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Typical M&A deals cost US private equity USD353k in legal spend

Private equity (PE) firms raise and invest billions of dollars. These organisations also spend millions with law firms to protect their business and investments. 

Private equity (PE) firms raise and invest billions of dollars. These organisations also spend millions with law firms to protect their business and investments. 

Apperio recently hired a third-party research firm to better understand trends in legal spend among US-based PE firms. The researchers polled senior legal stakeholders at such PE firms with at least USD2 billion under management. 

The findings present opportunities for PE firms and law firms alike. For PE firms, the data provides useful benchmarks of legal spend across a cohort of peers. For law firms, especially those specializing in corporate transactions, PE represents high-value legal work and market opportunity.

Private Equity Legal Spend Statistics from the US

The full report includes data from 100 PE firms across both the US and the UK. However, after the report’s publication, we received significant interest from PE firms and law firms alike based in the US. Since about half (47) in the study are headquartered there, we’ve gone back through the data to pull out just the US statistics. Importantly, you will find additional granularity about legal spend among PE firms that goes beyond what we included in the original report. 

1. Average legal spend

US PE firms spend an average of USD10.5 million annually on outside counsel legal fees. The vast majority (92 per cent spend between USD2 million and USD25 million – although 6 per cent spend more than USD25 million. 

Here’s how those numbers break out:

  • 2 per cent spend less than USD2 million on legal fees annually
  • 26 per cent spend between USD2-USD5 million 
  • 36 per cent spend between USD5-USD10 million 
  • 30 per cent spend between USD10-USD25 million
  • 6 per cent spend more than USD25 million

2. Legal spend as a percentage of a fund

More than half (57 per cent) of the US-based PE firms polled have raised five or more funds – and fundraising is a significant part of the overall spend. As a percentage, PE firms spend on average 4.7 per cent of a fund’s total commitments on legal costs. 

Here’s how legal spend as a percentage of a given fund tallies up:

  • 2 per cent of PE firms spend less than 1 per cent of the fund on legal costs
  • 13 per cent spend between 1-2 per cent of the fund 
  • 51 per cent spend between 3-5 per cent of the fund 
  • 32 per cent spend between 6-8 per cent of the fund 
  • 2 per cent spend between 9-12 per cent of the fund 

3. Average legal expense per M&A transaction

US-based PE firms spend an average of USD353,000 on external counsel during a typical merger and acquisition (M&A) transaction. There does appear to be both a ceiling and a floor to legal costs in M&A: no respondents paid less than USD50,000 per transaction and no respondents paid more than USD1 million. The majority (60 per cent) spend between USD201,000.

4. Big-ticket legal costs outside fundraising or M&A

Outside of fundraising and M&A, more than 80 per cent of US PE firms reported one-off legal expenses accounting for 5 per cent or more of the total legal spend. These line items included the following:

  • 87 per cent cited employment
  • 87 per cent cited regulation
  • 81 per cent cited litigation
  • 53 per cent cited tax

In addition, four percent of respondents cited additional big-ticket costs they preferred not to identify. 

5. Size of the law firm panel

About half of the US PE firms (47 per cent) work with between six and 10 external law firms, though some work with more and some work with fewer:

  • 36 per cent work with 1-5 external law firms
  • 47 per cent work with 6-10
  • 13 per cent work with 11-20
  • 4 per cent work with 21-30

It’s worth noting, most send much of their legal work to a smaller panel of firms. Among US PE firms, 81 per cent say three-quarters of their total external legal spend goes to six or few law firms. In addition, about one-third (30 per cent) say they spend that amount with just 3 or fewer firms. 

6. As deals slow, legal spend slows

The vast majority (98 per cent) of PE firms expect their legal spend will decline in 2020. Some 83 per cent say legal spend will fall by 6 per cent or more. Another quarter (23 per cent) expect it to drop by 10 per cent or more.

One key factor is most respondents expect deal-flow to slow and so their need for external counsel has slowed. However, that’s not the only reason. Below are the factors PE firms say are driving cost pressure on legal spending:

  • 89 per cent – reduction in deal volume
  • 87 per cent – increase in other costs
  • 68 per cent – introduction of procurement skills
  • 51 per cent – introduction of producing leads or teams
  • 19 per cent – demand to improve efficiency

7. Scrutiny of legal spending grows

Recessions tend to accelerate trends already in motion. To that end, PE firms say there were already scrutinizing external legal spending. US PE firms report a 24 per cent increase in the level of scrutiny applied to external legal spend since 2018. As deal volume drops, and other cost pressures grow, it stands to reason legal spending will continue to be carefully examined. 

8. Value the counsel, but not the business process

It’s clear from the data, that PE firms value the legal counsel they are receiving from their law firm partners:

  • 91 per cent trust their external legal counsel to offer quality advice
  • 85 per cent trust external legal counsel to bring innovative ideas to support their business

However, the business side of the relationship leaves much to be desired:

  • 53 per cent trust their external legal counsel to bill them promptly
  • 30 per cent trust their external legal counsel to bill them accurately

Nearly eight in 10 US-based respondents don’t believe their legal spend is transparent and, it seems, are routinely surprised by the invoices they receive from law firms.

9. An opportunity for better legal operations

While law firms could improve their billing processes, PE firms also have an opportunity to get a handle on legal spending. About four in ten (43 per cent) senior legal stakeholders do not believe that their organisations currently make efforts to manage legal spend. Moreover, most (91 per cent) are still collating and analysing billing data old-fashioned spreadsheets. 

The statistics above were derived from a survey of 47 US-based private equity firms with at least USD2 billion under management and have raised more than one PE fund. Among this slice of the sample, two-thirds of respondents had USD5 billion or more under management and 57 per cent have raised five or more funds. The full report – The Changing PE Legal Spend Landscape – is freely available for download with registration. 


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