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McDermott Will & Schulte is exploring a restructuring that would allow it to sell a stake to private equity groups, a move that would test ethics rules preventing non-lawyers from owning legal firms.
The reorganisation would involve creating a complex structure giving investors a slice of the law firm’s revenues without breaking traditional ownership rules, according to five people with knowledge of the matter.
Such a move, by one of the world’s largest law firms by revenue, could set a precedent for other large players in an industry that — in the US — has been impervious to outside investment.
Zack Coleman, the son of the firm’s chair Ira Coleman, joined McDermott from private equity and venture capital group Odyssey Investment Partners in July and had been sounding out bankers, advisers and private equity executives about the structure, the people said.
However, no agreement had been finalised and no commitments had been made, the people cautioned, with some saying it was at an exploratory stage.
The younger Coleman, who started his career at the investment bank Moelis in 2015 and joined McDermott as senior director of business opportunities, is considering a model in which some of the revenues that lawyers generate will be diverted to buy services from a separate entity in which outside investors could own a stake.
It is similar to models that have already been used to prise open medical practices and accounting firms to private equity ownership in recent years.
“As one of the fastest-growing, most successful modern law firms, we are constantly approached and we always listen to new ideas,” Ira Coleman told the Financial Times. “We’re excited to learn from other leading organisations as we challenge the status quo.”
The Chicago-headquartered firm, formed in a merger of McDermott Will & Emery and Schulte Roth & Zabel this year, has $3bn in revenues, it said in August. That would put it in the top 20 firms globally by revenue.
The structure under consideration would split it into two parts: a business giving advice to clients that is fully owned by its lawyers, and a separate “managed service organisation” that the lawyer-owned firm would buy services from. That could include back-office work, licensing its brand and buying IT services. Investors could buy a stake in the MSO, giving them a revenue stream designed to be attractive to private equity investors.
There has been an explosion of interest in the potential use of the structure in law this year, but no large firm has adopted it and opponents believe it could breach professional ethics rules designed to keep commercial considerations out of the provision of legal advice.
Ethics rules set by the American Bar Association that ban non-lawyer ownership of US firms are being questioned after some states, such as Arizona, have explicitly licensed alternative business structures that can include private equity control. The potentially more controversial MSO structure has so far been used by only a handful of small practices or start-up law firms.
Law is one of the last areas of the professional services sector that has not so far opened up to private equity and some investors sense an opportunity to buy up firms on the cheap by being in the first wave of deals.
Proponents of outside investment say it could give law firms capital to invest in new technology such as artificial intelligence, pay for the expensive hires and help tie rainmakers to them through equity awards in an industry that bans non-compete clauses.
Burford Capital, which pioneered litigation finance, has said it is interested in buying minority stakes in US law firms.
Lawyers at Holland & Knight wrote in a note that MSOs could “assist law firms in innovating and professionalising their operations”, pointing to a Texas ethics ruling in February that indicated support for the structure.