Gateley Holdings PLC (LON:GTLY) is the topic of conversation when Hardman and Co’s Analyst Steve Clapham caught up with DirectorsTalk for an exclusive interview
Q1: Why has Gateley Holdings been the first major UK law firm to actually list on the stock market?
A1: Well, it’s an interesting question. Gateley was established in the 19th century and it’s got over 400 lawyers across eight offices in the UK and one overseas. Its strategy is to add to its organic growth by taking advantage of being that first player, the first law firm to have a public listing, and participating in consolidation within the UK legal services sector. At Hardman, we see a significant opportunity within the legal sector but also a big opportunity for them to add on, by acquisition of complementary professional services businesses where, in fact, the company has done its first two deals.
Q2: Why is it that other law firms have not listed?
A2: The most important reason is that the only jurisdictions in which law firms can take external capital are Australia and the UK and we have seen floatation’s in Australia. In the UK, The Magic Circle are the largest players, these big global firms, but because they are global players they are operating in jurisdictions where their provisions of external capital isn’t allowed. The current capital structure and financing of many of the mid-size UK law firms will actually make it very difficult for them to float without a longer transition period and cultural barriers still seem to remain the largest barrier to other firms floating.
Q3: What are the opportunities for growth in the UK legal sector?
A3: The UK legal services market is a huge market and it has seen considerable long-term growth, in fact the sector has tripled in size in the last 20 years and it’s now a £30 billion market, I don’t think people realise just how significant this sector is. Although it’s rates of growth have varied over time, it’s actually only once ever been a contraction, during the Global Financial Crisis (GFC), when the industry shrank, it was down 4.1% in 2008 and down 7.7% in 2009.
Gateley’s strategy is to generate growth both organically and through acquisition and its organic growth that’s going to come from opportunities, firstly the retention of existing partners and fee earners and then the addition of new recruits, many of whom will be attracted by this PLC structure. It’s also looking to enter into new regional markets as it opened a Reading office in December 2015 and it’s looking to do more work with particular sectors, banks and housebuilders, and also to expand some of its specialist areas like regulatory into other geographical areas.
We also expect growth through acquisition as Gateley takes advantage of being the first law firm on AIM and can participate in that consolidation which we anticipate in the UK legal services sector. Gateley is also likely to continue to acquire complementary business services companies because by having a broader set of services, you can cross-sell to existing clients and there’s a stronger sales proposition for potential new clients.
Q4: How resilient is a law firm to an economic downturn?
A4: Well, clearly, as I mentioned earlier, the industry as a whole suffered in the GFC but Gateley’s is quite unusual because it’s got a very broad spread, both geographically and sectorally, and unlike many major legal firms it’s not exposed significantly to cyclical areas like property, M&A and capital markets. Many firms, particularly London-centric firms specialise in these areas, and they tend to be cyclical, that makes the legal businesses that serve them very cyclical. Gateley in contrast has a broad spread of sectors, a large number of clients which tend to be mainly SMEs so it has been and is expected to continue to be a much more resilient business and it’s certainly proved to be more resilient than peers during the crisis.
Q5: What are the risks then?
A5: Obviously, in any business there are risks and I think the main risk for a firm like Gateley is that this is a people business and people can come in and they can also go. Although management have highlighted incentivisation as a key goal and believe the PLC structure best addresses that long-term plan of encouraging early and widespread equity ownership, the risk is that it is a people’s business. I think there are some mitigations to that risk, the resolve also obviously the economic risk but the fact that the earnings were resilient during the GFC, and we would expect any economic slowdown not to result in a big hit to earnings but more as a drift in working capital.
Q6: What is the Gateley Holdings investment proposition?
A6: The investment proposition is quite simple, it’s a high quality professional services company with significant growth potential because it’s got a small share of what is a growing and consolidating market. It’s a good track record, it’s got a strong management team and we think it’s got considerable growth potential and it also offers an attractive dividend yield.