Third-party investment in law firms looms as CB Equity Partners launches new fund

The first third-party equity-style investment in a UK law firm could be only months away, according to private equity specialist Geza Toth-Feher, a partner at private equity advisory boutique CB Equity Partners.

The private equity house is seeking investors for a new fund, LexCap, which launched earlier this year. It is aimed specifically at investing in law firms by providing quasi-equity in the form of non-recourse debt or mezzanine capital. The business is also looking to capitalise on the expected relaxation of ownership rules in the UK post-Clementi. When the review becomes law, LexCap will seek to provide equity in what its memorandum describes as "a unique asset class".

CB Equity is hoping to raise $120m (£66.1m) for investments in small to mid-sized firms. The money will be used to acquire teams, fund new offices or restructure compensation systems.

Its model differs from bank debt in that it includes risk-sharing elements and would be non-recourse to the partners. "Law firms have traditionally funded themselves cash on cash, with no borrowings or leverage whatsoever," the LexCap memo states. "In the legal community, some partners of law firms still wrongly consider the absence of borrowings a sign of extraordinary health."

Toth-Feher is also of counsel with US firm Paul Hastings Janofsky & Walker.