Private equity and the rapid pace of change in legal technology
Ari Kaplan spoke with Thomas Martin, an investment professional with Hg, a private equity firm that recently acquired Litera Microsystems and Workshare. They discussed the types of companies in which Hg invests, the appeal of legal technology, the impact of consolidation on innovation, and how a legal technology company can attract interest from a private equity firm.
Ari Kaplan: Tell us about your background and your role at Hg.
Thomas Martin: I am an investor with Hg, one of the largest software private equity firms in Europe with a growing presence in the U.S. I’m in New York, but recently relocated from London. I have software experience in both markets and at Hg, I am responsible for the full investment life cycle, which starts at sourcing, looking at companies, conducting due diligence on companies, assessing the commercial position, and understand the operations, financials and core technology. I also provide portfolio support once Hg has invested in a company, which is typically at a board level and for any add-on acquisition. In practice, this means that I regularly research the legal IT sector, attend legal conferences, speak to experts like yourself, and meet with legal tech companies to exchange views on the sector and offer an investor perspective. Once a company is considering outside capital, I would review the product portfolio of the company, study its commercial position, talk to current and potential customers, look at the financials and, ultimately, review what’s under the hood in an effort to highlight future growth opportunities and see how can we collaboratively grow the company faster and more profitably. Once invested, I am in close contact with the management team and as part of the Hg family, we offer lots of different resources from industry events and cross-functional support between portfolio companies and experts providing guidance on digital marketing and cybersecurity. We really work together with the company to create value.
Ari Kaplan: In what types of companies does Hg invest?
Thomas Martin: We specialize in investing in software and services businesses in North America and Europe and have made several investments in select verticals, one being legal technology. We typically differentiate ourselves through software knowledge, sector knowledge and the network we have built within a sector. That gives us the advantage to pick great companies to which we think we can deliver the greatest impact to drive value going forward. Our current investments in the legal technology space includes Litera Microsystems, which we acquired in May 2019 and Workshare, which we acquired earlier this month, Mitratech, which is in the matter management space, and a company focused on insolvency lawyers in Germany called STP. The companies we like have strong sector positions, a very healthy and loyal customer base, a differentiated product offering, and strong financial metrics, which means high recurring revenue, decent growth, profitability and low churn.
Ari Kaplan: What is so attractive about legal technology?
Thomas Martin: Legal technology is attractive for three key reasons: First, it is a very large and growing sector. Law firms spend around four billion dollars on legal tech in the U.S every year. Clients are becoming more cost conscious and, as a result, law firms want to adopt more technology to drive productivity, which is beneficial for the legal sector overall. Second, law firms have very custom technology needs, which means that vendors focused on legal as one of their primary sectors are better suited to address the law firm’s needs. Besides Microsoft, most law firms work with tech vendors that are focused primarily on the legal industry and that gives tech vendors some sort of network effect, where CIOs of law firms recommend software to one another, which is very helpful for the technology vendor itself to build out a presence in that market. Third, consolidation benefits everybody. When larger companies buy smaller companies, the result is a better experience for both the CIO and the end-user lawyer. For the CIO, it means there are fewer vendors to deal with, which has administrative, security and compatibility advantages. For the end users of a point solution on a lawyer’s desktop, it results in a decluttered desktop and better support. For example, a typical lawyer might have five to ten add-ins that get loaded within Microsoft Word simultaneously, which might slow down the system and lead to stability issues.
Ari Kaplan: How do Litera Microsystems and Workshare fit into your portfolio and with each other?
Thomas Martin: Litera Microsystems and Workshare really satisfy all of the criteria I mentioned. Litera Microsystems offers a legal productivity tool, which gives lawyers the ability to deliver high-quality work more quickly and is delivered as an add-on ribbon within Word for proofreading, repairing, creating and comparing documents as a full-on product solution through the document life cycle. And we can now integrate Workshare’s document comparison tool, Workshare Compare into the Litera Desktop suite, while continuing to invest into Workshare’s innovative transaction management tool, Transact. I’m very excited about the combination and the feedback from customers and industry experts has been very positive. The employees are also very excited to drive innovation in a much larger and more global business.
Ari Kaplan: Does innovation change in the midst consolidation?
Speaker Two: It really depends on the culture of the company. Litera Microsystems, for example, came about as a roll-up of four different point solutions: Litéra, Microsystems, The Sackett Group and XRef. And we’ve seen that innovation actually picked up after the consolidation of those four companies with the growth rate of the combined company doubling after the time and the launch of the Litera Desktop Suite.
Ari Kaplan: Do you see opportunities in other areas of legal technology?
Thomas Martin: Absolutely. We spend a lot of time focusing on the legal front office and items that lawyers are using on a day-to-day basis to deliver tangible efficiency gains. We are also interested in corporate legal and have a footprint in that sector through our portfolio company, Mitratech. It is a very large, evolving space so it is certainly interesting from an investment perspective.
Ari Kaplan: What can a legal technology company do to attract interest from a private equity firm?
Thomas Martin: What we typically look for in a legal technology company is a differentiated product, good positioning with that particular product, and support from a very loyal, long-term customer base. We also want to see a path forward to continue the growth of the business and an ability to capture and analyze that growth by affecting the drivers behind that growth. Going forward, we evaluate a company’s cloud strategy, go-to-market and expansion opportunities into different geographies or segments within the legal sector.
Ari Kaplan: How do you expect legal technology to evolve?
Thomas Martin: We see two somewhat contradicting trends in the legal tech sector. First, consolidation is a trend that will continue. Second, there is a boom in legal tech investments so we see lots of new, cool startups pop up every year about which we are very excited. The focus on legal tech has never been stronger, and it is good to have smaller vendors that really bring innovation to the market and fuel consolidation that expands access to those benefits.
Listen to the complete interview at Reinventing Professionals.
Ari Kaplan regularly interviews leaders in the legal industry and in the broader professional services community to share perspective, highlight transformative change and introduce new technology at his blog and on iTunes.