Andy Poole interviews Victoria Ritchie, Head of Professional Services at HSBC, to explore funding, with a particular focus on partnership capital loans and invoice discounting.
Tell me about HSBC’s appetite for the legal sector and the type of firms that you work with
HSBC provide banking services to most UK domestic and international firms, globally across the banking network of 55 countries. With sector specialist knowledge, we understand the opportunities and challenges the legal sector faces. Due to the counter cyclical nature of full practice legal services and the critical nature of the services provided by the sector, HSBC is supportive of the sector to help firms navigate their strategy and seeks to continue to grow and take expertise to the market.
It is becoming more difficult generally to obtain partner capital funding. What are your views on this?
Growth in partnership numbers and partner contributions in firms in the past few years has resulted in an uptick in need. However, the decrease in growth currently may be due to a reduction or perceived lack of desire for future generations to become an equity partner, once seen as the traditional career path in the legal sector. This can be contributed by several factors; firstly being the preference for a balanced lifestyle with more flexibility, secondly, the evolving landscape of the economy and structural changes leads to more competition amongst firms, and thirdly, the financial reward of the partnership model may be less certain than before due to the current economic landscape. These factors have led to firms potentially moving away from the traditional LLP model and exploring alternative structures to limited companies which changes the financial decision making dynamics for partners.
It is important to note, however, that the situation is not universal and HSBC has supported more than 230 firms through Partner Capital Loans in the UK legal sector, where we have seen a growing year on year increase in loan completions where firms have been growing their partnership models. We see many firms of a certain size seeking more than one banking partner, which results in providing partners with optionality but leads to increased competition when sharing out services across the banking industry, especially for those firms who provide legal services to financial institutions. We are supportive of this approach and continue to offer Partner Capital Facilities for firms with 25+ partners in size, amongst other criteria in which we provide specialist advice. Partner Capital Facilities will be viewed as one of these offerings but HSBC does seek to provide services beyond the provision of Partner Capital Loans.
How are firms best going about obtaining funding for general working capital?
Last year HSBC supported the professional services sector with over £1bn of lending and we are keen to continue to support the sector in 2024. There are a number of working capital solutions that can be considered to aid a firms ambitions and/or strategy. Often these extend to working capital solutions through various debt structures depending on the firm, including sustainability solutions, acquisition funding and working capital solutions. These solutions may include revolving credit facilities, term loans or asset finance products to fund PII or capital expenditure.
These products have also been used to help firms navigate the Basis Period Reform (BPR), where the new BPR regulations will impact more than 70% of the firms we surveyed in the latest HSBC Legal Survey. Firms are looking at various levers regarding lending facilities to manage working capital through the BPR transition years, and we’re having these types of conversations with many firms.
It should also be noted there is also the consideration of third party funders, for example private equity, which we note have taken a real interest in legal services in the last 18 months particularly, and while IPO seems like a distant goal for the sector, 3% of firms surveyed believe they may have listed status in the next five years.
Additionally, the need for working capital often culminates in merging with another firm where culture, integration and cost synergies work. The fundamentals that need to be considered when seeking any working capital needs remain unchanged and any lender would be looking for a firm to have a business plan, strong financial management information to back up the plan, a strong management team, strong people culture and dedicated finance leaders to direct the firm. Often, having early discussions with your trusted advisers, accountants, a lender, and key members within the partnership is crucial to being able to work with the firm to explore the right solution.
There seems to be more acquisition activity in the market at the moment. How can firms fund this?
One of the words I hear when talking to legal firms’ managing partners, chief operating officers and finance directors is “growth”, and the latest HSBC Legal Survey suggests that 22% see M&A being one of the key disruptors for the sector this year, while 67% of firms expect there to be more M&A.
Given the back drop of economic uncertainly, staff and inflationary cost pressures, regulation (including basis period reform) impact on firms and technology advancements, notwithstanding succession planning challenges for firms, we should expect much more consolidation in 2024. Whilst many acquisitions in the sector may be deemed cashless, this tends to be where the people involved are continuing to work for a long period in the newly combined firm, where it is a succession solution without many other options to avoid run-off cover, or where the goodwill is personal rather than entity based. That said funding is often needed to buy practices and also to fund higher ongoing levels of working capital, which is where banks are often approached for support. Firms take a number of differing approaches to this, with some that seek to take on facilities to support growth in advance of identifying the target as an example. Firms are also using cash reserves, seeking partner contributions, holding back partner distributions to allow investment in growth, and private equity firms are also very interested in funding growth too.
