Leale: PE has to preserve professional values for firms to thrive
There is no reason why a law firm backed by private equity would be “less professionally ethical” than one owned by its lawyer-partners, a regulatory specialist has argued.
“Why is any increase in private equity backing of law practices, for example, substantially different to the arrival of ABSs [alternative business structures] or, in recent times, the substantial reduction in numbers in equity partner cohorts?” asked Nick Leale, a professional regulation partner at City law firm CM Murray.
Writing on its website, Mr Leale noted the difference between compliance with rules and acting in accordance with professional ethics (i.e. “something that is the right thing to do”).
He continued: “But don’t good lawyers take those two things largely hand in hand? While the compliance line is fixed, the ethics line can be more flexible—and it’s true that a firm’s ownership or strategic direction, whether driven by private equity or traditional partners, can influence where it chooses to position itself ethically on various client-related issues.
“But legal ethics don’t simply shift or disappear based on business decisions made at a given moment. Doing what’s right goes beyond what’s merely required.”
Mr Leale maintained that the management of any private equity-owned law firm “has no interest” in reducing adherence to professional codes.
The better question, he suggested, was whether private equity investors could still secure their returns on disposal of their asset.
“With the big prize of equity partnership removed and their star performers and rainmakers working under less risk, but with arguably less incentive to maximise profit, can a private equity owned business keep all its good people and maintain levels of growth and a wider upward trajectory for the firm?”
Doing so would achieve the core aim of making the firm an attractive prospect for purchasers a few years down the line.
“It must surely be that doing that successfully requires the firm to genuinely prioritise their clients’ interests, foster a culture of transparency, invest in future talent, and uphold ethical professionalism. For a private equity-backed firm to thrive, it must surely preserve these values.
“Only private equity-backed firms that recognise the link between principled conduct and long-term success will achieve the returns they seek when exiting the business. They will only succeed with ongoing established high standards of professional ethics at their core.”
With private equity activity at an all-time high in the legal market, the solicitor suggested that investors needed to appreciate this point.
“The legal profession is gradually being buried by regulatory compliance requirements and ethical expectations – the buyers who demonstrate a real understanding of the importance of the latter in particular will see discussions advance more often,” Mr Leale said.
“Private equity houses must plan for this by showing a keen awareness of the weight of its importance when negotiating and then on completion ensuring that sound professional ethics will be core to its blueprint for the business.”