UK Listing ­Authority-approved prospectus or an AIM admission document. It can also be concluded out of the public eye and with a lower execution risk.

It is too early to say whether private equity offers a genuine alternative, but it seems that, far from it being ­rejected out of hand, it should be looked at seriously. Indeed, private equity companies seem to be waking up to the business possibilities ­inherent in such investments.

The IPO and the private equity routes both have their advantages and disadvantages and as a result should be looked at, as any lawyer is likely to say. Which route is ­preferable will depend on the circumstances of the firm, what capital it needs and, most importantly, the appetite of the current and future owners of the business.