Private equity: diversity is the top factor in selecting outside counsel

Statistics from a survey of US in-house PE lawyers

We recently published a new survey of in-house legal professionals in private equity (PE). While the full report polled 160 GCs, CLOs and other senior legal leaders across the US and UK, we experienced significant interest from US-based PE firms. 

Since about 70% of the respondents come from that side of the Atlantic, we’ve gone back through the data to pull out just the US statistics. Importantly, you will find greater granularity here and even a few previously unpublished data points.

1. Forecast for outside counsel spend.

The 112 US respondents collectively expect their PE organisations will spend an average of $12.29 million on outside counsel in 2021. More specifically:

• 3% expect to spend less than $2 million
• 20% expect to spend between $2-5 million
• 26% expect to spend between $5-10 million
• 40% expect to spend between $10-25 million, and 
• 11% expect to spend more than $25 million. 

These numbers are slightly higher than the $10.5 million in average annual legal spend a previous survey assessed in 2020. It meshes with the macro trends we see in the PE community; there’s dry powder waiting to be invested and the data from this survey suggests legal teams are anticipating an increase in transaction volume. 

2. Tighter controls over legal spend.

Whether more is spent on legal services or not, most respondents say they are focused on better managing spending on legal services this year. There’s room for improvement too. More than half (57%) indicated they’ve been billed for legal work that was, in hindsight, considered unnecessary or redundant. 

3. The top three factors in selecting outside counsel.

When asked to rank a list of considerations for outside counsel selection, diversity was at the top of the list. Here’s the top three factors US PE firms consider before working with outside counsel:

• 46% say diversity of the external counsel team
• 45% say the ability to deliver, and
• 38% say price.

It’s worth noting the US slice of the data mirrors the findings of the overall survey – and is also reflective of other studies stemming from the PE community. For example, diversity and inclusion were among the seven strategic private equity business trends to watch in 2021, according to a review of such studies we published earlier. 

4. Some matters in PE are prone to cost overruns.

US PE firms admit to a surprisingly long list of matters that go over budget a least some of the time. According to the findings, the legal matters most likely to go over budget include the following:

• 75% say investment financing
• 74% say litigation
• 71% say regulation 
• 60% say employment
• 58% say fund structuring
• 58% say investor negotiations
• 46% say investment due diligence
• 43% say tax, and
• 41% say M&A. 

Further, about one in five said certain matters “always” go over budget:

• 28% say investment financing 
• 22% say litigation
• 21% regulation 
• 19% say tax, and 
• 17% say fund structuring. 

The cost for these matters is not insignificant. For example, a previous study we published last year found US-based PE firms spend an average of $353,000 on external counsel during a typical M&A transaction. 

To that end, M&A costs can go over, in part because, invoices come at the end of the transaction. As our CEO noted in a podcast interview with Ari Kaplan, citing his days in PE, managing profitable deals in PE requires accurate planning and forecasting. 

That’s hard to do when, after the deal is done, the law firm comes back and says, “I know we told you the cost of legal services would be $300,000 but here’s an invoice for the $1 million we booked on the clock.”

5. Cost overruns bring friction for in-house teams.

The survey found 79% of respondents indicated cost overruns cause friction between legal and finance teams. It also creates other relationship problems for in-house lawyers: 82% say surprise legal bills create friction between the legal team and the wider PE firm.

More than friction, higher than expected invoices create additional work for clients. Some 44% of in-house teams in PE firms say they regularly have to re-plan budgets due to unexpected invoices, or unexpectedly higher invoices, from law firms. 

Restructuring isn’t an option because the distributed authority model gives deal teams the flexibility required to pursue timely investment opportunities. Still, that dynamic puts in-house lawyers in a difficult position: About half (49%) say the legal team is at a disadvantage because they don’t have access to the data to justify the external legal spend. 

Having that visibility could make a big difference – both in terms of budget and peer relationships: 89% say their decision-making would improve if they could see work-in-progress (WIP) being undertaken by law firms. 

6. Cost overruns are no good for law firms either.

Aside from causing friction for the client, cost overruns aren’t a windfall for law firms: 

• 76% of respondents say they negotiate discounts for surprise bills 
• 70% say they delay payment on unexpectedly high legal invoices, and
• 73% say they challenge individual line items.

Here again, respondents noted better visibility into legal spend data could make a difference: 77% say having access to accurate accruals data from law firms, before invoices are sent, would reduce the chances of receiving a surprise legal bill. 

There is benefit for law firms that do this too. Eliminating the surprises leads to faster payment and fewer write offs which improves law firm cash flow and profitability. 

7. How in-house teams will manage legal spend in 2021.

Eight in ten (81%) in-house legal leaders working in PE say predictability of legal spend is more important than an absolute reduction in spend. Many are focused on doing just that: nearly three-quarters (72%) say optimising their legal spend is a priority in 2021. 

Legal leaders inside US PE firms are exploring ways to do this across people, process and technology: 

• 82% are considering working with alternative legal service providers (ALSPs)
• 79% are introducing more robust processes to manage spend
• 77% are engaging more with their colleagues in procurement, and
• 76% have adopted legal technology services to assist with legal spend management.

In addition, nearly one in five (17%) of respondents have implemented specialised legal spend management software geared to provide them with the visibility to manage spend. Another 46% plan to introduce such technology and 22% are considering it now. 

* * *

The statistics above were derived from the responses of just the 112 legal leaders working for US-based private equity firms. Collectively, these PE firms have raised an average of 3.7 funds each and manage $14.72 billion in assets under management (AUM). 

The complete report, based on the responses from all 160 respondents across the US and UK – Responsibility Without Control? Challenges Facing Private Equity Legal Leaders in 2021 – was published in January 2021 and is freely available for download. 

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