Ari Kaplan recently spoke with Scott Mozarsky, a managing director with the Jordan, Edmiston Group Inc., a middle-market investment bank, where he leads its legal and compliance practice.
Ari Kaplan: Tell us about your background and your role at JEGI.
Scott Mozarsky: I started my career as a cross-border M&A lawyer for a couple of multinational law firms. Then I became the general counsel and head of M&A and corporate development for UBM, which was investing in different media assets around the world. In my first three-and-a-half years at the company, we completed in 65 acquisitions and 18 divestitures, which was a great learning experience. Ultimately, I moved to the business side, and my first big operating role was at our subsidiary, PR Newswire. I later made my way to Bloomberg, where I ran its business across the legal market, left to run North America for Vannin Capital, which is one of the larger legal finance companies, and now lead JEGI’s practice across the legal and compliance market.
Ari Kaplan: How was the transition from working in a law firm to moving in-house, then leading a legal organization, running a litigation finance practice, and now evaluating investments in legal?
Scott Mozarsky: I have always been pretty happy at each step in my career. Being a lawyer—whether it is at a firm or in-house or even in my role now associated with legal market investing, M&A and capital markets advisory—is a lot more transactional than owning a P&L and operating a business. They all have benefits, are intellectually challenging, and hopefully have a positive impact on people.
Ari Kaplan: Can you characterize what the legal tech market was like before March 2020 and your impression of it now in the fourth quarter of 2020?
Scott Mozarsky: Over the last three years through March of 2020, the legal tech market had become more active, with more investments going into early to midstage companies. M&A was on the rise in legal tech, tech-enabled legal services and legal finance. Then from March through May of this year, the market was pretty quiet due to the pandemic. Companies that had good products continued to do pretty well from an operating perspective but experienced extended sales cycles. It took longer for them to close deals, though they held up pretty well. As some people headed back to work and companies overcame the shock of the lockdowns, the market began to recover, and the third quarter was extremely active. In fact, in Q3 2020, there were over 30 M&A deals in the legal market and an equal number of deals involving early-stage financing. October has also started with a bang, and it is interesting to see where the money is flowing. There were parts of the market that prospered in very stable sectors and have been well positioned during the pandemic. Legal practice management, for example, has been active because there has been a shift in how law firms are managing their operations more like businesses. Firms have also reevaluated the cloud and recognize that having everything on premises is probably not a good idea, especially since employees are not in their offices, and that businesses, which are more nimble and flexible, tend to perform better. People are looking at the legal process outsourcing space with fresh eyes. Coming out of the pandemic, firms are likely to reduce their overall office footprint. In a market where change management has always been a real challenge, the legal community has been forced to change and is recognizing that professionals can be very effective working from home. As a result, the notion that a firm has to have everything on premises and ensure that its people occupy the same office is fading, which bodes well for both the LPO and the BPO (business process outsourcing) industry. Finally, litigation came close to a grinding halt and has really slowed down during the crisis, so there is a backlog, which will benefit e-discovery, litigation support and legal finance.
Ari Kaplan: Why are so many people currently interested in legal technology?
Scott Mozarsky: Legal tech has been overshadowed by fin tech, which has been extremely active over the last 10 to 15 years. The legal market has been slower to change than finance, but even before the pandemic, we were seeing a tremendous amount of disruption by technology, data and capital enabling new business models. Investors now appreciate that the legal market has similar patterns to the finance market and was slow to adopt a number of solutions. As a result of all the macro factors impacting it, such as the increased transparency and commoditization for law firms that have forced them to change how they develop business and persuade new clients to work with them based on data and analytics, there is a tremendous amount of opportunity across the market. Also, disruption is accelerating because firms and their clients are recognizing that a number of the obstacles that caused them to move slowly have either fallen away or were not relevant in the first place. There are now so many companies in different pockets of the market solving real problems and growing to a level where they have sufficient critical mass for an investor to partner with them and infuse capital.
Ari Kaplan: What are investors looking for?
Scott Mozarsky: Investors always are looking for growth or at least a path to significant growth. The foundation of that is a good solid business that solves problems and creates opportunities. Investors are not that excited by annuity businesses. Most really like subscription or recurring revenue because it gives them predictability and a sense of stability that does not necessarily exist in businesses that are more transactional. They are also looking for strong management teams with a vision for how they can take their businesses to the next level. Some are also interested in roll-up opportunities. For instance, one of the reasons the legal practice management space has been so popular and why the e-discovery and litigation support sectors have been so active over the last few years is that a company with critical mass can be used to acquire smaller companies that enable them all to grow much more quickly.
Ari Kaplan: How has the inability to travel impacted deal flow, especially for cross-border transactions?
Scott Mozarsky: Since Q3, deal flow in legal and compliance, as well as other parts of the market, has been pretty robust. In fact, we are almost at pre-pandemic levels, which means that there were a lot of active deals during the lockdown even when the debt markets were somewhat frozen. Still, I think the days of somebody levering up a business four or five times, especially one that doesn’t necessarily have a significant amount of recurring revenue, are gone for a while. In terms of engagement, people are connecting with management teams on Zoom. I know of deals that closed where investors had not met the management team of the business they bought in person. More likely now, however, businesses will narrow the field down to one potential investor and in a very socially distanced and responsible way arrange for an in-person meeting. I do not see a lot of evidence of cross-border acquisitions happening. In fact, many of the deals that are occurring seem to be regional, with the investor and the target operating in similar locations due to travel restrictions or given the hesitancy to close a deal without meeting in person or interacting in the same time zone.
Ari Kaplan: What changed in legal during the pandemic that will have a lasting impact?
Scott Mozarsky: The way that people interact with each other and collaborate will have a lasting impact. There will be more online collaboration and online engagement. Other states are also going to follow the developments in Arizona and Utah, which will present opportunities for a range of companies, from those in legal finance to legal tech. More practitioners are also interested in moving to the cloud and finding better ways to engage with their clients.
Ari Kaplan: Where do you see the legal market headed?
Scott Mozarsky: I am bullish on the legal market and about the landscape around M&A and capital markets for legal. We are on the 20-yard line of a 100-yard field as it relates to the market continuing to evolve and grow. There has been a tremendous amount of activity on the investment side by private equity. It is a fascinating market with many strategic players who are looking for ways to grow their businesses beyond the organic growth they are experiencing. I see the expansion of litigation and data leading to opportunities in e-discovery, litigation services and litigation funding. Ultimately, the overall legal market is well positioned to continue to grow, and we are going to see more disruption from technology and capital. It is a good time to be a founder or a PE-backed firm in the legal market because investor interest will continue to rise. And I think that the relaxation of the ethics rules across a number of states will provide more opportunities for merchant banking and similar efforts.
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.