Private equity rails at rocketing legal costs as law firm profits boom

A global trade body representing private equity investors has called for curbs on ‘exploding’ legal costs which are fuelling the profits of some of the world’s most prestigious law firms.

The Institutional Limited Partners Association, whose members include public pension funds, family offices and sovereign wealth funds, says billing rates charged on fund creation are both unfair and opaque.

In a briefing note demanding changes, the association singles out Kirkland & Ellis, the Chicago-founded outfit which last year made history as the first global law firm to top $10 billion (£7.4bn) in annual revenue. Kirkland also reported average partner profits of $11m, an 80% rise since 2020, ILPA notes.

‘This example is not an exception,’ says the association, stressing that competitor firms ‘routinely’ charge out partners at $1,500 per hour.

The volume of capital flowing into private equity has grown 18-fold since 2000, from $550bn to $10 trillion. This has helped propel the profits of leading corporate law firms into orbit.

Washington DC-headquartered ILPA highlights what it describes as a ‘fundamental inequity’ in the division of expenses involved in fund creation. Limited partners (LPs), the capital allocators, were required to cover these organisational costs when the industry was nascent. That made economic sense because asset managers (general partners, GPs) ‘lacked sufficient capital’. However, ILPA says this has become an ‘outdated practice that now enables systematic costs-shifting by highly profitable asset managers to their investor clients’.

To improve alignment between GPs and LPs, the association recommends clearer expense caps, equitable cost‑sharing when budgets are exceeded, and greater transparency over legal fees and budgeting.

‘LPs typically have no visibility into how or why a certain law firm was chosen as fund counsel and typically do not have access to fund counsel billing rates, specific legal budgets, or overall organizational expense budget data,’ ILPA adds. ‘Absent any transparency, LPs cannot be certain —and indeed operate under the assumption based on negotiations with fund counsel — that GPs typically face no financial consequences in the event that budgets are breached or fund counsel exceeds its remit in drafting and negotiating fund terms.’