Why do law firms typically remain private partnerships whereas IBs have trended towards IPOs in recent history?
Just curious if anyone has $0.02 to throw in here. To my knowledge, the vast majority of Big Law firms you see on a Vault ranking list have remained privately held partnerships. If you contrast this with the Vault IB rankings, nearly every company on the list has IPOd in the past or just recently.
Anyone want to take a stab at why this is?
1. Big Law / Consulting partnerships are *highly* profitable. Financials are not disclosed publicly obviously - but these are some of the most profitable businesses in existence. McKinsey/Bain/BCG's 'EBITDA' margin is rumored to be well north of 60%. These partnerships are highly lucrative and the cloak of secrecy adds to the brand / image (the real secret sauce of any professional services organization). If they IPO'd - they would have to disclose their financials, their profitability, and invite a lot of other regulatory scrutiny.
Edit - also importantly... private partnerships are LLCs with pass-through taxation. You are taxed once. C-Corps or S-Corps are taxed twice - once at the corporate level, and once when dividends are distributed to shareholders. This is one of the reasons PE funds don't generally want to be public (Blackstone finally converted to a corporation many years after listing as a partnership which I believe was a novel 'technology' at the time that the markets didn't really understand).
2. IBs are too big. Investment Banks started off as 'elite M&A' advisory. Today, every single one of the bulge-bracket firms offer a plethora of services ranging from consumer banking, commercial banking, to traditional investment banking activities like capital raising, advisory, etc. Globally, GS / MS / JPM likely have thousands - of Managing Directors across an enormous range of geographies across different business lines. It is close to impossible to keep any semblance of culture / cohesion / run a 'tight-knit' partnership at that scale.
3. Capital requirements. Think about GS/MS/JPM - each of these have flagship buildings/HQs in flagship cities around the world (NY, London, Hong Kong, etc.). Think about the corresponding top tier law firms. Wachtell famously has I believe one office that is 1-2 floors in NYC. At a certain point, investment banks needed to be able to raise capital to grow and access capital markets for their variety of activities. Law firms don't really need to do that.
4. 'Greed'. See the current situation at EY and their rumored IPO. The partnership at Goldman, for example, cashed out the enormous equity value of their underlying ownership when GS IPO'd. Every subsequent generation of "MD's" at GS, even the "Partners", are really nothing more than highly compensated employees of a publicly-traded institution. The money cow (the equity) has been cashed in. At remaining private partnerships, the equity is bought by new partners typically at some controlled internal value and upon mandatory retirement, the partner will sell the equity at the same price or maybe with modest appreciation back to new partners. The equity in this case is preserved as part of the partnership - and helps maintain the 'continuity' of the firm from one generation to the next.
I'm OP, accidently posted the thread anonymously. That's actually pretty fascinating - did some further research and the reasoning comes down to preventing conflict of interests, as having outside investors may divide an attorney's interest between his client versus his investor.
So weird that law is the only industry in which such a rule has stuck. You would think the absolute same thing could be said about Bankers or especially Doctors/Medical Companies (patients before profits, etc.)
Thanks for the info, very interesting! I also read in the UK they are thinking about repealing this and/or already have. Wonder if the USA does the same if it will open to flood gates to massive amounts of blockbuster M&A. If not, I contemplate whether litigation finance could be an alternative solution.
Thoughts on the law industry/being a lawyer/going to law school in Australia?
OP, would echo what the top-rated response said above. Also to add to/expand on their last point (“Greed”) there’s also the matter of staff retention - whilst junior lawyers are well-paid compared to the average worker, in comparison to partners they slave away for years for far far less money. So the “carrot” that keeps them motivated is partnership and $$$.
Whereas (as the above poster says) if the company goes public, existing partners are cashed out - but how do you incentivize future partners? If instead of making $2m a year they’re only getting a higher base salary, will they really slave away for 10+ years to get there? You could give them a very high base or offer them shares, but then public shareholders lose out - as you’re either diluting their stake with every new “partner” or paying the “partners” (who are now just employees) an outsized chunk of profits that should rightfully belong to public shareholders.
A couple of law firms have actually gone public in recent years (think there was a large one in Aus that listed?) and they have all delivered below-average to poor returns for public shareholders. As an IPO is great for existing partners wanting to cash out, but how do you then make money for both shareholders and new “partners”? I believe to retain staff these public law firms paid outsized portion of profits to senior lawyers, but then that means they’re terrible investments for shareholders. But equally on the other hand, why would people stick around to reach partner-level and bring in loads of business just to make money for shareholders?
Of course banks are able to make this model work - I think that’s mainly because bankers are paid a fair bit more (eg a BB MD without any equity makes as much in salary + bonus as a Big Law partner). But for law and accounting firms where non-equity employees are paid relatively little until they make partner, the public model doesn’t really seem to work.
Respectfully have to disagree with you here. Yes even junior lawyers are well-paid compared to most people - but the important thing is they have other options, eg going in-house at a corporate/F500 for instance. In-house counsel can quite easily earn $150k-200k to start and then many of them can progress to $300-500k over the years.
I mean the IB equivalent would be like saying people will stay in banking if suddenly there were no more future promotes to MD. Yes some would stick around being senior associates/VPs forever - but I would imagine the majority wouldn’t. They’d eventually go into corporate development roles/startups etc (even for a bit less money if it meant not having to work horrendous hours).
While many people would still remain in banking, without the long-term carrot of one day becoming an MD the turnover in banking would be way worse.
You are all missing the big picture - law firms need to safeguard their client lists/info - being a public entity would not be a good idea or bring confidence to clients.
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