Private equity investors take aim at soaring law firm fees

Private equity investors are pushing back against rising legal costs in fund formation work, in a warning shot at some of the world’s most profitable law firms.

In a new guidance paper, the Institutional Limited Partners Association (ILPA) - the trade body representing investors in private equity funds - argues that the economics of fundraising have become increasingly out of balance.

Under the current model, investors - known as limited partners or LPs - usually pick up the legal and organisational costs of launching funds, while the private equity firms themselves control the lawyers and negotiations.

The ILPA says that structure no longer makes sense in a market now dominated by mega-funds and highly profitable sponsors.

Law firm fees under pressure

The paper points to market data showing organisational expense caps rising over the past five years, while elite law firm billing rates have climbed into the “thousands of dollars per hour”.

“Legal service providers, which operate on a billable-hours model, have inevitably capitalised on the misalignment,” the paper says.

Without naming firms directly, the ILPA references a global law firm with a leading funds practice becoming the first to surpass $10 billion in revenue while generating average partner profits of roughly $11 million which have grown 80% since 2020 - Kirkland & Ellis in other words.

The paper suggests the current structure gives little incentive for sponsors or fund counsel to control escalating legal costs.

“GPs select outside counsel to the fund, which is also typically outside counsel to the GP itself,” the paper says. LPs, meanwhile, “typically have no visibility into how or why a certain law firm was chosen as fund counsel, do not have access to fund counsel billing rates, specific legal budgets, or overall organisational expense budget data.”

The ILPA’s proposals would significantly change how large fundraisings are managed and how formation costs are allocated.

The organisation wants fund organisational expenses capped, with any excess costs shared equally between investors and sponsors.

More competition please

The guidance also calls for more scrutiny of fund counsel, arguing investors should receive visibility into billing rates and detailed legal budgets.

It further argues that funds above $1 billion should consider competitive tenders for legal work in order to exert “meaningful downward pressure” on formation costs.

The paper also challenges the economics of repeat sponsor-side fund formation work, and questions why later-generation funds using largely standardised documents should still generate increased formation costs.