Private equity firms feel pressure to scrutinise legal spend more closely as M&A and fundraising declines, says new Apperio study

Private Equity (PE) firms in the US and UK spend many millions of dollars on legal services annually, but they are scrutinising their external legal spend like never before, according to a new Apperio research study entitled “Rocketing Scrutiny, Eroding Trust – The Changing PE Legal Spend Landscape.” 

The data shows that in-house attorneys at PE houses feel intense pressure to examine and reduce legal spend for several reasons including drops in M&A and fundraising activity, now likely to decline further due to Covid-19 fallout.

Apperio, a specialist in automated legal spend tracking, management and analysis, commissioned the study from independent research firm Coleman Parkes, which polled 100 senior in-house legal stakeholders in US and UK PE firms with an average of more than USD10 billion under management across multiple funds.

In 2019, US PE firms spent USD10.5 million (on average) on external legal services, while UK PE firms’ average spend was USD8.6 million. Clearly, legal is a significant and necessary cost of doing business for American and UK PE houses.

However, the study showed that legal spend is now being scrutinised more carefully at PE firms. Transparency in legal services billing has been a persistent problem industry-wide. More than half of UK respondents said their legal spend is not transparent and they are surprised by their legal bills. Among US respondents, trust in law firm billing is even worse - nearly eight in ten (79 per cent) of American in-house counsel responded that legal spend is not transparent and they are surprised by legal bills.

Respondents said billing promptness and accuracy are chief sticking points with their law firms. Only 53 per cent of senior in-house legal stakeholders in the US and 55 per cent in the UK trust their law firms to bill them promptly. Only one in three US and 45 per cent of UK respondents trust their external legal counsel to bill them accurately. Lack of faith in timeliness and accuracy of invoices causes damaging friction between in-house and outside counsel. The client’s growing frustration with unpredictable billing practices erodes the trust that binds client and legal advisor.

Legal spend has been a longstanding blind spot for PE firms. According to the study, four in ten senior PE legal stakeholders do not believe their companies currently make efforts to manage legal spend. That is changing fast, driven by several factors. PE firms in both the UK and U.S. reported a trend of increasing scrutiny of external legal spend over time, predicting record highs to come in the near and distant future. In the UK, scrutiny has climbed 41 per cent since 2015 and has increased in the US by 24 per cent since 2018.

Reasons vary for this newfound scrutiny. Reduction in PE deal volume is driving increased pressure on external legal spend for about four in five respondents (72 per cent UK, 89 per cent US). However, 87 per cent of respondents say increased costs in other areas are major factors, and 62-68 per cent cite new procurement skills, too, since PE firms’ procurement teams negotiate more favourable cost arrangements from service providers.

In this tense time of increasing scrutiny and financial adversity, technology can be a strategic ally for PE firms and law firms alike. A shocking 91 per cent of PE firms surveyed still collate and analyse legal spend data manually in Excel rather than using modern technology which would provide real-time insights and hold law firms accountable for billing promptly and accurately.

“Trust between a PE house and their legal counsel is paramount for the relationship to work,” says Nicholas d’Adhemar, CEO and founder of Apperio and former lawyer and PE investor. “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. Technology will be an essential partner that PE firms can leverage to optimal advantage.”

 

Author Profile