David Beech, Managing Partner, Knights Solicitors LLP discusses Knights decision to convert and the benefits of private equity investment.

As the first commercial law firm to have attracted private equity investment just over 12 months ago, ABS status was the natural path for Knights. Hamilton Bradshaw, James Caan’s private equity house, invested in Knights in June 2012 - making us the UK’s first commercial law firm to receive private equity backing.

Our ABS licence was approved in January 2013, allowing us to leverage the private equity investment and continue to realise our ambitious growth plans of doubling turnover in the next three years and becoming a top 100 UK law firm.

2012 marked major change in the legal sector with the Solicitors Regulatory Authority (SRA) starting to issue ABS licenses. Although Knights has a long and distinguished history, we understood the importance of embracing the changes taking place in the legal market in order to grow and develop. We wanted to take advantage of this for the benefit of both the firm and our clients.

Private equity investment

Looking for external investment from a private equity house was a natural step for me. My previous experience in the sector gave me a unique advantage, as I previously raised and managed a private equity fund, having left Heatons in 2005 to join private equity house Arev. Having run a private equity fund, I understood the mechanics of building capital value within a business which is very different to how traditional partnerships operate.

My experience meant that I knew what I was looking for in a partnership; someone who shares the same values in making a success of a people-based business. We found this in Hamilton Bradshaw and James Caan. I knew that in order for Knights to grow and succeed it was imperative to unlock the talent of our people and James Caan has a successful track of investing in people-based business.

Hamilton Bradshaw was also keen to give Knights the autonomy in running the law firm on a day-to-day basis. Accordingly, I have sole responsibility for all management decisions at the firm with backing from a small board that includes Caan and Hamilton Bradshaw’s finance director. There is also a proper corporate management structure in place that provides leadership and direction to the firm; and the lawyers are freed–up to do what they do and enjoy best – lawyering.

I believe that the name ‘ABS’ can be misleading. Many of those law firms granted ABS licenses are not really doing anything differently or being innovative. Several of the new ABSs are small firms bringing in a non-lawyer into the partnership – the traditional partnership structure is still in place. Knights is one of the few ABSs actually doing something different.

The private equity model is a completely different way of running a business. The traditional partnership does not exist, because for me it is not a viable option any more. Equity partners have competing interests as individuals within a traditional partnership which often means that decision-making is flawed. The whole process becomes massively time consuming and demotivating.

At Knights, the management team provides the firm with a commercial decision making process and I assume the role of the CEO. This means decisions get made much faster which leads to efficiencies for staff and clients. Staff see decisions being made quickly and the firm moving forward which is motivating for them.

12 months on from investment

In June Knights celebrated its first anniversary of private equity investment with the acquisition of the Chester office of international law firm Hill Dickinson.

This is the first acquisition we have made following ABS approval and the private equity investment. The acquisition gives us greater geographical reach as we look to provide clients with national coverage.

The announcement rounds off a thrilling first year for Knights including a number of major achievements that demonstrate how the ABS and private equity model in law firms can be made to work effectively.

Under my leadership the firm has taken major steps towards realising its ambitions in the last 12 months, including:

- Recruiting 40 new lawyers – more than the firm has recruited in the past 10 years - across key practice areas

- Taking the first step in providing ‘non-law’ services by recruiting a team of six town planners from Staffordshire-based specialist planning and development practice, John Rose Associates

- Making a significant investment into IT which gives Knights the platform to grow into a top 100 UK law firm and delivers more collaborative working amongst staff

- Developing into new practice areas that will deliver growth with the launch of a new Energy team as the first sign of this

There is a still a significant fear factor when you use the words ‘alternative business structure’ and ‘private equity investment’ amongst the legal profession, both for being an unknown quantity and as a perceived threat towards the established ways of doing law. We’ve shown over the last 12 months that there is nothing to fear from the right kind of private equity investment, which we found in James Caan and Hamilton Bradshaw. Our people have been energised by a business model that gives them clear leadership from one decision maker and rewards them for the results they achieve.

There are a number of partners out there who are excellent at doing law but are dissatisfied by the bureaucracy of the traditional partnership model and by having to carry a firm that isn’t profitable. These are the kinds of lawyers we want to attract to Knights where they can stick to what they do best while we provide leadership and direction. It’s been an exhilarating 12 months with much to celebrate. The next 12 months is about consolidating and building on our growth and we are very excited about the plans we have in place to realise our ambitions.

Impact on Clients

The private equity model is also attractive to clients who in difficult economic times, are demanding more for less, which means that law firms have to respond by being more efficient. I believe the partnership model is dysfunctional when it comes to efficiency and law firms have got away with that dysfunctional structure for a long time. However, the legal landscape has changed and law firms need to adapt if they want to survive.

One example of how we provide value to our clients is through retainer agreements. Wherever possible, we look to agree up-front budgets with clients so that there are no nasty surprises.

Another example is through the use of integrated and properly supervised junior staff to work on the increasing element of process in law, rather than using an expensive lawyer to do it.

However, we also want clients to see the firm as a solution to deliver all their legal needs and as such this is a potential growth area for the firm. An example of this is a commercial relationship where Knights lawyers become members of the client’s team. This leads to repeat business moving to a retainer based model rather than one-off transactions. It’s a business relationship model that James Caan has executed very successfully in the past.

The new model already has proven success in passing on benefits to clients with our overheads already down, with 20 per cent plus savings in payroll and non-payroll. Profit has become visible that was not before and it has capital to invest in IT and people.

Knights will also be introducing a number of exciting new products and services in the next six months to clients that will deliver legal services more effectively and at a more competitive price.

The future

We have set an objective of becoming a top 100 UK law firm and more than doubling turnover in the next three years.

For me this is not aspirational - it is about survival. The legal sector is facing numerous challenges and the ‘squeezed-middle’ is bearing the brunt of it. The top 100 in three years will be those who survive those challenges and Knights will be one of those firms.

To ensure this, we are actively looking for new members of staff. We are also continuing to develop new and innovative methods to provide our clients through IT and client services.

We are ready to meet the new challenges and opportunities that the developing legal sector has to offer.

This article represents the views of its author and not those of the Law Society.