Law Firms Turn to Private Equity to Fund AI and Tech Costs
Private equity investment in law firms is accelerating, driven by the rising cost of AI and technology infrastructure. In the UK, seven in 10 mid-sized firms in England and Wales were approached by a PE firm in the last year, according to research published in January by accounting firm MHA and the Law Society.
The pressure extends to large practices. In November, McDermott Will & Schulte, a top 30 US firm, said it was considering a restructuring that would allow private equity firms to take a financial stake.
The Cost Problem for Smaller Firms
Two-thirds of law firms surveyed are already using AI technology. About a quarter said they would finance tech spending through external borrowing or retained profit.
For smaller firms with less than £50m in revenue, the challenge is acute. David Morley, a former senior partner at Magic Circle firm Allen & Overy, said the "tech and AI arms race" creates a substantial burden for these practices.
The issue goes beyond product costs. Smaller firms need business expertise to restructure operations for AI integration and external advice to drive growth, Morley said. PE investors typically aim to exit within three to five years, but bring operational knowledge that can accelerate development.
Firms that succeed with external investment treat it as more than capital injection. They use PE backing to access business expertise, innovative thinking, and patterns from other industries that improve growth prospects.
Where PE Investment Works Best
UK consumer law firms are particularly attractive acquisition targets. These practices operate on process-based models without robust technology infrastructure, according to Jeff Zindani, founder of Acquira Professional Services.
In the US, bar rules restrict direct outside investment in law firms except in a few states. PE firms have instead created managed services organisations that sell non-legal operational support, including technology, to practices. McDermott is exploring this structure.
DWF Shows the Model
DWF, a top 25 UK firm, is the largest PE-owned practice. Inflexion took it private in 2023 after a turbulent period as a public company.
PE backing has allowed DWF to spend "meaningfully" on AI and technology rather than "experimenting at the margins," according to group CEO Matthew Doughty. Access to capital and a long-term view of productivity and scalability enabled the investment.
DWF uses Microsoft's Copilot and Legora, a legal AI startup valued at $5.5bn in its latest funding round. The firm plans to deploy Legora for cybersecurity incident response, contract review, and corporate due diligence.
Morley predicted PE investment in law firms will continue at a steady pace before possibly accelerating, as happened recently in accountancy.
For more on how AI is reshaping legal practice, see AI for Legal.
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