Private Equity Circles Law Firms, But Will They Sell?

Legal ethics attorneys Trisha Rich and Joshua Porte were quoted in a Wall Street Journal article about private equity's increasing interest in investing in law firms. Although other countries such as the United Kingdom allow outside investment, the U.S. maintains a strict ban on nonlawyer ownership, with the sole exception in Arizona. As Ms. Rich noted, however, investing in Arizona has disadvantages, such as an onerous vetting process and having operations limited to that state. Private equity firms are thus turning to management services organizations (MSOs) to execute deals. Under these agreements, MSOs handle administrative and other non-legal functions such as billing and technological support, allowing investors to obtain a financial interest in a practice without having ownership.

Ms. Rich and Mr. Porte have advised on more than a dozen transactions involving MSO agreements, and she said even though MSOs themselves are not novel, "all the chatter is new, and private equity involvement is definitely new" when it comes to their presence in the legal industry. For his part, Mr. Porte predicted an influx of rollups, in which firms buy several smaller companies and combine them into a larger organization, because of the scale advantages in the legal field.

"There will be a significant effort to roll up smaller firms and realize the administrative efficiency you get as you scale," he commented.

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