Originally published in Modern Law Magazine, ABS Supplement 2013
Smedvig Capital has invested in legal services since 2005 when the capital venture firm backed the first ABS, Premier Property (part of myhomemove). Jordan Mayo discusses the benefits and attraction of investing in legal services and why firms need to take a longer term approach and adopt a culture that is open to taking calculated risks.
Q: Why did Smedvig Capital see the legal services arena as a candidate for investment and what elements of the legal services market are most appealing?
A: At Smedvig Capital we invest in fast-growing businesses that are taking an innovative and disruptive position in large, established markets. Clearly the legal services market is enormous, being worth over £23B in aggregate and with several specialist verticals such as conveyancing worth £1B or more. However, despite the large market and although there are some great law firms and lawyers, the sector has generally been underinvested in, principally due to the restrictions on external capital pre-ABS. As a result, and with some notable exceptions, there is often relatively little deployment of technology – both to improve the client experience and to improve efficiency levels – and relatively little investment in sales and marketing infrastructure to help grow firms and their brands. Consequently, the market is highly fragmented with few clear leaders, even in niche segments. For example, when we first invested in myhomemove in December 2005, it was one of the largest mover conveyancing firms with just 0.5% market share. We saw a huge opportunity to significantly extend their lead in this market.
Q: Why has the Private Equity House continued its investment for so long?
A: We are principally funded by the Smedvig family, so we have a very stable, long-term source of capital which in turn allows us the flexibility to commit long-term capital to successful portfolio companies. When we initially funded myhomemove in 2005 we agreed a five year plan with the management team, however the exit timing always remained flexible. In 2008 following the crash we saw an opportunity to invest more capital, increase market share and grow the business further so together with the management team agreed to extend the investment timeframe. Since 2007 the market has stabilised at roughly half the historic volumes of the previous decade, but in the same period myhomemove increased their volumes of activity by over 60% and more than doubled their market share. Investment in infrastructure, technology, processes and people have allowed this growth. Continued investments in people and technology have led to industry-leading customer satisfaction levels and time to completion. In addition our unit cost position is extremely competitive. So we see a huge amount of growth still to go for. In fact, today MHM’s market share is a little over 3% and the aim is to get to 10% in the near future.
Q: What are the benefits of being the first to take part in the ABS route?
A: From a consumer perspective, as an ABS the business has used external investment and expertise to improve customer service and deliver improved efficiency levels. From a Smedvig Capital perspective, we have invested in over 40 fast-growing businesses since 1996 and of course have experience of being an investor in a regulated ABS environment. We feel that we are very well-placed to support other ambitious and innovative legal services firms in future.
Q: Did the nature of Premier Property (being a conveyancing focused, transactional organisation) provide the ingredients for success in terms of prescribing the ABS model and regulatory requirements? Or are all legal services able to benefit from the ABS model, so long as the leadership, ethics, business plan, funding etc meets the requirements?
The ABS model works best when a law firm can efficiently use external capital to improve its processes, customer experience and ultimately create value by growing profitably. The model also needs forward thinking management teams who are prepared to make long-term investment decisions and who are culturally open to outside input and the experiences from other industries. At the moment that seems to be truer of ‘volume’ sectors, where law firms seem to have been quicker to grasp how investment in technology can improve service and profitability. To use a conveyancing example, 80% of clients use MHM’s eWay system to see the progress of their case and view the relevant documents online. All that said, our strong belief is that the whole legal industry will move in this direction over time. Looking out in the medium, or long-term it seems plausible that the whole legal sector will look very different in terms of external investment and use of technology.
Q: Do ABSs require a fresh approach to leadership and management?
A: They certainly require a longer term approach and a culture that is open to taking calculated risks. There is a perception that this is not always the case in traditional multidisciplinary law firms with multiple partners. The partner model does not naturally lend itself well to ABSs; when there are a group of partners in a firm, the structure is often not conducive to making mutual long-term decisions. myhomemove was an external, disruptive entrant into the legal services market. Innovation certainly can come from existing law firms, but it can also come from outside of the sector.
Q: Does Smedvig Capital have any other legal services offerings in its portfolio and would it consider any in the future?
A: Yes, we are actively looking at other legal services investments. More specifically, we are interested in those with ambitious management teams and great people. We want to invest in firms with disruptive, scalable business models, as well as a strong market position where there is the ability for us to add value – from our experience at myhomemove and also at dozens of other fast growth business – as well as, of course, capital.
Q: What has been the response from the Private Equity / investment sector in the legal services arena in light of ABSs? Will we see more widespread investment in the future?
A: There has been a lot of noise around investments in this sector, however in reality there has been little activity to date and surprisingly few deals have happened. Firstly whilst there are many great law firms, it is difficult to find firms that are culturally a good fit for a PE investor. Secondly, the ABS approval process is still new and the regulatory framework is still more complex than in other industries. However, I think that this will change and we will see more widespread investment in the legal sector in future.
Q: Are transactional-based ABSs in danger of lowering standards of customer care in return for lower fees and a faster service?
A: I think this is one of the most surprising concerns about ABSs. In contrast to small highstreet law firms, large scale businesses like myhomemove and Premier Property Lawyers are able to invest in technology, infrastructure, processes and people. A large scale business like this is going to be more efficient than a small high-street firm and has resources to invest to improve the customer experience. At myhomemove the team provide a consistently personal and trusted conveyancing service, which is strengthened by great technology and innovation. Through investment in technology and people, they can further reduce the risk of fraud and provide reassurance to lenders.
Q: How have ABSs helped meet the Legal Services Act – in terms of providing more choice for consumers – in your view?
A: It is too early to tell really. With the ABS model, we would expect to see consolidation in the number of suppliers – and perhaps very dramatic consolidation in certain segments. So whilst there will be new entrants the number of suppliers will probably fall. That said, we would expect to see far more innovation in propositions, pricing and so forth and so consumers will be offered genuine alternatives in the way legal services are delivered and paid for. In the long run, more investment in legal services and more innovation has to be good news for consumers.