Why should any private equity owned firm be less ethical than a traditional law firm partnership? Why is any increase in private equity ownership of law practices different to the arrival of alternative business structures or, in recent times, the reduction in numbers in equity partner cohorts?
I remember, from my own experience, how equity partnership groups were focused on profit per equity partner (PEP) and how substantially each of those equity partners, who were a tiny proportion of the firm, would be financially rewarded for their risk and efforts. And, equally, what the firm’s PEP was seen to be to the outside world with a view to mergers or attracting the interest of private equity firms.
A law firm’s real assets, from which its real value is drawn, are its lawyers. Those lawyers are on the roll of solicitors, subject in all that they do professionally (and these days personally) to the Solicitors Regulation Authority Principles. Every person and body regulated by the SRA, including the managers and employees of any licensed body, must act in a way that upholds the rules of law and public trust, with independence, with integrity, with honesty. They must encourage EDI and act in the best interests of each client. In any well-run firm, all the team are constantly reminded of and trained in the widespread regulatory expectations of the SRA. Successful lawyers are a stubborn bunch who hold the principles of their profession dear.
Of course, there is a difference between compliance with rules (i.e. something that is the required thing to do from a regulatory perspective) and acting in accordance with expected professional ethics (i.e. something that is the right thing to do).
Do good lawyers take those two things largely hand in hand? Generally speaking, yes. While the compliance line is fixed, the ethics line can be more flexible - and it’s true that a firm’s ownership or strategic direction, whether driven by private equity or traditional partners, can influence where it chooses to position itself ethically on various client-related issues. But legal ethics don’t simply shift or disappear based on business decisions made at a given moment. Doing what’s right goes beyond what’s merely required.
Can private equity ownership crush professional ethics in a law firm? The answer to that must surely be ‘no’. The management of any private equity owned firm has no interest in doing anything that has any substantial effect on the likely adherence of its lawyers to the professional codes that they eat and breath. Any serious shortcoming leaves their whole career, and the firm, exposed.
The better question perhaps is this: can private equity investors in law firms hold their businesses together under their model and thus secure their returns? With the big prize of equity partnership removed and their star performers and rainmakers working under less risk, but with arguably less incentive to maximise profit, can a private equity owned business keep all its good people and maintain levels of growth and a wider upward trajectory for the firm? Doing so achieves the core aim: making the firm an attractive prospect for purchasers a few years down the line.
The most successful law firms are those that genuinely prioritise their clients’ interests, foster a culture of transparency, invest in future talent, and uphold ethical professionalism. For a private equity-backed firm to thrive, it must preserve these values. Only private equity-backed firms that recognise the link between principled conduct and long-term success will achieve the returns they seek when exiting the business.
Private equity law firms cannot succeed without ongoing established high standards of professional ethics at their core. Private equity firms will see this, they will invest in talent and they will build ethical firewalls and transparent governance structures that have at their core those who oversee ethically sound and regulatory compliant behaviours within the firm. They will invest in compliance, training and technology and they will remove inefficiency and internal red tape and make their firms a better place for a lawyer (senior or junior) to bet their future. That will be the only way for PE-backed law firms to survive and thrive.
However, that will only happen with careful planning in advance of the completion of any transaction. Tensions will follow if the whole issue of compliance and ethics is not tackled head on at the pass. Private equity investors will need to fully understand what I have tried to touch on in this article and how the blood of sound professional ethics (and a strategy that puts it at the firm’s core) runs through all the best lawyers and most successful firms.
At an early stage, the buyers must be shown what professional ethics means in a law firm and how the firm’s management team has trained its people on the firm’s ethical expectations and then applied those expectations to tricky ethical questions as they have arisen. An action can be compliant but unethical or indeed ethical but non-compliant – a discussion that leads to real understanding to any non-lawyer purchaser about the former will not just evaporate tension in negotiations but also set the new business on the path to short term, medium term and exit success.
Nick Leale is a partner at London firm CM Murray
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