Private equity house makes first major post-LSA investment in fast-growing insurance law group. Sofia Lind reports

While proof that the advent of Tesco law is already changing the face of the consumer legal market has hardly been in short supply, Duke Street Capital delivered further evidence this week with the news that it is set to acquire a majority stake in Parabis Group – the parent company of insurance litigation law firms Plexus Law and Cogent Law.

The deal, announced on Monday (6 February) just days after Australia's Slater & Gordon announced its entrance into the UK legal market through the takeover of Russell Jones & Walker, marks the first leveraged buyout of a UK law firm since the Legal Services Act (LSA) came into force in October 2011.

Valuing Parabis at between £150m and £200m, the exact investment Duke Street made to acquire just over 50% of Parabis has not been revealed. What is clear, though, is that the deal will give Parabis an initial war chest of £50m to put towards funding expansion, with the possibility of more in the future.

And the expansion plans are significant. Parabis is already in talks with around four potential targets, including insurance law firms with annual revenues of between £10m and £30m apiece as well as, potentially, non-legal loss adjustment and rehabilitation businesses. The expectation is to double the size of the business within the next five years, with several acquisitions likely to take place during the current year, subject to the deal being approved by the Solicitors Regulation Authority (SRA) and going live in the first quarter of this year.

While Parabis Group's 10 equity partners are expected to receive a significant windfall from Duke Street's investment, both parties are keen to stress that the primary objective of the deal is to fund the firm's growth plans. As such, equity partners who become shareholders in the business have agreed to a five-year lock-in, while a wider financial reward scheme will be in place to help retain other lawyers.

Parabis chief executive Tim Oliver (pictured) comments on the motivation for the deal: "It is a very competitive market. You need to be a good firm with good products, and for that you need to make investments. For us, this is a way of getting access to capital, which is exactly what the LSA intended. My day job will not change."

Duke Street partner Iain Kennedy adds: "Parabis is already a very successful company and all of the stakeholders have done well out of it. The primary motivation was not cash out but to grow the business. There will not be a change in the experience to the customers or the employees of the business. The only change will be that it has now got access to deep-pocket capital for investment."

It is a deal that has been a long time coming. While the LSA only came into force last October and the SRA only started accepting applications for alternative business structure (ABS) conversions last month, Duke Street and Parabis have been in talks for nearly 12 months.

Indeed, Duke Street had been researching the legal market for potential investment targets ever since the LSA overhaul and opportunities for outside investment in law firms were first floated in 2006. Meanwhile, Parabis, which has already grown revenues to £100m in little more than 10 years since it was formed, stated last April that it intended to become an ABS.

The deal gives Duke Street the majority of seats on the board, but the buyout house insists it will work with Parabis' management to deliver growth over the next three to five years. At this point it will consider exiting either through a sale to a private equity house or through an initial public offering (IPO).

Kennedy comments: "As it has not been done before, there are no obvious buyers. We have not ruled out an IPO or an investment by another private equity house. There is also the potential of a sale to an outsourcing business."

While the true success of the deal, from Duke Street's perspective, will not be fully apparent until its exit, it is expected to mark the first of a string of private equity investment into law firms.

Other houses planning to invest in law firms include Lyceum Capital and Palamon Capital Partners (the latter has already invested in the holding company behind the QualitySolicitors franchise).

Commenting on the deal, Fox Williams senior partner Tina Williams says: "There is an astonishing amount of consolidation going on in the personal injury litigation space and this will not be the last investment in this sector. The real proof of the pudding will be seen when Duke Street seeks to exit in five years' time."

Richard Susskind, author of The End of Lawyers? Rethinking the Nature of Legal Services, adds: "The English market for legal services is around £25bn – this is attractive new territory for external investors. But the first wave of deals may not be indicative of what is yet to come.

"In the medium to long term, the impact on corporate law will be profound – private equity will provide a key platform for a wide range of newish entrants into the legal market (publishers, accountants, legal process outsourcers, for example) to penetrate the legal market."

Jomati consultant Tony Williams comments: "Inevitably the ABS era going live has flushed out those in contemplation for some time, but we can expect a few more over the coming months – especially in the volume sector."

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Key facts of the deal

Legal advisers – Squire Sanders acted for Parabis Group; SJ Berwin acted for Duke Street Capital; Hogan Lovells acted for the debt providers (Royal Bank of Scotland, Lloyds, Santander and Ares).

Deal – The deal, first discussed in April 2011 and signed in December, will see all Parabis assets, legal and non-legal, transferred into a new holding company, which will be run as an alternative business structure.

Management – Parabis chief executive Tim Oliver and commercial director Tim Roberts will remain in their roles. Duke Street operating partners Paul Lester and Bob Scott, respectively the former chief executives of VT Group and Aviva, will join the Parabis board as non-executive directors. Lester will become chairman of Parabis on the deal's completion.