Issues for Private Equity Investment in UK Law Firms

Market background

Outside investment in law firms in England and Wales has been permitted since the implementation of the Legal Services Act 2007 with the Solicitors Regulation Authority starting to license “alternative business structures” in 2012. Although outside investment was slow to take off, a paper published in February 2025 by law firm merger specialist Acquira Professional Services reported that nearly £1.2 billion was invested into the UK legal sector in the five years to 2024. This included Inflexion taking DWF private for c. £450m in October 2023. In their “UK Legal Services Market Report” of Summer 2025, PwC stated that “During 2024, we saw a record number of private equity-backed legal platform deals.” With 2025 reportedly a more difficult year for private equity investment in law firms, time will tell if 2024 was a watershed year signalling the beginning of a sustainable growth phase for private equity investment in the UK legal market, or whether it signalled the top of the market.

Private equity investors: Attractions of a law firm investment

Commentators cite the investment opportunity for private equity in UK law firms to be resilient earnings, a large, growing market for legal services, and an industry ripe for consolidation and innovation.  

Law firm: Drivers for seeking private equity investment

These include:

• The ability to monetise partners’ capital in the firm.
• Increasing demands for capital spending, particularly on AI technology investment.
• Investments must be made from post-tax profits, lowering partners' distributions.
• Benefits of expertise of private equity investors in helping to improve and develop the business.

Law firm: Negatives of private equity investment

Perceived negatives include:

• Profits available for sharing amongst partners reduced by the requirement to make distributions to private equity investors and servicing debt. Lower profit shares are less attractive to rainmakers and potential lateral hires.
• Conflicts of interest between older partners with larger equity shares (and therefore an incentive to cash out) and younger partners at an earlier stage of their careers. 
• Loss of control/change of culture.

Different investment propositions: Consumer services law firms and corporate law firms

Most of the investments by private equity investors in English law firms have been in firms with consumer facing practices rather than larger firms providing services to corporates and investors.

Reasons are likely to include:

• Consumer firms may be controlled by a few key partners – this simplifies transaction execution and magnifies the incentive to sell.
• Fragmented markets for consumer legal services – this provides greater scope for consolidation and rationalisation using the familiar buy and build model.
• Client relationships are more widely held in larger corporate law firms – partners are more mobile as a result, increasing the risk of investment for private equity.
• Different perspectives of younger and older partners on the idea of outside investment – this is likely to be more pronounced in larger corporate firms.
• Structural complexity of larger, international firms with different legal services regulatory regimes – this makes it more difficult to structure a deal.

Transaction issues: Commercial

• Agreeing a valuation and reinvestment requirement.
• Allocation of sale proceeds and ongoing incentivisation arrangements.
• Buyout or minority investment.
• Ongoing governance arrangements.
• Leaver provisions and restrictive covenants.
• Exit arrangements.

Transaction issues: Regulation

Regulation of solicitors in the UK

In England and Wales, solicitors firms are regulated by the Solicitors Regulatory Authority (“SRA”) under rules made by the SRA as a licensing authority under the provisions of the Legal Services Act 2007. Prior to the implementation of the Legal Services Act, solicitors were not entitled to share fees with non-lawyers. Under the rules now in force, solicitors are entitled to practice through alternative business structures (“ABSs”) licensed by the SRA, in which non-lawyers can participate in ownership and management. SRA consent is required before a person not authorised to carry out legal activities by the SRA can acquire an ownership or voting interest of 10% or more, or an ownership or voting interest entitling the person to exercise significant influence or control over the management of the relevant firm.  

In England and Wales, only solicitors are permitted to carry out “reserved legal activities”, including conducting litigation and certain aspects of conveyancing and probate work. In the case of Mazur v Charles Russell Speechlys [2025] the court confirmed that non-qualified persons cannot carry on the reserved activity of the conduct of litigation, simply by being an employee of a licensed firm. The Mazur judgement relates only to litigation, but the Law Society has highlighted that solicitors undertaking other reserved activities may wish to review the SRA guidance on supervision to make sure their processes are compliant. This is a relatively recent judgement which could have a material impact on the business model of more commoditised legal services providers. 

In Scotland and Northern Ireland, the ownership and management of solicitors firms by non-lawyers are generally prohibited.

The UK government has announced that the Financial Conduct Authority (“FCA”) will take over Anti-Money Laundering (“AML”) and Counter-Terrorist Financing supervision for law firms, replacing the SRA. This change is part of a wider reform aimed at simplifying AML oversight across professional services. The FCA will oversee money-laundering compliance across the legal and accountancy sectors, working alongside professional bodies, law enforcement agencies, and other regulators to strengthen the UK’s defences against financial crime. The move marks the end of nearly two decades of AML oversight by the SRA. It remains to be seen what impact that will have on what is a materially important area in the operation of law firms.

The impact of litigation funding on law firms in the UK is also in the process of evolving adding uncertainty to law firms where third-party litigation funding is relevant. The UK government has faced pressure to legislate, but no legislation has yet been passed.

