A $700 Million Deal Could Open a New Door for Law Firms
Private equity firms have been interested in law firms for years. But getting a law firm to accept outside money has been difficult. Most major firms have been unwilling to give investors a role in their business.
That could now be changing.
Wood Smith Henning & Berman, a California-based insurance defense firm, has reportedly agreed to a deal with Charlesbank Capital Partners, a Boston-based private equity firm. The deal would value Wood Smith at about $700 million.
The firm has more than 500 lawyers working from 43 offices across 35 states and London. If the deal is completed, it would reportedly be the largest private equity investment in a U.S. law firm so far.
More importantly, it could show other law firms that outside investment is possible without giving up control of the legal work.
Wood Smith Is Not a Typical Biglaw Firm
Wood Smith is not one of the famous names in American law.
It is not Wachtell, Kirkland, or Latham. It does not depend on huge mergers or high-profile corporate deals to make money.
Instead, much of its business comes from insurance defense—representing insurance companies and their clients in lawsuits and claims.
That may sound less exciting than billion-dollar M&A deals, but it has something private equity investors really like: steady business.
Wood Smith reportedly made about $244 million in revenue last year. With more than 500 lawyers and offices across the country, it is also much larger than a small local law firm.
The firm’s size and business model make it an interesting target for investors.
Private equity firms generally look for businesses that have:
- Regular customers
- Predictable revenue
- Strong cash flow
- Opportunities to reduce costs
- Room to grow
- Technology or administrative systems that can be improved
Wood Smith appears to have many of these qualities.
Why Insurance Defense Makes Sense to Private Equity
Law firms are often judged by their reputation, famous partners, and major cases.
Private equity investors look at things differently.
They care about how reliable the income is and whether the business can become more efficient and profitable.
Insurance defense can offer that kind of stability.
Insurance companies deal with claims and lawsuits every day. That means they need lawyers on a regular basis. A firm that builds long-term relationships with insurance companies can receive work year after year.
That is attractive to an investor.
A large corporate merger may produce a huge fee, but it is usually a one-time matter. Insurance defense can produce thousands of cases and repeat business over many years.
For private equity, predictability can be more valuable than prestige.
The $700 Million Price Tag
The reported deal values Wood Smith at around $700 million.
The firm’s adjusted EBITDA is reportedly about $38.2 million. That puts the deal value at roughly 18 times adjusted EBITDA.
For people outside finance, EBITDA can be thought of as a way of measuring how much money a business makes from its operations before certain expenses are taken out.
The important point is that private equity is looking at Wood Smith as a business—not simply as a group of lawyers.
Traditional law firms usually focus on partner profits, compensation, and yearly distributions.
Private equity investors think about things such as:
Can the business grow?
Can costs be reduced?
Can technology make the firm more efficient?
Can profits increase over time?
That difference in thinking is one of the most interesting parts of this deal.
How Can Private Equity Invest in a Law Firm?
There is an important legal problem here.
In many U.S. states, nonlawyers cannot simply buy a law firm and control the lawyers. Rules are designed to protect lawyers’ professional independence and prevent outside owners from controlling legal decisions.
So private equity cannot simply walk in, buy the entire law firm, and tell attorneys how to handle their cases.
Instead, deals like this can use a structure known as a management services organization, or MSO.
The basic idea is fairly simple.
The lawyers continue to control the legal work. The outside investor can have an interest in the business operations around that work, such as technology, billing, administration, office systems, and other support functions.
The lawyers remain responsible for decisions about clients and legal strategy.
That separation is extremely important.
An investor can care about profitability. It should not be deciding how a lawyer argues a case or whether a client should accept a settlement.
If this structure works well, it could become an important model for future investments in law firms.
This Does Not Mean Private Equity Has Taken Over Biglaw
It would be easy to see the $700 million figure and assume private equity is about to take over the legal industry.
That is not what is happening.
The biggest law firms are still largely controlled by their lawyers and partners. Many partners are not interested in giving outside investors a say in their businesses.
There are also serious questions about professional independence, conflicts of interest, regulation, and how profits would be shared.
Wood Smith is different from a top-tier global law firm.
That difference may actually be the reason this deal is important.
Private equity may not need to start with the biggest and most powerful firms.
It can start with firms that have steady clients, repeat business, large operations, and clear opportunities to improve the business side.
Could Wood Smith Be the First of Many?
That is the big question.
Private equity has already invested heavily in other professional industries, including healthcare, accounting, and consulting.
Law has been harder to enter because of ownership restrictions and professional rules.
But if the Wood Smith deal succeeds, other investors will have a real example to study.
They could begin looking for law firms with similar characteristics:
- Large and stable client bases
- Repeat legal work
- Strong collections
- Hundreds of lawyers
- National operations
- Good profit margins
- Outdated technology or inefficient back-office systems
- Partners who are willing to consider outside capital
The next firms to attract private equity may not be the most famous names in the industry.
They may simply be the firms with the best business economics.
What Could This Mean for Biglaw?
For now, the largest law firms have little reason to panic.
Many elite firms already generate enormous profits for their partners. If partners are already making very large amounts of money, bringing in an outside investor may not seem especially attractive.
But the situation could be different for firms that want to expand quickly, invest heavily in technology, open new offices, or give existing partners a way to take some money off the table.
That is where private equity could become useful.
An investor can bring capital, business experience, technology, and operational support.
The trade-off is that the relationship comes with expectations. Investors put money into a business because they expect that investment to grow.
That could create a new kind of pressure inside law firms.
The Biggest Story Is Not the $700 Million
The $700 million valuation makes headlines, but the bigger story is what the deal could represent.
For years, private equity’s interest in law firms was mostly a possibility people talked about.
Now there is a reported transaction that could serve as a real-world test.
Wood Smith has many of the characteristics investors have been looking for: a large operation, repeat clients, steady legal work, and a business model that can potentially benefit from better technology and management.
If the deal succeeds, other law firms will be watching closely.
They will want to know whether private equity can actually make a law firm more profitable without interfering with lawyers’ professional responsibilities.
A New Question for the Legal Industry
Private equity has not taken over American law firms.
But something has changed.
The conversation is moving from:
“Can private equity invest in law firms?”
to:
“Which law firms would make good investments?”
That is a much more important question.
Wood Smith could become a test case for how outside money enters the legal industry while lawyers continue to control the practice of law.
If the model works, the next few years could bring more deals, more investors, and more law firms willing to consider a partnership with private equity.
And that could eventually change the way law firms think about themselves—not just as professional partnerships, but as businesses with value that investors are willing to pay for.
