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Private Equity

The Allure of Law Firms for Private Equity

Published: June 21st, 2024
Recent investments by sponsors in accounting firms suggest PE would find attractive targets in the legal profession if more state bar associations allow nonlawyers to own stakes in law firms.

Private equity has been a great business for law firms. Someday, the reverse may be true as well. PE sponsors have purchased stakes in several large accounting firms since 2021, and law firms would seem to be at least as attractive.

State bar association rules have long barred nonlawyers from owning equity stakes in law firms. But Arizona and Utah eliminated the ban as of 2021 in an effort to expand access to legal services for individuals of limited financial means.

The practice would likely have to be licit in major jurisdictions such as California, Illinois, New York and Texas for sponsors to invest in the legal profession in a significant way.

Since 2021, five of the nation’s 25 largest accounting firms have received significant investments from sponsors. This year, Hellman & Friedman LLC and Valeas Capital Partners made an investment in Baker Tilly US LLP. The deal was reportedly done at a $2 billion valuation and left H&F and Valeas, both based in San Francisco, with a stake of slightly more than 50% in Chicago-based Baker Tilly.

Also in 2024, New Mountain Capital LLC, Caisse de Dépôt et Placement du Québec and OA Private Capital invested an undisclosed amount in Grant Thornton LLP, reportedly for a 60% stake in the Chicago-based accounting firm.

In 2022, Boston-based Parthenon Capital Partners LP invested in Raleigh, N.C.-based accounting firm Cherry Bekaert LLP, while New Mountain bought a majority stake in New York-based Citrin Cooperman. And in 2021, TowerBrook Capital Partners LP bought a stake in EisnerAmper LLP.

There have also been deals for small accounting firms.

Like accounting firms, law firms could use investment from private equity in at least three ways: revamping their ownership structure, expansion and technology investment.

Lawyers at most firms are entitled to payments for their stakes in the firm when they retire. A law firm could use money from a PE sponsor to reduce or eliminate that burden, allowing the firm to compete more aggressively in the lateral market. Firms could also use the investment to buy out underperforming partners or those in less lucrative practices.

Sponsor money could also help firms compete in the market for lateral talent, where the cost of bringing on large groups can run into the tens of millions of dollars.

Many smaller and midsize firms need to spend more on technology, an expense that sponsors could help meet, especially if the firm can grow more easily and spread its tech investment across a larger number of professionals.

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