Regulation of law firms in Europe

With some exceptions, the ownership and management of law firms by non-lawyers is prohibited in continental European countries.

Regulation of law firms in the United States

The Model Rules of the American Bar Association prohibit outside investment in law firms, with ownership being limited to lawyers only. In certain states, notably Arizona, local state bar rules have been modified to remove this requirement, but in most states the restrictions on outside investment continue to apply.

It has been reported that U.S.-headquartered global law firm McDermott Will & Schulte is exploring a restructuring that would allow it to sell a stake to private equity groups without breaking American Bar Association rules. The structure reported to be under consideration would reportedly split the firm into two parts: a business giving advice to clients that is fully owned by its lawyers, and a separate managed service organisation (“MSO”) that the lawyer-owned firm would buy services from. Investors could buy a stake in the MSO, giving them a revenue stream designed to be attractive to private equity investors.

Another report suggests that U.S. boutique litigation specialist Cohen & Gresser may borrow money in the form of a convertible bond which could then be converted into equity at a later point when the regulatory environment allowed the investment.

It remains to be seen whether the U.S. regulatory environment will be relaxed in further states, but there appears to be appetite from private equity to invest in U.S. law firms as and when (and where) this becomes possible.

Transaction issues: Deal structuring and transaction terms

Regulatory structuring

Where applicable, regulatory rules, as described above, will be important factors in designing the legal transaction structure.

In international transactions “valve partners” can receive their profit shares from profit pools in countries which outlaw profit sharing with financial investors, but not lawyers from other jurisdictions, leaving more profits available in countries where a financial investor may participate.

There may also be a role for the investor investing in a “managed service organisation” providing central services to the regulated legal entity as described above.

Minority or majority buyout transaction

As in any transaction, whether an investor is acquiring a minority shareholding or acquiring a controlling majority stake will drive the transaction structure.

A majority investor will expect to have full control over the management of the business, subject to any applicable regulatory requirements. Partners in the acquired law firm will become employees/fixed share partners so that profits are available for distribution to investors as well as employee shareholders. A balance will need to be achieved between providing ongoing incentives for partners (including through retained equity) and providing a return to investors.

Achieving the same balance between returns to partners working in the business and returns to the investor will also need to be achieved in a minority transaction. As in any minority investment, the investor will not have control over the operation of the law firm, with its financial and other entitlements protected by consent rights.

Corporate structure

Typically, an investor acquiring a majority investment in an English law firm will want to make its investment into a company, rather than an LLP. The company may acquire the legal business of the existing partnership or alternatively may act as a holding company for any existing LLP(s) constituting the existing law firm, with profits (after payment of partner incentives) being paid upstream to the holding company. A minority investor may make an investment directly into a law firm’s existing structure or via a corporate structure.

In addition to the regulatory issues described above, potential taxation on any pre-deal reorganisation and taxation of ongoing partner incentives will need to be considered in determining the corporate structure for the transaction.

Reinvestment requirement

As with most private equity investments, the reinvestment or rollover requirement will be a material point for negotiation. The investor will want to ensure that the most important partners have sufficient “skin in the game” – identifying those partners and agreeing such levels of participation will be key to the success of the investment. Dealing with retiring partners also needs to be navigated.

Leaver provisions and restrictive covenants

Given the potentially mobile nature of law firm partners, the terms of leaver provisions and restrictive covenants will need to be carefully considered. Restrictive covenants of key individuals will need to be tailored to balance the length and scope of restrictions with the probability of enforceability.

Exit provisions

With regard to transaction terms, a majority investor will expect to have full control of any exit decision, whereas the negotiation of a minority investor’s exit rights will be more nuanced.

Exit strategy

For investors following a buy and build strategy in a consumer services law firm, the obvious exit route is to sell to another private equity-backed operator in the same or complementary consumer legal services market. Platforms achieving sufficient scale may also be able to consider an IPO as a potential exit.

For any buyout investor that acquires a larger corporate law firm, the exit opportunities may be more limited. The most obvious exit opportunities could be an IPO, a sale to a continuation vehicle, or a secondary buyout to another private equity (or other financial) investor.

Alternative financing options

For law firms whose primary focus is on financing their operations rather than monetising their partners’ equity, private credit investors may provide an alternative source of finance to taking a traditional private equity investment.

Key takeaways

Although there are some doubts, it seems likely that the trend for private equity investment in UK law firms will continue to grow, particularly in consumer law firms where there is significant scope for consolidation, rationalisation and implementation of technology solutions.

Buyouts of large corporate law firms are a more challenging, complex proposition. Such transactions are arguably riskier than buyouts of other professional services firms, so query whether we will see the growth of buyouts in the legal sector to the same extent as in the accounting sector?

In any event, it will be interesting to see if those investors in the vanguard of private equity investment into law firms are able to achieve returns that will attract further investors and bring law firm investment into the private equity mainstream.   

Authored by James Cross, John Livesey and Simon Grimshaw.