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Why U.S. Legal Businesses Flirt With IPOs But Don’t Commit

Sept. 12, 2019, 8:50 AM

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at two legal businesses that decided against going public and ask what it means that the industry isn’t lighting up Wall Street.

Last week, two companies in the legal space sold to private investors after they flirted with the idea of publicly floating shares.

The bigger of the businesses was Axiom, the 20-year-old talent agency that provides on-demand lawyers for corporate law departments. Axiom had been in a quiet period after filing paperwork in furtherance of a public listing. They broke the silence to announce a sale to private equity firm Permira Funds.

The next day came news that Vannin Capital, a litigation funder, was being sold to PE firm Fortress Investment Group. Vannin had ditched IPO plans less than a year ago.

Sure, they are in different businesses. And their decisions to scrap IPO plans came almost a year apart. But the fact remains that the legal business has seen a huge influx of capital in recent years, and very little of it has come from public listings.

Burford Capital, publicly traded for a decade, in October 2018 raised $250 million by selling more equity shares. And a handful of law firms have gone public in the UK, most notably DWF’s March listing raised $125 million. Another IPO headline popped up in June when I broke the news that Elevate Services was aiming for a public listing — sometime around 2021.

By comparison, private investors this month alone have put serious money in Axiom and Clio, a cloud-based legal management software company. Terms of the Axiom sale were not disclosed, but it said it had annual revenue run rates of $300 million in late 2016. As for Clio, venture capital investors recently poured $250 million into the company, which reportedly set a record for the largest venture capital investment in Canada since 2000.

All told, legal tech companies raised over $1 billion last year, virtually all of it from private investors, according to LawGeex.

First things first: There is clearly nothing wrong with private investment. And IPOs aren’t a finish line or demarcation of success. They are mostly just a funding event for companies older than the ones currently trying to change the legal business.

The current investment dynamic among legal businesses serves as a reminder that the narrative of the legal industry being on the precipice of a profound shake-up is still very young — and so are the companies advancing it. And even for older companies, the sometimes painstakingly slow pace of change may not jive with the quarterly earnings pressure of being public.

“I think all of us have sort of settled on the notion that we’re really talking decades, not years, when it comes to transforming the legal market,” said Ken Grady, a former CEO of SeyfarthLean Consulting, who follows the space closely. “This is a marathon, not a sprint. And in that type of market it is harder for a company to show the type of growth that [Wall Street] likes to see and reward with large multiples. This is just not an area where you’re going to see that type of rapid growth.”

Since there are so few publicly traded businesses in the legal industry, executives also face the challenge of educating public investors about their companies. As an example, just look at what Burford has endured trying to explain itself to skeptical investors. As of Sept. 11, the company’s shares were still trading around half their value before an early-August short-seller attack.

“There just hasn’t been enough done in this area and it’s not well-enough known that everyone agrees on the actuarial tables for litigation,” Grady said of lit funders. “And more broadly, that will be true for the legal industry for a while. How do you value a major law firm? If we had Allen & Overy go public in the true sense of the word, how do you value that firm? And what are the right metrics to use?”

I have said before that the industry’s slow pace of change is an opportunity. So far, private investors are the ones who are buying it. But it likely won’t be that way forever.

Worth Your Time

On a Recession: Will law firms pull back their investments in technology and other efficiency-based projects if a recession hits? Some law firms say they’ll do the exact opposite in a story I wrote with colleague Sam Skolnik. State courts may not fare as well in a downturn, another colleague KimberlyStrawbridge Robinson reports.

On Blockchain: Law firms talk a big game about staying on the cutting edge of blockchain technology in their work, and many have launched relevant practice groups. But Sam Skolnik reports that firms have been hesitant, at least so far, to use blockchain in their own operations.

On Law Firm Innovation: Baker McKenzie officially opened its Tampa Bay operations center, the firm’s fourth in total and first in North America. Hogan Lovells named Washington-based partner Mark Brennan its “lead innovation partner.”

On Litigation Finance: Burford Capital is in the news again with the Financial Times reporting on a lawsuit related to the company’s relatively small asset recovery business and a billionaire’s alleged sex tape. Elsewhere in the world of funders, Bentham IMF hired two lawyers in its third round of hiring since it raised $500 million last year.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Jessie Kokrda Kamens at jkamens@bloomberglaw.com; Rebekah Mintzer at rmintzer@bloomberglaw.com

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