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16 July 2020

Private equity firms increasing scrutiny on legal spend amid Covid-19 pandemic

Majority of in-house counsel at buyout firms say their legal bills are not transparent

By Ben Edwards

The concept of business, technology, the Internet and the network. A young entrepreneur working on a virtual screen of the future and sees the inscription: Private equity

Photon photo; Shutterstock

Private equity firms are ramping up scrutiny over their external legal spend, with a majority of in-house counsel concerned about a lack of transparency when it comes to billing, according to a survey by Apperio.

More than half of in-house counsel at UK private equity firms and almost eight in 10 in the US said their legal spend is not transparent, with them often receiving legal bills charging them more than they had been expecting. Only a third of US and 45% of UK respondents said they trust their external legal counsel to bill them accurately.

More than 100 senior in-house legal 'stakeholders' in US and UK private equity firms were interviewed for the research, which was commissioned by research firm Coleman Parkes by Apperio, a specialist in automated legal spend tracking.

Average US legal fees spend in 2019 was $10.5m while it was $8.6m in the UK, according to the research.

Nicholas d’Adhemar, CEO and founder of Apperio, said: “Trust between a PE house and their legal counsel is paramount for the relationship to work. Real-time transparency and granular visibility of legal spend provide crucial information to keep budgets and commercial partnerships on track. Empowered with the right data at the right time, in-house legal teams at PE firms can make informed decisions and achieve optimal results while participating law firms benefit by retaining their clients’ loyalty and trust.”

The survey also found that just over half of US and UK in-house teams at private equity firms are confident that their law firms will invoice them on time. Apperio says issues around billing accuracy and timeliness can risk eroding trust between in-house legal teams and outside counsel.

Against the backdrop of the coronavirus pandemic and slowing M&A and fundraising activity, private equity firms are starting to place more scrutiny on their external legal spend. In the UK, scrutiny has increased 41% since 2015 and in the US it has increased by almost a quarter since 2018, the data show.

Part of that increased scrutiny is down to the fall in deal volumes caused by the Covid-19 crisis, but 87% of respondents said it is also down to increased costs in other business areas.

Even so, four in 10 senior private equity legal stakeholders do not believe their firms currently make efforts to manage their legal spend. And few firms are using technology to help keep track of what they are spending. Some 91% of firms surveyed said they still collate and analyse legal spend manually using spreadsheets.

Mergermarket's data for the first half of 2010 found year-on-year deal value down by 30% at $210.4bn and deal count having fallen by 29% to 1,318.

A report LexisNexis CounselLink, published earlier this week, found that US corporate counsel continue to demand better value from their legal providers with the use of alternative fee arrangements (AFAs) rising in 2019 and invoice discounting becoming more common during the Covid-19 pandemic.

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