The cost of investing in tech, particularly AI, is prompting a growing number of law firms to accept private equity investment, especially for small and mid-sized firms, experts say.
In the UK, PE investment in law firms is reaching a record high. Seven in 10 mid-sized law firms in England and Wales said they had been approached by a PE firm in the last year, according to research published in January by accounting firm MHA and the Law Society.
Roughly two in three (65%) of firms surveyed said they are using artificial intelligence technology in their business. About a quarter (23%) said they would finance spending on technology either by external borrowing or using retained profit to fund improvements.
Large law firms are also open to investment offers. In November last year, top 30 US firm McDermott Will & Schulte said it was considering a restructuring that would enable private equity firms to take a financial stake in the firm.
David Morley, a former senior partner at Magic Circle firm Allen & Overy, now A&O Shearman, said that for relatively small firms with less than £50m of revenue, “the challenge of responding to the tech and AI arms race is massive”.
Morley, who now advises law firms and investors, added: “It’s not quite as simple as saying law firms need tech and AI, therefore they take external investment. It’s a bit more complicated than that, but strategically, it’s definitely a key factor.”
The challenge for smaller law firms is not just the cost of AI products but the need for business expertise to “rewire” a law firm for future tech and AI integration and to get external advice to boost growth, he said.
PE firms will typically look to make a profit by selling their ownership of a law firm within three to five years, although other types of investors may wait for longer, Morley said.
He added that the firms that are likely to do best with external investment are those that don’t just view it as “getting a chunk of money“, but see it as bringing business expertise, innovative thinking and pattern recognition that “really good quality investors can bring from other industries” to help boost growth.
Morley predicted that PE investment in law firms is likely to continue at a steady pace for the near future and then possibly increase sharply, as happened recently in the accountancy sector.
Jeff Zindani, founder and managing director of Acquira Professional Services, another adviser to law firms, said UK firms specialising in consumer law were particularly well suited to acquisition by external investors.
Those firms are process-based commodity-type practices without a decent tech stack, Zindani said.
In the US, where bar rules prevent direct outside investment in law firms except in a handful of states, PE firms have started to set up managed services organisations which sell non-legal operational support to practices, including technology, with a view to building large-scale legal networks.
While the model is regarded as best suited to small practices such as personal injury firms, it is the structure being explored by McDermott.
In the UK, top 25 firm DWF is the largest PE-owned practice by a wide margin. It was taken private in 2023 by Inflexion after a turbulent period as a public company when it navigated the impact of the covid-19 pandemic.
Matthew Doughty, group CEO, said: “Investment from private equity hasn’t fundamentally changed our approach, but it has helped us to accelerate some of our plans.”
Access to capital and a “long-term view of productivity and scalability” means the firm has been able to spend “meaningfully” on AI, data and technology, rather than “experimenting at the margins”, he said.
The firm uses AI technology from Microsoft’s Copilot and Legora, a legal AI start-up, which earlier this month was valued at $5.5bn following its latest funding round. DWF has said that it will use Legora for legal tasks, including responding to cybersecurity incidents, reviewing contracts and corporate due diligence.
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