The news that DWF is weighing up an initial public offering (IPO), with Fieldfisher also on record as "watching with interest", has provided the strongest signal yet that law firm listings are moving upmarket.

Since 2015′s landmark IPO of Gateley, which sits in the outer reaches of the UK top 50, the option to go public has only been taken up by smaller firms such as London's Rosenblatt and regional player Knights.

However, the renewed interest from two UK top 30 firms has raised questions over the potential challenges that an IPO would present for firms of such size and scope.

Although previously a largely domestic player, DWF has in recent years built up a large international footprint with outposts across Europe, the Middle East, North America and Australasia, while Fieldfisher has also expanded rapidly across international markets.

Keystone Law CEO James Knight, who led the firm's float in November last year, suggested that the scale of a firm such as DWF would create speed bumps, specifically in relation to due diligence and differing jurisdictional regulations.

"An IPO comes with a significant amount of due diligence," Knight said. "The larger and more international the firm, the more work is involved because it requires law firms in relevant jurisdictions to undertake due diligence in that country. It certainly adds to the complexity.

"Profit-sharing rules in local jurisdictions are also something that will be a major consideration. Ultimately, the success of a flotation of an international law firm will depend on the regulation and the rules, not just in this country, but others."

While the official line from Fieldfisher is that it does not have any plans to list, managing partner Michael Chissick told Legal Week last week that if the firm could "solve the European bar issue" – the rules prohibiting third parties sharing with profits with non-lawyers – then he would be interested.

An ambitious senior associate may go to a firm which is less likely to IPO

Partners with experience of advising on IPOs say that an international law firm such as DWF or Fieldfisher could choose to list just the parts of the businesses based in jurisdictions that allow outside ownership, or alternatively pursue a licensing arrangement.

The latter option would see just the UK entity of the firm listed, while its international offices would pay a licensing fee to the floated business in return for referrals from the UK offices, as a way of working around the regulations in jurisdictions that do not allow outside ownership.

Eversheds Sutherland corporate partner Steve Nash, who has advised on IPOs for UK water company Waterlogic and investment platform IntegraFin Holdings, echoed Knight's warning about the challenges of floating an international outfit.

"Outside investment is not permitted in every jurisdiction – it will depend upon the local bar rules in the different jurisdictions where a firm is present as to whether outside investment is allowed, and that may cause issues which will need to be considered when structuring an IPO," he said.

"Another factor is scale, as the larger the operation, the greater the number of partners that will have to buy into the benefits of floating."

Multiple market sources said that a challenge for a larger law firm looking to float will be convincing the partners to back the idea. Travers Smith corporate partner Aaron Stocks, who has advised on a range of listings, said one issue is that the advantages are not necessarily spread across the partnership, with future partners facing the biggest disadvantages.

"For an existing senior associate, this means, on becoming partner, sharing your profits 50/50 with the other partners and the public market," he said. "It makes it a less attractive place to be a career-focused lawyer. An ambitious senior associate may go to a firm which is less likely to IPO, so there is a degree of a loss of talent."

Jomati Consultants principal Tony Williams also pointed towards the difficulty of selling an IPO to the entire partnership when "the benefits are more obvious to older and more senior partners". Williams also warned of the potentially chilling effect that restructuring the firm in order to get around outside ownership regulations could have on culture.

This is going to make people sit up and take notice

"It is more complex for firms with international offices," he said. "What impact workarounds will have on operations and culture will be important to think through; it could end up creating very separate offices and approaches if you have to have jurisdictions under separate ownership."

Williams also questioned the accuracy of the widely-cited £1bn valuation of a DWF float, describing it as "ambitious". Arden Partners corporate finance director John Llewellyn-Lloyd, who has previously advised Irwin Mitchell on methods to raise external capital, echoed this. "I think the £1bn valuation is ambitious, based on public information," he said. "Until you can understand profitability, two times turnover is where you would start."

Two times turnover would value a DWF float at around £400m based on its 2016-17 revenue of £201.3m. However, that does not allow for growth during the 2017-18 financial year, during which the firm has launched in Australia, Italy, Turkey and Qatar. Fieldfisher, meanwhile, recently posted global revenues of £207m for the 2017-18 financial year.

Whatever the valuations, Knight said that premature media reports of potential IPOs will not be helpful for the firms in question, given that law firm listings are an "uncertain, untested environment".

"If investors decide that they don't have the appetite for what is on offer, the IPO won't proceed, Knight said. "People tend not to announce to early as they don't want to be left with egg on their face."

Despite this, Knight described the potential listing of a firm the size of DWF or Fieldfisher as a "gamechanger".

"This brings the concept of law firms IPOs into the mainstream, rather than it only being outliers," he said. "This is something that is going to make people sit up and take notice."

Photo credit: Gary Campbell-Hall