Study Finds Venture Capital and Private Equity Firms Share Common Woe: Pressure to Cut Legal Costs | LawSites

Study Finds Venture Capital and Private Equity Firms Share Common Woe: Pressure to Cut Legal Costs | LawSites

In July, I reported here on a survey of private equity firms in the U.S. and U.K. that found that a softening market for M&As and fundraising, exacerbated by the COVID-19 pandemic, was causing them to scrutinize their external legal spend more carefully than ever before.

Now, the sponsor of that survey,  the spend tracking, management and analysis company Apperio, has extended that research to venture capital firms, analyzing the situation confronting senior legal stakeholders there.

This new study, Private Equity and Venture Capital:  Two Industries United by Lackluster Legal Spend Management, concludes that, while VC and PE firms may differ in many ways, they share the predicament found in the earlier study of increased pressure to cut legal costs as business revenue from M&A and fundraising declines.

In fact, this new survey finds that VC firms in the U.S. and U.K. are likely to be under even more perceived pressure to cut costs. It also found that both PE and VC firms are concerned about their law firms’ lack of billing accuracy, timeliness and predictability.

Further, like that earlier study, this one finds that the majority of these firms do not use legal spend management technology. Rather, 91% of PE firms and 76% of VC firms track legal spend by manually collecting data and using Excel spreadsheets.

In 2019, the study reports, PE companies spent an average of $9.5 million on legal fees while VC firms spent an average of $7.5 million. For both VC and PE firms, the primary spending was on M&A and fundraising.

VCs typically spent less than PEs for a variety of legal services, specifically 21% less on external legal counsel, 22% less on M&A legal costs, and 16% less on fundraising.

However, even though VCs are paying less than PEs for most legal services, 55% of them said they do not trust that their law firms are billing them accurately.

At both PE and VC firms, scrutiny of legal costs for fundraising rose by 33% in the past five years. Scrutiny of external legal spend generally rose by 27% for PEs and 32% for VCs in the past five years. It is poised to climb further to 29% and 35% respectively by 2022, the study found.

“What’s particularly striking about this new data set,” the report says, “is that senior VC leaders anticipate scrutiny on legal spend to increase even faster than their PE colleagues, albeit from a slightly lower base.”

The majority of those who responded to the survey believe their budgets will be reduced this year – 69% of VC legal stakeholders and 85% of PE counterparts — with 60% of VCs expecting to reduce by over 6%.

Both VCs and PEs expressed significant concerns about their legal bills, with many saying they are “surprised” by them. Just 54% of both VC and PE respondents trust their external legal counsel to bill them promptly, and half of VC legal leaders do not think their legal spend is transparent.

The study also finds that the majority of VC and PE legal leaders have faith in the predictability of legal spend, but VCs less so than PEs. Seventy-six percent of VC senior counsel report that their legal spend is predictable, compared to 92% in PE.

Even so, however, the study suggests that there is significant dissatisfaction around the day-to-day management of outside legal costs. There is also a need for after-the-fact negotiation after work is completed and bills are submitted to retroactively create more consistency.

This process is time-consuming for senior legal stakeholders and disappointing for external counsel who experience write-downs and delays in payment for services rendered in good faith, the survey indicates.

Interestingly, 75% of VC leaders said the introduction of procurement skills had catalyzed increased pressure on legal spend, compared to 65% of PE counterparts. Also, 51% of VCs had introduced procurement leads/teams (PEs were slightly less at 48%), showing that VC firms have made increased investment in procurement. This may shield them from the impact of deal-volume downturns because expenses have already been reduced by procurement experts, the report suggests.

As with the July survey, this one was commissioned by Apperio and conducted by the independent research firm Coleman Parkes. The firm surveyed 100 legal stakeholders in the U.S. and U.K. at VC firms with an average of more than $9 billion under management across multiple funds.

The bottom line of the study, says Nicholas d’Adhemar, CEO and founder of Apperio, is that it is imperative for VC and PE legal leaders to get deeper visibility into their legal spend so that they can more proactively manage work in progress across outside firms.

“Many senior VC and PE legal stakeholders are not adequately prepared to proactively manage the legal spend cost reductions that they are anticipating,” d’Adhemar says. “They’re held back by reliance on Excel and its inherent limitations.”