McDermott Will & Schulte is considering a restructuring that would enable private equity firms to take a financial stake in the firm.
First reported by the Financial Times, the possible restructuring would set a precedent in the US market, where ethics rules set by the American Bar Association (ABA’s) prohibit law firms from offering ownership or other investment or revenue-sharing opportunities to non-lawyers.
The FT reported McDermott’s leadership was considering a model that would deliver the financial backing without breaching ethics rules. The business would be split into two parts – one fully owned by its lawyers that advises clients, and a separate “managed service organisation” from which the lawyer-owned firm could buy administrative services such as billing. Investors could buy stakes in the MSO, generating returns from the revenues paid to it by the lawyer-owned firm.
McDermott’s chair, Ira Coleman, emphasised the idea was “very preliminary”, adding the firm was “fielding inbound interest”.
“As one of the fastest growing, most successful modern law firms, we are constantly approached and we always listen to new ideas,” Coleman said. “This is how we find the best opportunities to attract and retain the industry’s top talent and what our clients expect from us. We’re excited to learn from other leading organisations as we challenge the status quo.”
The structure McDermott is reportedly considering is similar to models used in accounting and medical practices in the US in recent years to enable private equity ownership. Should it be employed by McDermott – which with revenue of around $2.8bn in 2024 is among the top 20 law firms globally – it could set a template for other large US or international firms.
Private equity’s move into the legal profession has been slow in the US, where Alternative Business Structures are only allowed in a few states, notably Arizona, which led the way by becoming the first state to permanently adopt ABSs in 2021.
However, there has been heightened interest in employing the MSO structure in law firms this year, with private equity firms drawn to the profession by its stable revenue models and growth potential.
For law firms, an injection of PE capital could help them to invest in technology and top hires in a hyper-competitive market, as well as lock down partners through equity awards. The model appears to have the support of Holland & Knight, which said in a practice note “properly structured, MSOs can assist law firms in innovating and professionalising their operations”.
Litigation funding giant Burford Capital also told the FT in August it was intending to buy minority stakes in US law firms using the MSO model.
“The MSO model is relatively new, but it has been shown to work in accountancy and healthcare,” said Adil Taha, co-founder of advisory Taha & Watmough, which specialises in advising on private equity investment in law firms. “I know of several top 60 US law firms currently in the middle of setting up MSOs that will be finalised next year. McDermott going down that route could open the floodgates to other top US firms doing the same.”
PE investment in top US firms could heap yet more pressure on their UK rivals, Taha added, which could in turn trigger a wave of investment in top UK firms.
Until now, private equity has focused mostly on regional and mid-market firms in the UK, though there have been deals involving larger firms, with Inflexion’s £342m take-private of listed firm DWF the most high-profile to date.
That could change, however, with Clifford Chance managing partner Charles Adams, telling Financial News earlier this year he “wouldn’t exclude” external investment if the right opportunity arose.
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