A few eyebrows were raised in the intellectual property sector last week when Managing IP revealed that a UK private equity firm had taken a significant minority stake in law firm Rouse.
The IP profession, after all, is something of a closed shop – some might even say it’s slow to change.
But such announcements might not be so unusual in the coming years.
Sources in the IP legal services sector suspect PE will become more common in the market.
If that’s the case, the implications for the industry could be profound.
Sources think the arrival of PE investors could lead to a serious culture clash and problems over staff morale and retention.
“PE is part of the future and it will require firms to embrace a different dynamic and mindset,” says Jesper Knudsen, founder and CEO of the Zürich-based trademark and domain boutique Brandit.
Some IP lawyers will be more enthusiastic about that culture shift than others.
“I don’t want to be bought out and have PE telling me what I can and can’t do,” says a partner at one IP firm in Dublin.
Most IP lawyers in the Irish market would prefer to maintain their current quality of life without extra pressure to maximise profits, the partner adds.
A partner at one London-based patent firm says tension between external investors and attorneys is inevitable.
“There’s a culture shock and you’re not going to get around that,” he says.
Shifting sands
One uncertainty raised by the Rouse deal is whether said agreement is a one-off or indicative of a trend.
Several sources familiar with the company’s strategy told Managing IP earlier this month that the firm had long held ambitions to pursue a PE partnership or even a public listing.
Based on that anecdotal evidence, it may be fair to argue that the deal says more about Rouse than it does about the market at large.
“Rouse has always been one of the bolder, more innovative firms out there,” Knudsen says.
It may be no surprise that Rouse was among the first UK-based firms to seek PE investment.
But most sources agree that the deal points to a wider shift in the market that will lead to more private investors taking an interest in IP.
Christian Gordon-Pullar, a freelance IP consultant and former legal executive director at JP Morgan in Singapore, expects PE investment in IP services to increase in the near future.
“Investments will likely come first to those entities providing insights platforms and artificial intelligence analytics, and then to other services,” he says.
Gordon-Pullar points to PE investment in the IP analytics market, including Astorg’s ownership of Corsearch, as evidence of the shift already taking place.
As a disclaimer, Astorg and another firm, Epiris, have offered to buy Euromoney – Managing IP’s parent company – for about $2 billion.
Knudsen says PE could be an option for Brandit in the future but that the company can fund growth and acquisitions itself for the moment.
The Rouse deal, and the 2019 takeover of Glasgow-based Murgitroyd by Sovereign Capital, may be evidence that legal services providers are garnering PE’s interest as well.
It will likely be patent prosecution firms that attract the most interest because of the higher risk associated with litigation work and the lower margins in trademark law.
Culture war
Many lawyers will take it as bad news if the trend continues.
One reason there have been few PE investments in law firms up until now, some suggest, may be that partners enjoy a comfortable set-up and have little incentive to embrace change.
As one London-based partner puts it, counsel in patent attorney firms frequently earn more than £1 million ($1.15 million) a year already.
He says: “What more could they offer you when you’re already in complete control of your own destiny?”
It’s this type of setup that Knudsen says is holding traditional law firms back and killing innovation.
“If law firms have 40 partners who need to take out big dividends to sustain their lifestyles with nice holiday houses in France, they won’t take risks,” he argues.
Partners at some firms may baulk at that attitude though. As the partner at another top UK patent litigation firm tells Managing IP, the reason firms don’t take on PE investment is they don’t need it.
If the firm wants to recruit or expand into a new market, it has the resources to finance those moves itself, the partner says.
And not all IP partners take mega dividends each year.
Those lower down the food chain may be happier with smaller – but still very comfortable – incomes in exchange for more free time and a higher quality of life, says the Dublin-based partner.
“I’ll never be a millionaire because, ultimately, I want my holidays,” she says.
The fear among lawyers is PE will come in and demand higher billings and longer hours in a drive to increase profitability.
“I don’t want to see my life change as a result of PE coming in,” the Irish partner adds.
The case down under
Recent history in Australia, which has undergone a major shake-up in its patent attorney sector in recent years, may be informative.
Over the past decade, several firms have listed on the Australian stock exchange to raise capital and fund growth.
Stefan Paterson, principal at Integrated IP in Perth, was at Griffith Hack when it was acquired by the publicly-listed firm Xenith Group in 2016.
Xenith was later acquired by IPH, an Australian publicly-listed company comprising several IP firms.
Paterson says the arrival of external shareholders who didn’t understand IP led to frustration among patent lawyers.
He says there was a cultural shift in those firms that put a greater emphasis on efficiency and profitability.
“Don't get me wrong, that focus is important for any business, but IP firms function because of people and their relationships with clients.”
In Paterson’s case, he chose to leave to start his own firm.
Any clash of values between firm staff and external investors could lead to employee retention problems.
One way PE might try to manage that risk is by inserting lock-in clauses into the terms of any takeover.
Such clauses could stop partners with equity shares from jumping ship too early.
MML Capital’s agreement with Rouse contained such a provision, two sources with knowledge of the deal told Managing IP.
Managing IP has contacted Rouse for comment.
Whether or not all parts of the Rouse deal are indicative of what’s to come in the wider market, sources agree it probably won’t be the last we hear of PE investment in IP.
