[February 28, 2013]

Law firms turn from banks to partners for financing, The American Lawyer finds

Law firm managers have been quietly shifting their financing strategies from dependence on bank debt to partner capital infusions, according to a study by The American Lawyer, published in the March issue and online at http://americanlawyer.com.

Interviews with leaders of dozens of the highest-grossing U.S. firms - the Am Law 200 - reveal a five-year movement toward internal financing tied to the recession and its accompanying string of firm failures. Of 20 firms for which details could be confirmed, six have increased partner capital requirements and several more are considering it. Seven firms - Dechert; Weil; K&L Gates; Day Pitney; Perkins Coie; Morgan, Lewis & Bockius; and Gibson, Dunn & Crutcher - no longer borrow at all for either long-term or seasonal needs.

For each o the 20 firms whose capital programs are profiled, The American Lawyer reports changes in capital level since 2008, current capital requirements, how capital is paid in and out, and debt structure and other cash-raising strategies. Partner capital on these firms' balance sheets varied widely, from under 10 percent to 52 percent of past year's earnings.

"In the end, partner equity capital can't be viewed in isolation," wrote The American Lawyer's Julie Triedman. "It's just one piece of a variety of techniques that firm leaders are using to free up capital on the balance sheet for various uses. Other techniques that firms say they are using in combination with partner equity include the maximum prepayment allowable of leases and other expenses and the depreciation of certain current-year fixed-asset expenses. To help meet short-term operating capital needs, many firms are back-loading distributions more heavily toward the end of the year or holding back final distributions several months into the next fiscal year, a sort of 'soft capital call'."

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