15 June 2022 The Legal Profession This Week - Mishcon Suspends IPO

The Legal Profession This Week - Mishcon Suspends IPO​

What do you need to know this week?

Mishcon de Reya has suspended its initial public offering (IPO) — a plan that has been in the works since 2019.

IPOs around the world are down across the board. The volume of cash raised in Q1 2022 is down 51% year on year. Unsurprisingly then, Mishcon, which had a turnover of £189m in the year ending April 2021, cited unfavourable equity capital markets conditions as the primary reason for halting its IPO.

Had the UK-based law firm proceeded with the IPO, it would have been another in a series of law firms going public: Rosenblatt floated its shares in May 2018, with DWF Group following suit in March 2019. Gateley Holdings was the first firm to go public in 2015 following reforms brought by the Legal Services Act 2007 (LSA 2007) which ended the requirement that only qualified lawyers could own law firms.

There are two main arguments in favour of law firms offering their shares to the public. First, as with any public company, by requiring firms to disclose more information to the public, investors can make sufficiently informed decisions as to if they wish to invest in a particular firm. It follows that for the law firms prepared to meet these disclosure requirements, they have access to a segment of the market that, before the LSA 2007, was closed off to them. This provides them with fresh capital which they can use to fund further expansion.

Second, access to the public markets drives competition. By allowing non-lawyers to own law firms, the management and ownership of law firms become more diverse and require traditional law firms to innovate if they wish to stay competitive. Ideally, this is good for clients. (This is in effect the same argument we see in favour of professional services like the Big Four now providing legal advice in addition to accounting and auditing services).

But have these arguments been borne out? Are publicly traded law firms more competitive and successful? The results are decidedly mixed if we look at the change in share price from when certain law firms offered their shares to the public with the current share prices as of yesterday:


Table 1 - Change in Share Price


Insofar as the share price is a proxy for a company’s underlying performance, the widespread market volatility since 2020 might explain the mixed results. However, by looking at underlying annual earnings, simply going public does not translate into improved performance.

Table 2 - Annual Operating Profits (£m)


That said, this is an elementary analysis: these five firms operate in different segments of the legal market; only DWF Group (which reported a £26m operating loss last year) is positioned in the same markets as the US and Magic and Silver Circle firms (i.e., annual revenue greater than £300m). It is therefore difficult to compare performance between them. A further line of enquiry would be to compare the performance of non-listed competitor firms and see what emerges.

Therefore, while it may be too early to make conclusions about the long-term prospects of publicly traded law firms, it is unlikely that we will see further IPO activity in the legal sector so long as inflation continues to soar and the spectre of further interest rate rises lurks on the horizon.

Notes:

Share price information from Morningstar and Refinitiv (accessed through Google).
Operating profit figures from publicly-available Group annual reports (NB, Rosenblatt’s figures are listed as “Profit from operations”, calculated as revenue less personnel costs, depreciation and amortisation, and other expenses).