Rocketing Scrutiny, Eroding Trust: The Changing PE Landscape

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Private equity (PE) firms spend a considerable amount of money on legal expenses. Costs can easily accumulate quickly when everyone’s got their head down working on a deal and you don’t know it until the invoice comes in after the deal closed.


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PE Spending On Legal Expenses

“The cost of executing deals from a legal perspective has increased exponentially over the past 20 years”, according to Epiris Chief Investment Partner Bill Priestley. “We have very good relationships with our law firms, but historically one of our bugbears has been the opaque nature of how legal fees are generated, so that it always becomes an after-the-event discussion.”

That’s why Nicholas d’Adhemar, who is a lawyer, turned PE investment manager, turned entrepreneur, saw a niche and started Apperio, a software product that brings predictability to legal spend.

Over the last 12 months, Apperio has commissioned two separate independent surveys of lawyers working in-house at PE firms.

Study 1: Rocketing Scrutiny, Eroding Trust: The Changing PE Landscape

This survey primarily looked externally at the relationship PE has with their outside legal counsel. In May 2020, research firm Coleman Parks surveyed 100 senior in-house lawyers working for PE firms with an average AUM of $10 billion. Seventy percent of respondents were based in the U.S. and 30% were based in the U.K.

Key findings included:

  • Average annual legal spend on external counsel. In the U.S., PE firms spend an average of $10.5 million on outside counsel. In the U.K., that average is lower at around $8.6 million.
  • Average spend on external legal counsel during M&A. In the U.S., PE firms spend an average of $353,000 on the “typical” acquisition. In the U.K. PE firms spend an average of $253,000. There is both a ceiling and a floor to legal costs with respect to M&A as no respondent paid less than $50,000 per transaction and no respondents paid more than $1 million.
  • Number of law firms on a PE panel. In the U.S., about half (47%) work with between 6-10 law firms. However, 75% of total legal spend goes to a smaller group of just 4-6 law firms. In the U.K., 60% work with between 1-5 law firms. Similarly, 75% of total legal spend goes to just 2-3 law firms.
  • Quality legal counsel… PE firms value the legal counsel they are receiving from their law firm partners. Across all geographies, a full 95% trust their external legal counsel to offer quality advice.
  • …but are surprised by invoices. About half (54%) trust their external legal counsel to bill them promptly, just 38% trust their external legal counsel to bill them accurately, and about 6 in 10 respondents (65%) are routinely surprised by the invoices they receive from law firms.
  • Rising costs meet procurement. 87% of respondents said growth in other costs is adding pressure to control legal expenses. Some 65% are introducing procurement skills into the process.

Study 2: Responsibility Without Control? Challenges Facing PE Legal Leaders in 2021

This study primarily looked internally at the relationship in-house lawyers in PE have with their peers on deal teams and finance. In December 2020, research firm Coleman Parks completed surveys of 160 in-house lawyers working for PE firm with an average AUM of $14 billion. Respondents in this survey were also split between the U.S. (70%) and U.K. (30%).

Key findings included:

  • Accountability without control. About two-thirds (62%) of in-house lawyers working in PE are accountable for selecting preferred law firm partners. However, fewer than half (46%) are responsible for approving budgets on new legal projects – and just about a quarter (28%) are tasked with measuring outside counsel performance.
  • Certain matters always go over budget. About one-fifth of respondents say certain legal matters always go over budget, according to the survey. These matters include investment financing (28%), regulation (22%), fund structuring (17%), and litigation (21%). In addition, another roughly 50% say these matters are sometimes susceptible to exceeding the budget. In aggregate, this means upwards of 70% of these matters are at risk of cost-overruns.
  • Sometimes fractious trilateral relationship among legal, finance and deal teams. The survey found 78% of respondents say cost overruns cause friction between legal and finance – and 79% say surprise legal invoices create friction between the legal team and the wider PE organization.
  • Responding to higher-than-expected legal expenses. While this may sound like a potential windfall for law firms, the survey suggests otherwise:
    • 76% frequently negotiate discounts in response to surprise invoices
    • 74% delay payment on legal bills that exceed their expectations
    • 72% regularly challenge individual line items in law firm invoices; and
    • 81% are considering working with alternative legal service providers (ALSPs)
  • Predictability in legal expenses outweighs cost. Three-quarters (75%) of respondents believe that predictability of legal spend is more important than an absolute reduction in spend.