Mishcon de Reya/listed lawyers: partnerships are not cut out for public markets

The £2.9m suit against law firm Mishcon de Reya over acceptance of potentially “tainted” money from a former client as payment for legal fees, comes at a bad time.

The storied law firm, whose clients have included Diana, Princess of Wales, is seeking a London stock market listing at a reported £750m valuation. But smaller peers have not fared well in public markets. Manchester based DWF’s shares are down around 12 per cent from their listing price two years ago.

Law firms, like accountants and other professional services firms, are an unlikely fit with public investors. Capital light, with value largely bound up in people, the historic partnership model has served them well. Allowing top lawyers to divvy up profits between them provides an inbuilt incentive and retention mechanism. Pre-Covid, Mishcon’s senior equity partners took an average £1m apiece a year from the profit pool. That worked for everyone. When disgruntled top performers leave they often take business relationships with them.

Going public means sharing these spoils with shareholders, who naturally want their share of the pie. No problem for top-of-the-pile lawyers selling out now. Less good for those still working their way through the sausage factory.

Mishcon’s proposed structure takes some of this on board, in part by splicing off a portion of profits as a cushion for bonuses. Partners, who will see part of their salary replaced with dividends, will be locked into their holdings for seven years. Other former partnerships have found alternative perks. Goldman Sachs, which listed in 1999, rewards its 440 partners with access to exclusive investment opportunities.

Profitability among law firms varies hugely. Mishcon’s elite client base is perhaps what has enabled it to enjoy far higher margins than DWF or Keystone, another UK listed firm. Assuming normalised run rate revenue growth of 6 per cent on £180m and 30 per cent margins would imply a price/forward earnings of 13 times.

New risks must be watched. Partners will doubtless find it easier to spend public money. Proceeds are marked for expansion and having an acquisition currency in hand could prove a temptation too far. Still, the lurch towards capital markets looks unstoppable. Investors should be circumspect.

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