Ninety eight per cent of US private equity groups expect external legal spend to fall in 2020

Legal expenditure

US private equity groups spent an average USD353,000 on external legal counsel per acquisition when prosecuting deals in 2019, according to research released by Apperio, a London-based specialist legal spend management platform. In the UK, the figure was slightly lower at USD253,000. 

Legal advice represents a significant part of the private equity deal making model and accounts for 4.2 per cent, on average, for a typical fundraise. Law firms who specialise in M&A advisory services and fundraising activities are well positioned to capitalise; especially if 2021 becomes a more fertile M&A period, following the impact of Covid-19.

This year, even though there are record levels of dry powder in excess of USD1.5 trillion, Covid-19 has understandably impacted deal volumes; only 205 transactions were completed in Europe through June 2020, which is 38 per cent down on H1 2019, according to Imperial College London’s Centre for Management Buy-Out Research (CMBOR). 

Apperio’s white paper, entitled “Rocketing scrutiny, eroding trust…the changing PE legal spend landscape”, found that only 16 per cent of UK senior in-house legal executives expected M&A to increase modestly on 2019, because of coronavirus. In the US, the heartbeat of global PE, only 6 per cent of senior legal executives believed M&A activity would increase post-Covid. 

In light of this sobering outlook, the report findings might serve as a clarion call for PE groups to re-assess exactly how much they are spending on external legal fees, and whether they are really getting true value. If a manager is able to better manage, and potentially reduce total annual legal expenses, so much the better for their end investors.  

The white paper found that US-based PE groups spent an average of USD10.5 million on legal fees in 2019, while in the UK, that figure was USD8.6 million. More revealing was the fact that, in the UK, even though six out of 10 PE groups who were surveyed said they worked with between one and five law firms, three quarters of their annual spend went to two or three advisors.

This is perhaps a time to re-evaluate whether so many external relationships need to be maintained? After all, if a GP can get a clearer overall handle on total legal costs, it opens up the possibility to more closely scrutinise just how much value they are getting from each external relationship, and allow them to consolidate their net spend with those advisors they trust. 

Increased scrutiny on legal costs associated with fundraising is another key area of cost containment, with US in-house legal executives citing a 25 per cent increase over the past two years. The net result is that an incredible 98 per cent of US private equity legal departments expect their external legal spend to have reduced by end of 2020. 

Asked whether he think the level of scrutiny will continue to increase in 2021, Scott Lenahan, Vice President, Legal & Compliance at Boston-based Falcon Investment Advisors, remarks: “Yes, I expect the scrutiny to increase. With hourly rates increasing, in-house teams will naturally push firms to bill fewer hours so overall expenses remain close to prior years. KPIs and other metrics will be helpful in guiding that conversation.”

In theory, gaining a more holistic view of one’s legal spend sounds perfectly logical. In practice, however, the ongoing use of spreadsheets and manual processes means that achieving a helicopter view on total spend can be devilishly hard. 

As a result, there remains a lack of transparency in respect to legal cost management. According to Apperio’s research, eight out of 10 US in-house legal counsel said their legal spend was transparent. 

“This is not that surprising,” states Lenahan. “Although you receive monthly invoices, it can be difficult to get a clear picture of how the work is being allocated, especially if you do not have experience working at a law firm. 

“Technology can play a major role in showing trends over time but it also requires asking questions from external counsel on the bills to develop your own understanding of what is appropriate.”

Even though 92 per cent of PE legal executives across the US and UK confirmed that their legal spend is predictable, paradoxically only half of them trust their external legal advisors to bill them on time. And even more revealing, only one in three US respondents trusted their external partners to bill them accurately. 

Apperio’s white paper suggests that, in order to address the problem and better manage external legal spend: “PE houses need immediate and granular visibility on each in-flight legal matter.” This, they argue, “will help PE legal leaders to see and manage work in progress across law firms, understand how matters are progressing and drive course-correction where necessary to prevent budget overruns and spiralling external costs.”

Lenahan believes that in-house legal teams being able to access a single source of spend data to better measure KPIs and avoid being over-charged by external legal counsel would be “extremely helpful”. “However, to do so would require a thoughtful approach by in-house legal teams in identifying KPIs for individual projects and for general fund expenses,” concludes Lenahan.


To read Apperio’s white paper in full, please click here…

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James Williams
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