PE leaders aim to cut legal costs, study finds

Firms are rethinking how much they spend on external legal advisors, as low trust in the industry’s billing practices and increased spending on procurement services collide with lower levels of dealmaking.

Ninety-five percent of PE firms planned to spend less on their external legal advisors in 2020, according to a study commissioned by Apperio, a legal spending management platform. The study, executed by research firm Coleman Parkes, is based on a survey of 100 PE senior legal stakeholders in the US and UK with an average of $10 billion or more under management across multiple funds.

Most firms, 53 percent, planned to decrease legal spending by 6 to 10 percent, according to the survey.

PE firms spent an average of $9.5 million in 2019 on legal, Apperio says. Legal costs associated with M&A amounted to an average of $300,000 for PE firms in 2019, and legal costs associated with fundraising accounted for 4.3 percent of PE fund value, according to the report. For 48 of those firms surveyed, three-quarters of their legal spending was typically split between four and six firms.

Declining M&A and fundraising activity, the biggest sources of legal costs for many firms, were expected to be lower for the year.

But PE houses also expected in-house scrutiny of legal costs to increase in intensity this year, and for that to continue through 2022, in part because of “severe trust issues around billing accuracy,” Apperio said. Sixty-two percent of those polled said they don’t trust their external counsel to bill them accurately; though 95 percent trust the advice their law firms give them.

While 92 percent of PE firms polled said their legal costs are predictable, only 54 percent said they trust external legal counsel to bill them promptly. “It would seem that there is a lot of negotiation after the fact, sometimes months after the work is completed, to bring costs back to a more ‘predictable’ level,” Apperio said.

Increases in other costs, including on procurement skills and procurement leads and teams, in combination with lower expected revenues, is also pressuring firms to reduce their legal spending.

And yet, for all the apparent fuss, many respondents don’t think their firms make an effort to manage legal spending (42 percent), and only 11 percent know their firms actively manage spending.