Legal Costs and Pressure Growing

Legal Costs and Pressure Growing for PE and VC Lawyers

In-house lawyers say spending on legal services in Venture Capital and Private Equity has grown this year and is likely to grow next year too.

Survey finds pressure to control legal costs builds as spending climbs; 84% of lawyers reveal limited partnerships are scrutinizing some legal expenses; 74% say ‘Fixed Fees’ aren’t always fixed.

Sixty-four per cent of venture capital and private equity firms are spending more on legal services this year – and more (66%) expect spending levels to rise again next year. That’s according to findings from a new survey of 300 in-house lawyers working for these investment firms across the US and UK. The survey was commissioned by Apperio, conducted by the research firm Coleman Parkes and just published in a report titled, The Pursuit of Control in Legal Spending.

Spending isn’t the only thing that’s growing. Nearly nine in 10 respondents (86%) say their investment organization feels some pressure to control legal costs. That pressure has been building over time as well: 62% say the level of pressure to control legal costs has increased this year compared to last year.

“Inflation may well be a factor as the cost of everything is going up,” says Apperio Founder and CEO Nicholas d’Adhemar, who is both a former lawyer and PE investment manager. “However, there is something more fundamental at play here: PE and VC firms are facing increasing compliance and regulatory matters, which inevitably drives up demand for expert legal advice.”

Sources of cost control pressure

One source of pressure comes from limited partners (LPs), the in-house lawyers that took the survey said. More than eight in 10 respondents (84%) indicated LPs are scrutinizing legal expenses – and the data shows it’s not just a casual spot-check either. About half (48%) say LPs scrutinize legal expenses “always” (21%) or “often” (27%).

Another source of pressure is brewed internally. Nearly three-quarters of respondents (71%) say their organisation is moderately concerned about overall legal costs. About half say their investment firm has “significant” or “very significant” concerns over big-ticket legal line items including individual transactions like M&A (45%), fundraising (46%) and “house spend” (45%) such as the legal cost of operating a general partnership.

Complicating factors

In-house lawyers working for investment firms face a myriad of challenges in striving to balance the need for good legal counsel with cost control pressures. When asked specifically about the top challenges respondents identified the following:

  • 57% say legal work is unpredictable and therefore legal costs are too;
  • 46% point to the lack of transparency around law firm time, billing and invoices; and
  • 40% say they sometimes get billed for unnecessary or redundant legal services.

However, the survey revealed other complicating factors – that are related. For example, 78% of in-house lawyers working for investment firms say they are surprised by the size of law firm invoices at least some of the time. Of these, about 4 in 10 say such invoices are “always” (16%) or “often” (23%) higher than expected.

Control means getting more value from legal spend

“Fixed fees” are often advertised as a remedy for bringing predictability to legal pricing. Yet the survey found that fixed fees aren’t always so fixed. Nearly three-quarters (74%) of respondents say fixed fees exceed the agreed price at least some of the time. This includes 40% who say this happens “always” (17%) or “often” (23%).

Some of the problems rest in the organizational structure of investment firms: deal teams want to move quickly on competitive deals and are empowered to initiate matters with law firms directly. This often happens outside the purview of the in-house legal team. The survey found that 81% of respondents indicated that some matters are initiated without their knowledge.

“This puts in-house lawyers working for investment firms in a difficult position of trying to manage expenses over which they have little visibility, let alone control,” added d’Adhemar.

So, how does the legal department first learn about these matters?

“The department is informed by a third-party agency,” said one respondent, a legal partner at a PE firm in open-ended comments. “Through meetings and discussions with senior management,” according to another, who is an associate general counsel working in PE. “We receive an email from the investors,” noted a third, who is the chief legal officer for a PE firm.

“Control does not mean cutting legal spending, which may expose a firm to intolerable levels of risk,” said d’Adhemar. “Control means getting more value for the money spent. The path to achieving this rests in being proactive: motivating the organization to centralize its legal spend processes, augmenting those processes with modern legal technologies, and inviting preferred law firms to be part of these advancements from the outset.

About the survey

Apperio commissioned a survey of 300 lawyers who work in-house for private equity (83%) and venture capital (17%) firms in the US (67%) and UK (33%).

On average, these organizations manage $9 billion in assets, spend $12 million on outside counsel annually, and employ five in-house lawyers.

Nearly 6 in ten (58%) said they are the senior decision maker on legal spending, while the remainder (42%) said they are part of a team of decision-makers. Respondents hold titles including chief legal officer, legal partner, general counsel, and senior legal counsel.

The research firm Coleman Parkes conducted the survey in August and September of 2022.

Also read top viewed Ai Legal article: The Role of AI in Legal Research.

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