'We don't need an exit': Burford Capital's Travis Lenkner on the case for external capital in law firms

Ever since the Legal Services Act 2007, the UK’s alternative business structure (ABS) regime has allowed outside investment in law firms. But until recently, most of the action has been confined to the lower end of the market, focusing on regional firms and consolidation plays. Now, bigger firms - City even - are starting to pay attention.

For Travis Lenkner, chief development officer at Burford Capital, the shift is both overdue and full of potential. "In the UK market on the one hand, not much has changed - the ABS model has been around for some time now", he says in a conversation for The Non-Billable Podcast. "But the recent activity and the uptick is very noticeable."

Lenkner, a former litigator at Gibson Dunn who went in-house to Boeing before co-founding litigation funder Gerchen Keller Capital (later acquired by Burford), rejoined the firm in 2024 with a remit that includes exploring equity investments in law firms. In his view, a combination of factors, from growing acceptance of outside investment in professional services to the efficiencies offered by legal tech, is creating "a particular moment" for law firm capital deals.

Listen to the full-length interview on the podcast. Episode page with links here.

Why law firms need capital

For Lenkner, the case for outside capital is rooted in the limits of the traditional partnership model. "It does not incentivise - in fact, it actively discourages - investment or reinvestment in the firm itself and the creation of long-term equity value", he says. "The incentives are to clear the accounts at the end of every fiscal year and… maximise current earnings in the current year."

That model worked when growth required little more than keeping billable hours high. But "the costs of growth and expansion… are changing pretty fundamentally and fairly rapidly", Lenkner says. The two big drivers are technology and talent.

On talent, he points to a "much more dynamic and competitive market" for leaders and rainmakers. "More guaranteed upfront payments are becoming necessary to lure people into a firm. That was not true a few years ago", he says. "You’re introducing more risk… and that is fundamentally at odds with the partnership structure."

On technology, the challenge is investing in tools, and often the developers or implementation teams to adapt them, when clients can’t be billed for the development period. "If you see the technology rush coming, you have a choice: view it as a threat or an opportunity", Lenkner says. "The way to be able to view it as an opportunity is… to be leaders in the space. That has a cost associated with it."

The partnership model actively discourages investment or reinvestment in the firm itself and the creation of long-term equity value.

Guarding against the biggest risk

For any investor, one of the most obvious risks is talent - the prospect that a handful of star partners walk away after the capital has been deployed.

In the US, the problem is compounded by rules that prevent law firms from imposing restrictive covenants on lawyers. "There’s more flexibility in the UK and some other markets", Lenkner says. Tools like synthetic equity structures in non-law firm entities can allow "significant restrictions around talent and mobility" while also providing incentives.

Ultimately, he says, getting comfortable with the risk means ensuring firm leaders are truly bought in. "You’re asking firm leaders to… say, ‘We’re willing to have some handcuffs here in exchange for some incentives relating to this equity and this new structure.’ But that’s the cost potentially of getting that outside investment."

Exit strategies: why Burford’s approach is different

Private equity’s traditional model relies on exits within a set time frame, often through a trade sale or to another investor. That’s a harder fit for law firm investments, where the market for secondary buyers is still developing.

Here, Lenkner says, Burford’s capital structure is a key differentiator. "We don’t operate on private fund life cycles that are really focused on exits and returning capital to investors within a certain period of time", he says. "We can be very patient."

That patience allows for more flexible outcomes. From structures that phase out the investment once a return threshold is hit, to holding stakes indefinitely if they continue to perform. "We’re seeing the first stage entrants into the space. We don’t have a lot of experience yet to say there’s a robust market upon exit… That’s the thing that we don’t know yet", he says.

The high-profile £342 million take-private of DWF by Inflexion in 2023 will be an important test case. "It will be a relatively high-profile example that people will look to", Lenkner says, though he notes that it’s just one data point and still early in its ownership cycle.

We don’t operate on private fund life cycles that are really focused on exits and returning capital to investors within a certain period of time. We can be very patient.

Minority stakes over control

One of Burford’s biggest strategic distinctions is its preference for minority stakes in law firms. "A lot of other investors in the space are naturally looking for control transactions… That is a more difficult sell… for the types of law firms that we’re talking about today", Lenkner says.

Burford looks for firms "where we believe in the firm, we love the management team… and they see us as a value-add partner who’s coming in not to take control… but to help them grow the pie and add value."

The firm’s minority investment in London-based litigation boutique PCB in 2020 is a case in point. Focused on asset tracing and recovery, PCB had a "really tight strategic connection" with Burford’s own London team in the same space. The investment has "performed well", Lenkner says, and serves as "exactly the type of situation we want to reconstruct as many times as we can."

The US market: different rules but growing momentum

If the UK’s ABS regime offers a straightforward regulatory path for law firm investment, the US remains fragmented. Arizona is one of the few states to allow ABS structures, with just over 100 firms approved. But, Lenkner cautions, "It is not… a place where everyone is just going to move their headquarters… and then open offices in 49 other states." Indeed, he said, current US professional conduct rules do not allow for such a structure.

Still, he sees US growth coming through other structures, citing parallels with healthcare and public accounting, where managed service organisations have allowed outside investment in related entities. "Law will move quickly in the US as well, but the structures are… different and in truth a bit more complicated", he says.

Looking ahead

Burford’s publicly stated target is to double the size of its portfolio in the next five years. That will include law firm equity stakes alongside its core investments in legal claims, and possibly asset-light service companies in the legal ecosystem.

When asked about the prospect of PE-backed law firm startups (e.g. a handful of rainmaker partners targeting high-end work), Lenkner says it's "absolutely interesting" - particularly in certain practice areas or claimant-side litigation - even if brand power will keep some top corporate work in the hands of established names.

Whatever the structure, Burford’s long game remains the same: patient, strategic investments in firms and legal businesses where its capital and market know-how can create value. "We know how law firms work. We know the industry very well", Lenkner says. "That’s a very special position to occupy compared to a lot of the other capital coming into the space at the moment."

We know how law firms work. We know the industry very well. That's a special position to occupy.

This is a condensed version of our full length interview with Travis Lenkner on The Non-Billable Podcast. View the episode page here.