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Even at $2,500 an hour, the business of charging fees for service may not be enough for top corporate lawyers. As private equity circles their industry, some are considering taking a slug of outside capital, among them boutique litigation specialist Cohen & Gresser and global outfit McDermott Will and Schulte, the FT has reported.
For partners in such firms, who already enjoy a salary and bonus, it’s a question of monetising the significant value locked up in the form of partnership equity. American legal outfits have grown large and profitable. McDermott Will and Schulte has annual revenue of $3bn. At Kirkland & Ellis, the biggest US firm with nearly $9bn of revenue, annual profits per partner in the past decade have grown from $3.5mn to more than $9mn.
Law firms in the US typically restrict ownership to partners, who are also practising senior employees. But where there is a will, capital finds a way. Private equity has already put considerable sums to work in other professional services firms that offer the prospect of steady, recurring revenue, such as physicians’ practices, accounting partnerships and management consultancies.
One way to square the circle is to create so-called management service organisations to take on back-office administrative functions. Private equity groups can invest in these MSOs, as they are known, and charge the front-office — in this case the lawyers — a fee.
The Cohen & Gresser deal, as reported, would take another route. Since law firms are allowed to take on debt from outside capital providers, it may borrow money in the form of a $40mn convertible bond that could potentially be turned into equity later, should all parties then find themselves in a regulatory environment that allows such things.
More aggressive is the “alternative business structure”, something pioneered in Arizona, whereby a non-law firm, free to take investment from private equity investors, employs lawyers to give professional advice. KPMG has used that option to begin its legal practice in that state.
Not all the cash that flows into law firms through these innovative channels will necessarily go to line partners’ nest eggs. Some will inevitably fund signing-on bonuses for poached talent. Investments in technology, including artificial intelligence, have to be paid for too.
But top lawyers are increasingly clamouring for riches they can access during their working lives, as they benchmark themselves against the Wall Street bankers with whom they collaborate on deals. Law firms once held up their partnership models as a sign of the culture, restraint and honour that separated them from less civilised businesses. As billing rates rise, that rarefied principle becomes harder to sustain.
