The opportunities lie especially in the sectors …that are fragmented — where there are thousands of firms in the space, but most of them are small and practically none of them are specialists…It is because those firms are not differentiated that it will be so hard for them to continue to compete with specialists who are investing properly in the technology and the service delivery.
Smedvig Capital is a private equity firm that invests in fast growing businesses.
We have invested in two legal service providers: Kings Court Trust (KCT) and myhomemove (MHM). We got involved in legal investing back in 2005, so well before the UK Legal Services Act came into effect. This happened because the Council for Licensed Conveyancers permitted ABS-type structures for conveyancing that far back. At that time, we were not specifically looking to enter legal services — we simply liked MHM — the dynamics of its market, the management team, their use of technology in a disruptive way to take out cost and increase customer service, and they were doing that in a very scaleable way. Those are the same things we look for in all our investments, regardless of the sector.
MHM has been a success in the ten plus years we’ve been an investor. We plan to remain an investor for some time yet — it’s very profitable, it’s the market leader in the UK, it’s much larger than the number two, and it is growing very quickly. But its market share is still relatively low, since it remains a very fragmented market, spread among High Street law firms who have no technology and who have high prices.
Since we had a good experience with MHM, when ABSs for other types of legal services finally happened, we started to proactively think about in what other segments in legal services you could apply the same sort of business model and have the same sort of value creation: by bringing in external capital, by using technology to automate, by increasing the speed of the processes, and by offering legal services over the internet in a way that people can help themselves. We also looked for segments that would benefit from greater expertise with sales and marketing, in order to promote rapid growth by approaching different distribution channels. It was with this sector by sector analysis that we identified probate.
Probate is a very large but also very fragmented market. Generally the service is very poor, the prices are very high, and those in the market are not technology specialists at all. That is exactly what we like as it gives us the opportunity to become the service leader and the market leader.
We have been able to help MHM and KCT in two ways. Of course, our capital has allowed them to do things they otherwise could not have done, and notably further develop their technology and offshore support, their sales and marketing infrastructure and their people. We’ve also provided guidance and expertise, to fill in the non-legal gaps in the management team, and to share our experiences and learning from our other investments in fast-growing business sectors.
In investing in these businesses, it is important to take a long-term approach, as these things take time. If a law firm has a partnership structure, it can’t do this — all the money is taken out at the end of each year, and any investments are seen as coming out of today’s salaries. That is a real barrier.
Between 2010 to 2013, we met with at least 150 law firms seeking investment, but in the end, we invested in only one more, KCT, bringing our total investment in the legal sector to just two. The reason we did not invest in those other businesses is because they could not explain what they would do with the money. They said they were seeking investment because it sounded like something they should do, or because they liked the idea of having some capital. But any business we get involved with needs to have a clear plan for how they will use the money, and their plans need to be distinctive and scaleable. In contrast to those other firms, MHM and KCT had clear plans, they were distinctive and they were scaleable.
Today we see in some sectors of legal services dynamics that you don’t see anywhere else. Take MHM move, for example. Today it has about 3% market share, and that’s three times the size of the number two. It is the cost and quality leader, and it has the ability to grow into a 15 or 20% market share position over the next few years. This is a fantastic opportunity. Probate offers the same opportunities. The opportunities lie especially in the sectors like these that are fragmented — where there are thousands of firms in the space, but most of them are small and practically none of them are specialists — they do a little bit of everything. It is because those firms are not differentiated that it will be so hard for them to continue to compete with specialists who are investing properly in the technology and the service delivery.
The current regulations strike a good balance. They are especially good for the consumer — the consumer gets genuine competition for the first time, and the prices are being driven down while the quality is being driven up. We think there remain many opportunities in legal services. We feel we are just getting started in what we can do and the sort of businesses we can invest in and help grow. Our challenge is to find the right team, the right approach and the right strategy for the business.
When the US market opens up, it will create massive opportunities. And I am sure it will open up — at some point, the consumer argument will win, and capital will be allowed in. When that happens, the competitive landscape will change dramatically. If I were a lawyer in the US, I would already be thinking about how my business would change if my competitor had a huge amount of capital. What would they do that I couldn’t – invest in products, in technology, in faster processes?
We were surprised by how poorly the competition was prepared for someone like MHM to enter the market. There seemed to be an attitude of “this will never happen, or, if it does, it will be ok” rather than proactively thinking it through. Because of MHM, conveyancing customers now expect to be able to follow their case and manage all their documents online if they want to, and they expect to have things turned around overnight. This type of change in the market can happen very quickly, and if you are law firm who never really thought about technology or customer service, there is a risk the market will pass you by very quickly. As soon as experienced managers with the right skill sets are able to come in and create efficient, customer service businesses, the entire market will change. It’s a huge opportunity. We are only at the beginning of a very long period of investment, of innovation and of change.
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