Private equity’s workaround to buy law firms

This is an audio transcript of the FT News Briefing podcast episode: ‘Private equity’s workaround to buy law firms’

Victoria Craig
Good morning from the Financial Times. Today is Friday, February 13th, and this is your FT News Briefing. The US plans to roll back some of its tariffs. And how do you buy something that’s not for sale? We look at one strategy to acquire a storied UK asset manager. And, we see how private equity is taking stakes in American law firms.

Stephen Foley
It’s the last sector, basically, of the professional services that private equity has not come into. And they have a lot of money, and they want in. 

Victoria Craig
I’m Victoria Craig, and here’s the news you need to start your day.

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US President Donald Trump plans to scale back some of his steel and aluminium tariffs. It comes as, sources say, administration officials believe the tariffs are hurting consumers by raising prices for food and drinks packaging. People familiar with the matter say the administration plans to exempt some items on the tariff list and prevent new ones from being added. Instead, sources say the administration will launch more targeted national security probes into specific goods. The president is battling an affordability crisis ahead of the November midterm elections. Research from the Federal Reserve Bank of New York found US businesses and consumers paid nearly 90 per cent of the cost of his tariffs last year.

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British wealth manager Schroders said on Thursday it’s being taken over by US asset manager, Nuveen. It’s a deal that would end the independence of one of the city of London’s most historic names, and it would be the latest blow to the domestic market. But before the deal was announced, Schroders boss gave the UK Treasury a ring. The call was to reassure policymakers of the company’s commitment to the nation’s capital markets. Here to explain what all of this tells us about the industry and the future of London as a financial centre is the FT’s Robin Wigglesworth. Hi, Robin. 

Robin Wigglesworth
Hi, Victoria. How are you? 

Victoria Craig
I’m good. Thanks for being here. So it was less than a year ago that Schroders CEO insisted that the company was not for sale. Just tell us a little bit about Schroders and why it’s had this change of heart. 

Robin Wigglesworth
Well, I mean, the Schroders family’s been this fixture in the city of London for a very long time, and sort of one of the more famous businesses in the city. In fact, one of the few remaining of the old names like Warburgs and Cazenove that have been gobbled up by foreign banks and investors over the years. And it’s been a successful business, but it maybe kind of found itself in this what people call the muddled middle or the valley of death, where it’s not a small, hot, sexy boutique in private equity or private credit, but it’s not one of the massive American juggernauts either. And that’s been a really tough spot to be in, so the family got a good price, and the time was right, I guess, so they just decide to sell it. 

Victoria Craig
And there’s been a little bit of consternation over the buyer, which is an American firm. What can you tell us about Nuveen? 

Robin Wigglesworth
I think Nuveen is probably one of the better buys they could hope for. It’s a very old American firm, also started by a family, a guy called John Nuveen over a hundred years ago that’s now owned by TIAA, which started off as the pension system for American professors. And, you know, it does look like a pretty good marriage, because Nuveen is very American centric, and Schroders frankly has a very tiny business in the US and is bigger in Europe and the UK. So actually, I think if I was working at Schroders, this is close to one of the ideal acquirers I could think of if I was gonna get bought up.

Victoria Craig
What does this deal say about the future of the city of London? And really the city as a financial centre? 

Robin Wigglesworth
Well, nothing immediately, because I mean, foreign firms have been acquiring pedigreed UK names for a long time, and London has continued to thrive. Its skill has been marrying the best of emerging markets of Europe, of the UK and the US. Nuveen also doesn’t have a big European business or a European or UK business at all, pretty much. So, it is saying now that Schroders is going to be the head of its international operations. It’s going to be bigger in the UK than it is in the US, so this could be a great thing. But you know, Schroders is a big listed UK asset manager. There have been fewer companies going public and more and more companies going private for a while. And you know, just as this general vibes based thing, it’s not great, right? 

Victoria Craig
And Robin, what does this deal mean for competition in the industry? Will this newly combined company be able to rival big names in this industry like BlackRock, for example?

Robin Wigglesworth
Well, it’s important to remember that even Nuveen and Schroders combined won’t actually make it into the top 10 of the asset management industry. It still is slightly behind the likes of Amundi and Allianz in Europe, and far behind Capital Group, or State Street or Fidelity, let alone BlackRock or Vanguard, which are just juggernauts. But it does show how these mid-size players fear that to survive, they need to be far bigger than we ever thought was necessary before. That a trillion dollars is kind of table stakes in the asset management industry now, so this is probably not going to be the last big deal we see here. We’re probably going to see a lot more over the next few years.

Victoria Craig
Robin Wigglesworth is the editor of the Financial Times’ finance blog Alphaville. Thanks so much for your time, Robin. 

Robin Wigglesworth
Oh, thanks for having me on.

