For the past four decades, private equity has taken over fragmented businesses in almost every industry, including accounting firms, medical practices, and more. However, private equity has never entered the legal industry. Not because the economics of the opportunity did not work, but because Model Rule 5.4 prohibits non-lawyer ownership of legal practices in almost every state. In 2021, Arizona eliminated the non-lawyer ownership ban, and other states loosened regulations at the same time. Still, sponsors waited on law firms, perfecting their workaround strategies in similar accounting and medical fields.
This past August, Charlesbank Capital Partners, a $22 billion Boston firm, signed a letter of intent to take a stake in Wood Smith Henning & Berman at a valuation of around $700 million. If this deal closes, it will be the largest private equity investment in an American law firm to date.
Wood Smith is not a typical corporate law firm; it specializes in insurance defense law and has 500-plus lawyers, 43 offices across 35 states, and a London office. The firm made $244 million in revenue last year in a field with high-volume and repeat work, exactly what private equity typically looks for. At $38.2 million of adjusted EBITDA, the deal was priced at roughly 18x. To complete the deal and bypass certain laws, the buyout was structured as a management services organization, with Charlesbank owning the billing, software, and administration, while the lawyers retain the entire practice entity. Because the sponsor’s return is limited to the management fees it charges the legal entity until an exit occurs, Charlesbank’s profit potential from the buyout is more constrained than under the accounting firm structure, where investors participate directly in the firm’s revenue. Charlesbank likely saw value in this model through AI and its potential to automate everyday management tasks, allowing Charlesbank’s separate management entity to create value with very few new costs.
At 18x on a relatively small fee stream that Charlesbank cannot raise rates on, the return has to come from expanding the platform and cutting delivery costs, which is why the AI case matters more here than in a typical private equity roll-up. If those economics work, personal injury is next; if this deal doesn’t, it will be the moment private equity learns to stay out of a law firm’s back-office tasks.
