Diary of a Sharemark float: private-equity investors swoop in

James Hunt is a solicitor, serial entrepreneur and founder of Everyman Legal – a new type of law firm providing legal services for entrepreneurs. The company of solicitors is the first in the UK to announce it will take advantage of the new practising regime created under the Legal Services Act by seeking a stock market admission. The company intends to trade its shares on Sharemark – a stock market for smaller companies – in the last quarter of 2012. In an honest and open account for Real Business, James Hunt will be charting the ups and downs of preparing his company for an admission.

Over the past two weeks I have had a number of unsolicited approaches from potential private equity investors and corporate advisers.

This shows the advantage of having announced our intention to seek admission to Sharemark: we are now being watched!

Such approaches force you to examine your strategic plans, and of course, it is always a good discipline to do so anyway.

This causes me to pause and reflect on the relative advantages and disadvantages of private equity versus public equity accessed via a stock market.

From the right partner, the advantages of private equity as I see them are:

  • Access to funds that can be structured in a more flexible way than for public equity, which really needs to be “plain vanilla”: the use of different classes of share and combinations of debt and equity can be a useful way of matching different value expectations.
  • Advisers who are often well connected.
  • Growing a business out of the glare of the public arena: this can be used to maintain commercial confidentiality and if things go wrong to avoid having to deal with the problem publicly.
Of course, like anything there are disadvantages which I see as:

  • The likelihood of greater equity dilution with the private equity route.
  • A greater loss of control: a private equity investor will require negative veto controls and whilst a public listing will mean non-executive directors and accountability there is likely to be more freedom.
  • Dependence on one or two key relationships instead of having relationships with a broad range of investors.
The principal advantage of public equity, provided a company has the right growth story to tell and can execute a plan, is the ability to build value more quickly and with greater freedom.

Admission to a stock market creates a “currency” that can be used for acquisitions. Shares can also be used to incentivise key team members: a share scheme for a company whose shares are publicly traded can be much more potent than for a private company. That assumes, of course, that the company has a good growth strategy and is able to execute its business plan in line with market expectations.

However, as I ponder this further I conclude that there is no reason why we cannot invite private equity investors to invest in Everyman Legal on our terms rather than their terms. As the private equity market continues to mature specialist investors and investment funds are being created to fill gaps in the market. Investors are always on the look-out for hot new sectors. In my experience those sectors that excite interest are those where high margins can be achieved.

Regulatory change can also be a stimulus for new opportunities. Fragmented industries are susceptible to consolidation and investors like to back consolidators. Both apply to legal services and I have seen how that principle is applied in the pharmaceutical and financial services sectors.

I have seen too the risk for a client company dependent on one key investor relationship. That investor failed to back the company on an acquisition leaving the client overly dependent on one key customer which went into administration two years later – thus leaving my client in extreme financial difficulty. The private equity investor had had a change of personnel and a change of strategy followed. So I am very aware of how crucial it can be not to have a range of relationships and avoid the trap of “putting all your eggs in one basket”.

In the coming months we are looking to raise funds by private placing. I guess I will soon find out if private equity providers are prepared to do “plain vanilla” deals, whereby the private equity investor takes just ordinary shares alongside other investors rather than looking for shares with special rights and protections.

Read the full Diary of a Sharemark float series here.

James Hunt, Everyman Legal

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