While the majority of in-house lawyers for private equity firms in the U.S. and U.K. are expected to select outside law firms and control legal spending, they’re being deprived of some key tools for the job.
Corporate counsel in private equity are being kept on the sidelines when it’s time to approve budgets for new legal projects and lack access to live spending data, which has led to widespread overspending, according to a new report from Apperio.
The London-based legal spend management and analytics platform had independent research firm Coleman Parkes survey 160 senior corporate counsel, 70% of whom work for major U.S.-based private equity firms and 30% are in the U.K. The survey occurred in December.
According to the report, 62% of in-house lawyers at private equity firms have to select preferred law firm partners, but just 46% are responsible for approving budgets on new legal projects and 12% are in charge of analyzing legal budget overruns. Also, only 28% of respondents said they were responsible for measuring outside counsel performance.
The finance and deal teams are typically in charge of the aforementioned responsibilities, according to the study.
“You have this relationship between the lawyers in the private equity funds and the finance teams. But really the people who drive a lot of it are the deal teams and they are not lawyers. That relationship is what creates some of the issues that came out in this report,” said Apperio founder and CEO Nicholas d’Adhemar. He previously served as an investment manager for London-based private equity firm Platina Partners.
Meanwhile, about 20% of respondents reported that an array of legal matters “always go over budget,” including investment financing, regulation, litigation and fund structuring. Nearly 80% of the survey participants said unexpected legal bills create friction between the legal team and the rest of the company.
More than 50% of respondents reported that finance teams expect that legal expenses “will always be unpredictable,” according to the report.
The organizational structure and interplay between legal, deal and finance teams is ingrained and unlikely to change in the near future, according to d’Adhemar. The most apparent solution to overspending, he said, is to track live spend data and allow legal teams access to that information so they can warn deal and finance teams before a budget boils over.
“They can only do that if they have access to that data and that data is close to real time. You’re not going to get that by using an Excel spreadsheet,” he added.
While the survey focused on private equity, the findings could also apply to other types of firms, especially those that are doing significant mergers-and-acquisition work or litigation, which tends to be unpredictable and can result in unexpectedly large legal bills, d’Adhemar noted.
“They have the same problems. They might not have that same concept of the deal team, but they do have that relationship between legal and finance in a big way,” he said. “The numbers will be a little bit different. But it’s still the majority that are doing this [data analysis] manually today. So the application is far wider than private equity.”
Interestingly, law firms aren’t necessarily benefiting from dysfunctional budget planning in the private equity realm. The study found that the majority of respondents negotiate discounts on surprise bills, delay payment and challenge line items on invoices. Also, 81% were thinking about sending their business to alternative legal service providers.
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