Cash and candour

It’s not alone in this, either – dozens of firms in the top 50 have done the same. The cash call used to be a rarity, and used to be big news. In 2009 it’s become commonplace.

But there’s a problem here. All of the above may be prudent management, as Cohen argues, but the rules of the game have tacitly changed.

Net income for both partners and associates is still high compared with the real world, but that neverthless masks some structural tensions. The number of deferred distributions and capital calls among firms outside the magic circle this year hint at a fragility that up till now has never quite been exposed.

Cashflow is all, and so demands on partners to bankroll the firm are getting more onerous. It won’t be long before we see a definitive move to corporate-style funding outside current norms; Bird & Bird’s debenture scheme on its conversion to LLP may not seem quite so quirky in a couple of years.

There is a consensus that compared to most other business organisational models, partnership is robust. Certainly it has distinct cultural advantages, but I’m starting to have doubts about its longevity outside the magic circle. Commoditisation, pricing, LPOs, associate-partner gearing, precarious capital base – law firms are only just coming to terms with these issues. And here’s another one with implications for the next decade: the fact that most law firms’ revenue growth in the noughties has simply piggybacked on an increase in chargeout rates to clients.

All of which makes me question whether most law firms as currently configured would really be of interest to private equity after all. Take away the bull market factor, and how many firms have actually reengineered their business and produced real growth?

Three years ago managing partners were seeing outside investment as a retirement cheque. But if you want to take private equity money, you have to make that money grow or you’re just forward-selling income. Doing well in a bull market doesn’t quite cut it as a management track record.