You can’t invest in American law office yet. It’s only a matter of time.
You might expect there would be no common class of big, highly rewarding businesses that has actually failed to tap their receivables for capital. Consider the American law firm and its strange partnership-based capital structure.
Every state in the US prohibits outside investment in law office by obstructing attorneys from sharing revenues with non-lawyers. These completely well-intentioned rules aren’t likely to be relaxed anytime soon. Proposals to allow outside ownership have up until now been dismissed by the American Bar Association.
However in time, this ownership model is wearing down. In several places around the world, you can already see the fractures, and something new emerging through them. The United Kingdom has permitted outside investment in law firms since 2012. Australia saw its very first law-firm public offering in 2007. And it currently occurs in Washington, DC, where non-lawyers are partners in lots of law office that concentrate on lobbying work.
At the same time, the partnership capital structure does US law firms a disservice when it focuses their interest on the short term, as it does far more acutely than at other privately held companies. Exacerbating the situation, US law firms revenues are taxed prior to they are distributed to partners, creating another disincentive for reinvesting post-tax dollars back into the firm.
On the other hand, customers are pressing firms to be more efficient often code for lower your rates and have shown no reluctance about taking their company to lower-cost companies. In the purchasers market of legal services, if law firms stay concentrated on pulling out earnings in the short-term, they’re far most likely to take part in a race to the bottom.
No other market runs by doing this, including other professional services. Experts and consultants of all sorts offer high-end company services utilizing traditional capital structures with conventional equity (and with no inherent ethical problems, I may include). There s no reason law firms couldn’t do.
Fortunately: there are numerous indications that the old law-firm ownership design is breaking down. Most of the big firms have counted on professional managers, setting up CEOs or other MBA-trained policeman’s to assist them run more efficiently. Numerous also utilize financial professionals, often to help lawyers analyze cases so they can more specifically price their services and manage their risk.
And law companies are starting to get more sophisticated in their use of financial instruments. Burford Capital, which I co-founded in 2009, provides lawsuits funding to clients and law firms.
As American firms progressively embrace tools like litigation finance, and as they see their abroad brethren raising large amounts at lower costs of capital, I think they’ll likewise be more likely to start coming around on the concern of outdoors investment and ownership.
And if that happens, it will enable firms to take a longer view that will result in much better customer service and better lawyer. And it will permit American capital to participate and even more among our economy’s most profitable sectors.