Several top US law firms have explored selling stakes in their businesses to private equity groups without triggering rules that bar ownership by non-lawyers.
Paul Weiss, Quinn Emanuel and Proskauer are among firms to have had conversations with private equity groups or bankers to consider taking outside capital, according to people with knowledge of the matter.
US ethics rules prevent law firms from being owned by non-lawyers, which has left them as one of the few areas of the economy untouched by buyout groups. But some investors are stepping up their attempts to break into the legal industry using a structure known as a “management services organisation”, which separates a firm’s legal work from its administrative functions to get around the rules.
Law firm leaders are increasingly keen to understand the model and how it could reshape their industry, at a time when many are spending large sums on top talent and planning to invest in AI. But most are hesitant about making the move.
“Everyone is interested, but everyone wants to go second,” said one adviser specialising in MSO structures. Buyout groups have already used the MSO model to circumvent similar professional ethics rules on outside ownership of medical practices and accountancy firms.
Quinn Emanuel, which promotes itself as the world’s most-feared law firm, has spoken to investment bank Guggenheim Securities about what private investment might involve, according to six people with knowledge of the matter. Several of the people cautioned that no decision had been taken and the law firm had not committed to a sale process but was simply carrying out research. The firm declined to comment.
Executives at Paul Weiss met New Mountain Capital, a private equity group with $60bn in assets under management, at the investor’s request in New York in recent months, people familiar with the matter said.
“At the request of certain firms with which we have business relationships, we listened to a couple of pitches regarding this structure a number of months ago,” Paul Weiss told the FT. “There have been no follow-up meetings, and this is not something we are currently pursuing.”
Proskauer has also met at least one private equity group to discuss MSO structures, according to people familiar with the matter. White & Case has a group of senior lawyers examining the structure. Both firms declined to comment.
The FT reported in November that McDermott Will & Schulte was exploring a private equity deal, and it has since held meetings with potential investors and advisers. People familiar with the matter said it remains far from making a decision.
Some smaller law firms including personal injury specialists and start-ups have already taken outside investment using the MSO structure.
The model in effect splits a law firm into two: a lawyer-owned entity that provides legal advice, and a separate MSO entity that provides services such as back-office functions, intellectual property and technology, and which outsiders can invest in. The lawyer-owned entity pays a fee to the MSO.
The conversations come as a number of law firms outside the US have taken private equity investment for the first time. Offshore law firm Mourant announced this week that it had sold a 27 per cent stake to MML, while UK sports law boutique Northridge Law did a deal with San Francisco’s Cordillera Investment Partners in March.
Appleby, the offshore law firm once at the centre of the “Paradise Papers” data leak, was exploring selling a stake to private equity, people with knowledge of the situation told the FT this week.
Discussions at US-based firms have focused on whether the MSO structure could help in the war for talent, either to lock in rainmaker partners with equity that vests over time, or to lure other firms’ stars.
Sceptics say that powerful partners might be turned off by the prospect of working for a private equity-backed firm, risking an exodus. Some law firm leaders are also concerned the move could be seen as older partners cashing out at the expense of younger generations, while others fear lawyers losing control of decision-making about how the firm should allocate resources.
Some private equity groups are also wary of law firm investments, partly fearing that AI could harm business models and because the MSO structure is untested in the legal profession and could hit regulatory problems.
“There are a lot of feelers out there,” a private equity investor told the FT. “There are much stricter rules on law firm ownership, [but] there are ways around, you own the side company.” However, he added, the complex structure “makes people nervous”.
John Quinn, founder and non-executive chair of Quinn Emanuel, discussed MSOs on a February podcast with Christopher Bogart, chief executive of Burford Capital, which has said it wants to buy stakes in law firms.
“It’s going to take a while, but I do believe that there’s a lot of compelling reasons why these types of structures and non-lawyer ownership investment in law firms should exist,” Quinn said during the conversation.
Investors are pitching different versions of the model.
Burford, whose main business is financing litigation, has pitched itself to Big Law as a hands-off minority investor. It had also floated being part of a consortium with a private equity buyer, according to people familiar with the matter.
Another litigation finance specialist, Fortress Investment Group, which has done MSO deals with personal injury law firms, had suggested large firms could create an MSO and sell debt rather than equity, one person said. The firm declined to comment.
New Mountain began exploring law firm MSOs after doing two of the biggest acquisitions of accounting firms using a similar structure, though people familiar with its thinking say it has not committed to doing a deal. The firm did not respond to a request for comment.
Holland & Knight attorney Trisha Rich, whose practice helps structure MSO deals to comply with ethics rules, said they had talked to half of the largest firms in American Lawyer’s Am Law 100 ranking, but a much smaller group was actively exploring the possibility of taking outside capital.
“Every firm needs to be able to answer the question, what are you going to do with the money?” she said. “If you do not have an answer that crystallises the long-term benefits to the firm, then you probably should not be doing this.”
Additional reporting by Antoine Gara
