Among the myriad geopolitical changes in recent weeks is increased chatter about a possible recession in the United States. Earlier this week, the US Federal Reserve cut its growth forecast as it warned that President Donald Trump’s tariffs were “clearly” driving up prices. Moreover, share prices in the US have seen substantial drops, with investors fleeing, given the prospective impact of tariffs.

When asked about the possibility of a recession on Fox News, Trump did not rule it out, noting that the American economy was going through a “period of transition”. His Treasury Secretary, Scott Bessent, also told CNBC a “detox period” was coming for the economy.

As the old saying goes, when America sneezes, the rest of the world catches a cold. Whilst Australia - unlike global counterparts - managed to stave off recession during the GFC and height of the COVID-19 pandemic, we're still likely to see ripple effects in our market from what's happening across the Pacific.

Economic downturns can, of course, be a boon for legal services, such as in restructuring and insolvency, litigation, and dispute resolution. This demand for law firm expertise may well make firms attractive private equity (PE) targets.

VIEW ALL

In such conditions – and against the backdrop of multiple examples of Australian legal businesses being targeted for investment in recent years – it is worth exploring what types of firms may attract PE moving forward.

Case studies

As reported earlier this month, Australian-founded international disruptor firm LegalVision has sold an ownership stake to Quadrant Private Equity, which was the PE player’s first investment from its $660 million Quadrant Growth Fund No. 3, raised in December. Speaking to Lawyers Weekly, LegalVision chief executive Lachlan McKnight said the partnership will enable the firm to “invest aggressively in our next phase of growth”, with a focus on its team, technology, and service lines in the coming years.

The investment in LegalVision was the latest in a series of PE firms buying into leading Australian firms.

In May 2023, national plaintiff firm Slater & Gordon delisted from the ASX following its compulsory acquisition by Allegro Funds, which saw the PE firm acquire over 97 per cent of the firm. At the time, then-chief executive John Somerville pushed back on media reports that Allegro would recapitalise the firm and execute a turnaround plan, saying the acquisition was “not about turnaround, this is not about restructure. This is about investment for growth.”

In mid-2022, international insurance law firm Wotton + Kearney entered into a partnership with Straight Bat, which took a 30 per cent stake in the BigLaw practice. The partnership, W+K said at the time, meant that Straight Bat would assist the firm in delivering on client solutions and growth objectives, as well as bolstering the firm’s position in the insurance market.

And, back in mid-2018, flexible resourcing provider LOD entered a partnership with UK-based Bowmark Capital, which the provider said would allow it to “add new service lines, geographies and technology to our existing offering for our lawyers, consultants and clients”.

Five years later, LOD was acquired by US-headquartered tech and enterprise services business Consilio, at which time Bowmark said its years of investment had been “defined by considerable growth”.

Types of firms

These four case studies demonstrate that law firms can and will be attractive PE investments – should they meet certain criteria. In these Australian examples, firms that: disrupt traditional business models, niche down, and/or are scalable with high-volume loads, fit the bill.

In LegalVision’s case, Quadrant’s investment seeks to capitalise on an innovative, disruptive subscription-style service – which, as McKnight noted, intends to combat the “dominant” billable hour model.

Quadrant investment director Peter Elkhouri said: “LegalVision is a business we have been tracking for some time – we have been highly impressed by the team and the way they are disrupting the large and fragmented B2B legal services industry. The business now has +4,500 active clients and is growing +30 per cent p.a. with its disruptive technology-driven model.”

Plaintiff law firms attract interest – not just from private equity but also on the ASX – as such practices, broadly speaking, will have high work volumes and may be easier to scale relative to multiservice corporate firms. Allegro, at the time of its acquisition of Slater & Gordon, had a four-pronged growth strategy: capital structure, management equity, lawyer-focused culture, and a value creation plan.

Wotton + Kearney’s “clear” insurance focus appealed to Straight Bat – firms that home in on such niches, and can prove both scalable and tech-driven, will be of interest to PE players. As Straight Bat managing partner Steve Gledden said at the time: “We saw that Wotton + Kearney’s clients enjoy multi-partner relationships, and there is clear collaboration between teams, which is different to the siloed client relationship model that is prevalent in many other law firms.”

In the case of LOD, the investment by Bowmark in 2018 spoke to the broader appeal and growth trajectory of alternative legal service providers (ALSPs) – whose market share recently hit US$28 billion. As noted by Thomson Reuters in January, the ALSP industry is “thriving”, and “reshaping the legal landscape through both partnership and competition with traditional law firms”. LOD’s success has, of course, mirrored this.

Looking ahead

It is likely that investors will continue to see law firms as lucrative opportunities – particularly if Trump’s trade wars and consequential adverse shocks to the US economy – portend global effects that reach Australian shores.

However, not all firms are likely to be investable.

Top corporate practices, for example, may offer high-value, recurring clients but simultaneously could be seen as difficult to scale by way of unpredictable revenue from billables, have talent retention concerns, or have cultural or client sensitivity to external investment. Elsewhere, boutique family or criminal law practices will be seen as having low repeat business and highly personal cases that don’t lend to scaling.

As McKnight put it: “Traditional law firms are just a collection of individual practices. If a partner leaves, he or she often takes a significant client base with them. This type of business model isn’t great for creating long-term value.”

In conversation with Lawyers Weekly in 2023, BBB Capital managing director Adrian Bouris said that global turbulence and a potential recession will expose law firms whose business models are struggling.

“This might create opportunity for acquisitions, and perhaps access to PE funds might be the answer for firms that are positioned for growth,” he said.

“The business of law continues to evolve; for some, it will be critical to implement innovative legal tech, streamline operations and look at acquisitions to keep growing (if that is the strategy). Having more funding options available for law firms to consider is a good thing, and PE is just one.”

Of course, PE interest will not always translate to ownership changes. As with all things, time will tell.