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Personal injury attorneys are at the forefront of a movement to bring private equity investment into US law firms for the first time, following a financing technique used by medical practices and accountancies.
Firms in states from Louisiana to Michigan and Arizona to California have been sounding out investors about selling stakes, according to investors, bankers, advisers and lawyers.
The sector of the legal market that pushed the envelope decades ago by advertising on roadside billboards could set off a round of consolidation, if deals come to fruition, as regional firms armed with private equity cash buy up rivals across the country.
But the deals could attract scrutiny from regulators that historically policed a ban on non-attorney ownership of law firms, under ethics rules designed to prevent commercial considerations distorting the practice of law.
“It feels like we are at a tipping point and I don’t think there is any part of the legal market that’ll be untouched by this,” said Crispin Passmore, a former UK legal regulator who now runs transatlantic consulting firm Passmore & Oliver Partners.
McDermott Will & Schulte, one of the 20 largest law firms by global revenue, and the white-collar defence firm Cohen & Gresser were exploring taking outside investment, the Financial Times reported earlier this month.
Advisers say the personal injury law firms are closer to doing deals.
“They are among the most entrepreneurial in the legal profession. They have concentrated ownership. And they are ripe for consolidation, not least because of the ability to share technology and marketing,” said Passmore.
Among the firms considering a deal is Louisiana’s Dudley DeBosier, a 16-year-old business that says it has recovered more than $1.2bn for injury victims, according to people familiar with the matter. It had hired the investment bank KBW Stifel to look for a potential private equity backer to help fund acquisitions, the people said.
One of the firm’s founders, Chad Dudley, told the FT he expected firms that dominated local markets would look to expand nationally. He declined to comment on the possibility of his firm taking private equity investment.
“Smaller acquisitions have been going on for some time, as solo practitioners who are tired of running their firm are brought under the umbrella of a larger firm. But now the bigger players are going to be going into different geographies,” he said.
Dudley, who also runs a marketing agency and consultancy for other personal injury attorneys, said Dudley DeBosier aimed to become a platform for acquiring other firms, pitching them on its operational expertise and success for clients.
Advisers argue that personal injury firms could be attractive to private equity because of the high turnover of cases, most of which settle quickly. That gives them more predictable cash flows compared to firms that specialise in large civil cases such as class actions or white-shoe firms where top lawyers could take big clients with them to a rival firm.
“I think private equity investment in plaintiffs’ personal injury firms is a near-term reality because they are marketing machines in pursuit of valuable cases that can scale successfully with investment,” said Kent Zimmermann of the consulting firm Zeughauser Group.
“They are also largely recession-proof,” said Andy Halaby, chief legal officer at Arizona’s Rafi Law Group, which has hired KBW Stifel to seek a private equity investment. “People are always going to drive . . . There are always going to be accidents.”
Rafi is about to open its first office outside Arizona, in Colorado, and plans to expand into New Mexico and Texas. “All businesses that want to expand and innovate need capital to do it,” said Halaby.
Firms across the country are holding talks with potential investors. The Dominguez Firm in Los Angeles has hired Capstone Partners to solicit private equity interest and Michigan’s Mike Morse Law Firm is also exploring its options, according to people familiar with the matter. The firms did not respond to messages seeking comment.
The structure being proposed for private equity investment involves buying a stake in a “management services organisation” (MSO) that employs the non-lawyer staff and owns most of the assets. The part of the firm that runs the legal cases becomes a separate entity and pays fees to the MSO.
Similar structures have been used by private equity to invest in medical and dental practices and accounting firms. But only some US state regulators have weighed in on whether MSO arrangements comply with the legal profession’s ethics rules. A Texas ruling in January blessed the structure but set strict rules on the relationship between the two sides of the business.
Dudley predicted more firms would open themselves to private equity in the years ahead.
“You can stick your head in the sand if you want. But it doesn’t seem prudent. What was it Winston Churchill said? You can take change by the hand or it will grab you by the throat.”
