Aug. 3 (Bloomberg) -- Private equity funds including Fleming Family & Partners Ltd., Phoenix Equity Partners Ltd. and Lyceum Capital Partners LLP are considering investing in U.K. law firms as rules allowing shared ownership move closer to taking effect, according to people familiar with the plans.

Fleming Family, a money management firm, is in talks to buy law firm stakes of as much as 20 percent, said the people who declined to be identified because the talks are private. Lyceum Capital, a London-based leveraged buyout firm, may invest in other legal services models, managing partner Jeremy Hand said.

Funds are raising money to prepare for when law firms can accept outside investments in 2011, industry consultants say. Phoenix Equity, another leveraged buyout firm based in London, has similar plans, the people said.

“Law firms are pretty attractive investments as they have stable cash flows, long track records of business operations and increasingly are much better run,” said John Llewellyn-Lloyd, executive director of Noble Group Ltd., a London-based investment bank. “You would expect them, like any professional services business, to provide a pretty good return.”

Alan Hodgart, a law firm consultant at H-4 Partners in London, said investors are expecting “fairly high returns, in excess of 15 percent.”

Mid-sized U.K. firms are considering accepting investments as the credit crisis limits the amount they can borrow to open overseas offices, develop new practices or acquire competitors. The U.K.’s largest and most profitable law firms, the “Magic Circle,” have said they don’t want outside investors because they don’t need the money.

Tight Debt Markets

“With the downturn, the bank debt markets have obviously tightened up,” said Simon Johnston, the senior partner at 550- lawyer Nabarro LLP in London. “For some firms it’s harder and more expensive now, so people will certainly be thinking about their options.”

The U.K. will allow investors to buy shares in law firms, merge with companies and sell shares on the stock exchange under the 2007 Legal Services Act. The Legal Services Board, the regulatory body that will oversee the investments, says the law will take effect in mid-2011.

The City of London Law Society, a trade association, set up a committee to lobby the Solicitors’ Regulation Authority, which governs the profession, to allow private equity funds to invest in firms before the act takes effect, said Alasdair Douglas, senior partner at law firm Travers Smith. Douglas and Phoenix Equity are on the panel.

Lyceum Capital

Slater & Gordon Ltd., based in Melbourne, became the world’s first law firm to sell shares on a stock exchange two years ago after a similar bill was passed in Australia. The personal-injury firm raised A$35 million ($29 million) from the listing and acquired two law firms.

Lyceum Capital, the London-based buyout firm, is interested in investing in the legal industry, with a “focus on new business delivery models, not traditional law firms,” Hand said in an e-mail. It hired former Clifford Chance managing partner Tony Williams last year to help target law firm investments.

The firm’s investment range is 10 million pounds to 40 million pounds, Hand said. Lyceum Capital wants to invest in ways to reduce legal costs and make some types of legal work cheaper and more efficient.

U.K. investors are valuing British firms by multiplying after-tax profit by about 15 times, more for high-quality firms, Llewellyn-Lloyd said. In return for their investment, Noble expects to double their money in six or seven years in an offering on London’s Alternative Investment Market.

Magic Circle

At least one investor, the 133-year-old U.K. stockbroker Panmure Gordon & Co., decided against investing in law firms after reviewing the possibility when the Legal Services Bill was passed two years ago, the people said.

The Magic Circle, which includes Linklaters LLP, Freshfields Bruckhaus Deringer LLP, Clifford Chance LLP, Allen & Overy LLP and Slaughter and May, have said they aren’t interested in outside investors because they don’t need any external capital.

“We looked into it, but decided it wasn’t right for us,” said Wim Dejonghe, the managing partner of Allen & Overy. “Why would we need the money?”

Revenue was flat at the U.K.’s highest-grossing law firms for the year ended April 30, and profits per partner were down by as much as 37 percent at Clifford Chance, which suffered the steepest fall.

Profits Drop

Olswang LLP, a mid-sized London-based firm, is also open to third-party investments, managing partner David Stewart said.

“It’s something we’ve looked at from the first moment the Legal Services bill was passed,” Stewart said. “It remains a theoretical possibility.”

Taylor Wessing LLP, a 750-lawyer U.K. firm, created a five- partner committee last month to consider outside investment, managing partner Tim Eyles said.

“All the leading firms have fielded inquiries from private equity, brokers, private investors,” Eyles said. “We’re a long way from even deciding that third-party investment is right for us.”

Fleming Family has contacted more than 20 U.K. law firms and is in advanced discussions with a smaller number of firms about acquiring minority stakes through its private equity fund, according to people familiar with its plans. Fleming Family private equity invests between 5 million and 25 million pounds in companies valued from 10 million to 75 million pounds.

Buying law firm stakes has attracted interest from mid- level and small private equity funds and institutional investors who are looking to invest a few million pounds up to “tens of millions of pounds,” said Robert Colthorpe, head of the financial institutions group at Europa Partners Ltd., a London- based mergers and acquisitions adviser.

To contact the reporter for this story: Lindsay Fortado in London at lfortado@bloomberg.net.

Last Updated: August 3, 2009 08:40 EDT