It was reported today that Spanish-Portuguese powerhouse firm, Cuatrecasas, has completed a partner capital call raising €20 million to deal with Covid-19 revenue shortfalls. (Law.com/International; Spanish Firm Raises €20M With Cash Call to Shore Up Finances) This of course follows months of social shutdown on the Iberian Peninsula and escalating cost-cutting measures by Cuatrecasas globally. Who would have dreamt of lovely Lombardy as the hotspot for a virus out of central China? Now that our eyes are open, is there any reason to doubt Cuatrecasas’ tough experience is a harbinger of things to come in London, New York and other world capitals?
We see and hear it all around us: embargoed partner draws, staff layoffs, office closures, severe cost-containment and non-essential-cost cutting are the daily news. But it’s one thing for partners to accept a pay cut or embargo; it’s another to reach into their savings both to live and to keep their firm alive. Ouch. When will the rest of Europe, with the US hot-on-its-heels, face the draconian reality that they have no alternative to raising fresh capital or debt to deal with the run-off of the pandemic and the uncertain recovery period to come? One hopes never.
Unlike most businesses, law firms are hobbled by limited access to equity capital; outside investment in law firms is permitted, but regulated and still nascent, in England. It is not permitted in the US. Even though restrictions on outside fund-raising by lawyers for their firms showed pre-pandemic signs of relaxing in the US, it is still not an option. For many, that leaves only recourse bank debt. Ouch. What the legal profession needs is a class of specialized merchant banks that understand the unique legal, asset valuation and ethics landscape in which the profession operates. Legis Finance is one such merchant bank (www.legisfinance.com).
But there are a number of other law-finance specialists that understand the unique law firm ecosystem, and they purvey a number of creative solutions. To structure these solutions requires navigation of the current regulatory environment and financial principles like risk-mitigation and leverage. In this way, advisors can “bank” the law firm’s assets though the most valuable (but risk-adjusted) means. One example is a law firm’s interests in litigation outcomes—transactions where firms have co-invested with their clients through contingent fees (US) or damages-based agreements (England). These investment assets are both valuable and value-able at a price often well above the firm’s past and projected investments. There are a variety of financial providers who will bank them on a non-recourse basis, meaning no law firm or partner guaranties. Litigation co-investment assets can be “leveraged,” and that leverage, whether through debt- or equity-style transactions, can provide the capital firms need to avoid new equity investments by partners.
Law firms in common law systems are financially more equipped, perhaps advanced, than those in civil law jurisdictions like Spain. They have more options to avoid the blunt instruments of layoffs and partner capital calls. But the common lawyers need to be open-minded and urgent, looking at their revenue streams and accounts receivable as assets and seeing the bankable equity in their litigation risk investments. They also need to be proactive and prepare. What we are seeing in the Spanish legal economy is heading our way.