Deal volume may be down, but legal costs are going up: survey

The complexity of doing business means PE and VC firms are seeing rising legal costs, according to a survey from Apperio.

A new survey shows that a sizable majority of in-house lawyers at private equity and venture capital firms said legal costs have risen since last year – and a similar amount expects the trajectory to continue in 2023.

The report, commissioned by legal spend management vendor Apperio, found that 64 percent said their spending has increased, including 28 percent who said it has gone up “significantly.” Only 9 percent said their firm’s spending has fallen to differing degrees.

“The simple explanation is that business is becoming more complex which adds to the compliance and regulatory risks,” the survey stated. “In turn, these fuel demand for legal services.”

Apperio cites US competitive scrutiny of buyout shops, along with a desire to regulate PE firms more like banks, as examples of rising regulatory pressures.

The report has a sample of 300 attorneys who work for firms in the US and in the UK. The survey was taken in August and September.

The trends aren’t anticipated to abate; 66 percent said they expect costs to rise next year, including 24 percent predicating them to jump “significantly.” Just 7 percent predicted that their firms’ spending will drop to differing degrees.

The survey defines significant changes as being at least 10 percent. Respondents’ average legal spending is $12 million annually for external counsel, plus five attorneys in house.

The report attributes the trend to sponsors having greater business complexity, even though deal volume has dropped.

Lawyers note pressure and LP scrutiny

Most respondents, at 86 percent, said their firms feel some pressure to rein in legal expenses. The figure includes 29 percent who reported pressure being “significant” and 35 percent who reported “moderate pressure.”

Meanwhile, 84 percent reported that LPs are scrutinizing legal costs. Twenty-seven percent responded that LPs are doing it “often,” and 21 percent replied that they are “always” scrutinizing. Thirty-six percent reported scrutiny “sometimes,” 10 percent said “rarely” and 6 percent said “never.”

Respondents also said that LP scrutiny has been rising, with 62 percent reporting it has gone up over the past three years. The figure includes 26 percent who said it has gone up “significantly.” Just 7 percent reported varying degrees of falling scrutiny.

Certainty and transparency are in short supply

Predicting legal expenses is hard, and the report detailed three related challenges. It found that 57 percent said legal work is not predictable, which in turn makes expenses unpredictable. Forty percent said they are sometimes billed for legal services that aren’t necessary, while 46 percent replied that there is a dearth of transparency regarding law firm invoices, time and billing.

Apperio also listed a series of legal matters that are most likely to breach cost estimates. Tax came in first among respondents at 54 percent, with employment in second at 45 percent and litigation in third at 40 percent.

Most respondents, at 78 percent, reported getting law firm invoices higher than estimated sometimes or more frequently. The figure included 16 percent reporting “always” and 23 percent reporting “often.”