Why private equity is increasingly scrutinising legal costs

Nicholas d'Adhemar, Apperio

By Nicholas d’Adhemar, founder and CEO of Apperio – Slowing deal volume is just the latest factor prompting PE firms to examine the expense of outside law firms.

Private equity investors are taking a closer look at legal expenses. Slowing deal volume is a primary reason, but it’s not the only one. That’s according to a survey of 100 PE firms in the US and UK with more than USD10 billion under management.

While the survey found four in five respondents said slowing deal flow was contributing to the pressure on external legal spend – respondents also cited growth in other costs (87 per cent) and the introduction of procurement skills (65 per cent) as catalysts for examining legal expenses.

There’s a saying that recessions don’t cause trends – they accelerate those already in motion. To that end, this pressure on legal costs isn’t new. US PE firms reported a 24 per cent increase in the level of scrutiny applied to outside counsel costs since 2018. Similarly, in the UK, the level of scrutiny has climbed 41 per cent over the last five years.

The surprise law firm invoice

Law firms provide an essential service to PE investors. Indeed, most are satisfied with the service – 95 per cent of respondents said they trust their law firm to offer quality advice. That’s an important point because it’s not the quality of legal service in question, it’s the lack of transparency around billing and unpredictable costs.

An anecdote from my days as an investment manager for a PE fund provides context. I observed it was not uncommon for a law firm to quote USD300,000 to get a deal done – and yet we’d receive a million-dollar invoice three months later.

Stories like that were evident in the survey data too. Just 54 per cent of PE firms that responded trust their law firm to bill them promptly. Even fewer – 38 per cent – trust them to invoice accurately. About 6 in 10 respondents (65 per cent) are routinely surprised by the invoices they receive from law firms.

The unpredictability is a problem because legal expenses in private equity are not insignificant. Consider the following statistics compiled from the survey:

  • Average annual legal costs. PE firms in the US average USD10.5 million in outside legal counsel costs annually while UK firms average USD8.6 million.
  • Average cost per M&A. The average legal expenses for a typical US acquisition is USD353,000; it’s lower in the UK at an average of USD253,000.
  • Legal costs as a percentage of a fund raised. Average legal costs can account for 4.7 per cent of a fund raised in the US and 3.9 per cent in the UK

As the economy has slowed, PE firms have focused inward on benchmarks like these and realized there’s a significant amount of money to be saved in legal expenses.

Legal spend management tips for PE firms

The problem all this points to is a systemic flaw in the administration of legal services. The question remains what can PE firms do to manage legal spend?

Below are a few considerations.

1. Make legal spend management a priority.

About four in ten senior legal stakeholders in PE firms indicated their organisation makes little effort to manage their legal spend. That’s unthinkable given the expense. The first step is simply to make getting a handle on legal costs a priority.

2. Show a preference for predictable pricing.

No investor would agree to a deal without agreeing to a fairly certain acquisition price. The price of legal services should also be predictable. This is a key point because the scrutiny isn’t necessarily aimed at lowering legal costs but bringing a level of predictability to them. An effective technique is to demonstrate a preference for outside counsel that can name a price and stick to it.

3. Visibility into work-in-progress.

PE firms need visibility into their law firm’s work-in-progress (WIP). It’s here that costs can soar when billable hours are logged over work that doesn’t really need to be done, could be done differently or would be better off sent to a different lawyer with a different specialty. A window into WIP provides insight into the work that’s yet to be invoiced and the venue to refocus outside counsel on their needs.

4. Consolidate your law firm panel

Some PE investment teams have several law firms on their panel but spend the majority of their legal budget with a select few. For example, about half (47 per cent) PE shops in the US work with between six and 10 firms, however, 75 per cent of total legal spend goes to just four to six firms. This is a proven way to manage legal costs – consolidate legal work with those firms that provide predictable pricing and visibility into WIP.

5. Ditch the spreadsheets for modern technology.

One of the most ironic findings in the survey was that 91 per cent of PE firms still use old-fashioned spreadsheets to aggregate, collate and analyse law firm billing data. These are investment organisations that pour billions of dollars into modern business technology – but when it comes to managing their own costs – they are using an application first brought to market in 1985.

Legal cost pressures will continue to climb

The cost pressure on outside legal expenses is a trend that’s liable to continue. When respondents were asked about the level of scrutiny applied to external legal spend over time – they uniformly indicated it will continue to intensify over the next two years.


Nicholas d'Adhemar is the founder and CEO of Apperio, a legal spend analytics and matter tracking platform for in-house counsel. Before starting Apperio he spent six years working as a lawyer and another three years as an investment manager with a PE firm. Apperio commissioned the survey described here and it was conducted by an independent research firm. A full report based on the surveyThe Changing PE Legal Spend Landscapeis freely available for download.

Author Profile