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Victoria Craig
Goldman Sachs general counsel, Kathy Ruemmler, told the FT she will resign on June 30th. Her departure comes after the US Department of Justice released a tranche of documents last month that revealed the extent of her ties with sex offender Jeffrey Epstein. Documents showed she had extensive discussions with him between 2014 and 2019. That was years after he pleaded guilty to state charges of soliciting prostitution from a minor. Ruemmler joined Goldman in 2020. Ruemmler has said she regretted ever knowing Epstein and had, quote, no knowledge of any ongoing criminal conduct on his part. She said media coverage about her links to Epstein had become a distraction from the bank. On Thursday, she told the FT she made decisions based on the information available to her, and that she has an enormous amount of sympathy and heartache for anyone who Epstein hurt. The company’s chief executive, David Solomon meanwhile said in a statement he accepted Ruemmler’s resignation. He added she, quote, will be missed.

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Private equity has become a major investor in many industries, real estate, retail, hospitality, even sectors where rules have traditionally prevented outside investors, like healthcare and accountancy. Law firms also fall into this latter category, because ethics rules are built to prevent commercial considerations from tainting legal advice. But as is sometimes the case, where there’s a will, there’s a way, and the FT’s US accounting editor, Stephen Foley, has been finding out how to buy a law firm when you’re not allowed to buy a law firm. Hi, Stephen. 

Stephen Foley
Hi there. 

Victoria Craig
So if we’re asking you this question, it means there must be an example here. So what set off this latest reporting mission for you?

Stephen Foley
Where there’s a will and where there’s money, there’s a way. 

Victoria Craig
All the things. 

Stephen Foley
Yeah. Well, as you said, I’m the accounting editor, right? So I’ve been following private equities march in the accounting sector for several years. And the way it’s done in the accounting sector is you ringfence the audit business from the rest of the business. You keep everything that has to be described under the ethics rules as the practice of law. You keep all of that in one core law firm, but everything else you put into an organisation called a management services organisation. Now that’s the back office, that’s the technology. And you could also put the brand into that business, and then license it back to the law firm. And law is a very significant sector of the US economy. And it’s the last sector, basically, that of the professional services that private equity has not come into. And they have a lot of money and they want in. 

Victoria Craig
And so what are some of the firms that private equity is interested in? 

Stephen Foley
Well, a lot of the deals that have happened up to this point are very, very small. They’re very, very regional and they have tended to be in the personal injury law space. But what we’ve seen in the last few months is an explosion of interest in this model, in this idea amongst full-service law firms. There’s a very interesting white-collar defence firm called Cohen & Gresser in New York, which has gone public and said that it is already talking with bankers about trying to bring in private equity. 

Victoria Craig
What has caused this growing interest by private equity in law firms? 

Stephen Foley
I think there’s a couple of reasons. As I said at the outset, this is kind of the last frontier for private equity. It’s the last unconquered territory. People have made money out of being the first into accounting, so you want to be the first into law as well. If you’re a private equity partner thinking, well, what can I do with my career? So there’s that. I think there’s also some changes in the practice of law too. This is an industry like a lot, right? That is thinking a great deal about how AI is gonna disrupt the technological investments that law firms have to make. So, part of private equity’s pitch is that they can bring capital to law firms that will help them invest in this new technology at a time when some of these professional services are becoming just a little bit more capital intensive because of that investment requirement. 

Victoria Craig
Gosh, I didn’t think we would be talking about AI in this interview.

Stephen Foley
Sorry. Sorry. Surely you talk about AI in every interview.

Victoria Craig
Almost every day. So Stephen, I guess just the last question is: is there a concern that this boom in private equity involvement in law could somehow change or reshape the industry in a meaningful way? 

Stephen Foley
Well, for sure. And look, I have to say right at the outset, there’s been a small number of deals so far of small firms. If we see a very big law firm exploring this idea, then we could see the floodgates open. Now, You don’t have to look very far in the comment section on the articles that . . . I’ve been writing about this over the last few months to find FT readers who worry about the impact of private equity on law firms, and whether or not the commercial drive and the efficiencies that private equity will want to bring to these firms could compromise the practice of law. There’s plenty of people who see private equities investment in healthcare in the US, for example, as having been a negative for the quality of service. So that’s one aspect also to keep an eye on as well.

Victoria Craig
Can always rely on the FT comments section for the scepticism. Stephen Foley is the FT’s US accounting editor. Thanks for diving into this for us, Stephen.

Stephen Foley
Thanks so much. 

Victoria Craig
You can read more on all of the stories in today’s podcast for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back next week for the latest business news.

The FT News Briefing was produced this week by Julia Webster, Sonja Hutson, Fiona Symon, Marc Filippino and me, Victoria Craig. Our show is mixed by Alex Higgins and Kelly Garry. We had help this week from Peter Barber, David da Silva and Gavin Kallman. Our executive producer is Topher Forhecz. The FT’s global head of audio is Cheryl Brumley, and our theme song is by Metaphor Music.