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A mid-market private equity fund with £255 million to spend has become the first investment house to say it is actively targeting the legal sector ahead of radical changes that will allow law firms to take on outside investment for the first time.

Lyceum Capital — whose previous investments include Asquith Nurseries and Southern Cross, the healthcare group — says it is already talking to several law firms and has begun designing investment structures to capitalise on opportunities arising from the Legal Services Act 2007.

Described as the equivalent of the City of London’s "Big Bang" deregulation in 1986, the Act will allow law firms to sell themselves to private equity or other investors or float on a stock exchange from 2011.

Lyceum, which closed a £255 million investment fund last week, has also hired three high-profile figures from the legal world including Tony Williams, a management consultant who was formerly managing partner of Clifford Chance, the world’s largest law firm by revenue.

Mr Williams will join Lyceum’s legal industry advisory board alongside Paul Hewitt, who helped establish the legal services arms of the Co-Operative Bank and the RAC, and Richard Susskind, an IT specialist and well-known adviser to the legal profession.

Although many law firms say they have no need for — or interest in — external capital, a recent survey by consultants Smith & Williamson found that nearly a quarter of British practices could look to raise outside money in the next five years.

Mr Susskind, a regular contributor to The Times, said: “I believe external investment in legal businesses will be vital in coming years.”

Jeremy Hand, managing partner at Lyceum, said: “The legal services market is large, fragmented and offers considerable potential for continued growth. We anticipate consolidation of small and mid-sized legal services businesses and believe that there are many opportunities to improve service standards, efficiency and profitability.

“Although the Act does not come into full force until 2011, now is the time to build the early businesses that will have first mover advantage."

Mr Hand said the fund had not set aside a specific sum of money to invest in law firms but that he did not feel "capital constrained". He said Lyceum was most likely to consider buying mid-market law firms with annual revenues of between £20 million and £80 million.

Investment banks including Goldman Sachs and Rothschild are also reported to be closely watching the forthcoming changes. Several investors, including hedge funds, are also looking at putting money into the legal market in the form of litigation funding, whereby investors fund court cases in return for a share of the winnings.

Private equity, investment banking and hedge fund interest in legal services are all seen as examples of how the traditionally conservative sector is heading for radical changes over the next 10 years.

Will lawyers exist in 100 years? Read Times Online's special on the future of the legal services market, including exclusive excerpts from Richard Susskind's forthcoming book

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