John Quinn Sees Big Law Investor Deals as States Ponder Bans

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at whether Big Law firms will take investment from private equity funds. Sign up for Business & Practice, a free morning newsletter from Bloomberg Law.

Quinn Emanuel’s John Quinn told me outside investors will ultimately own a slice of Big Law firms, but legislation winding through state courthouses could snuff out the ability for founders like him to cash in.

Law firm founders traditionally get profit draws but can’t sell the business as those in other industries can. Instead, the founders retire and leave the value of the business to the next generation.

But there’s a lot of money on the table for trailblazing founders if they manage to capitalize law firms in the mold of non-legal industries.

For Quinn’s part, it’s hard to envision someone better positioned to benefit from outside investors buying into Big Law firms. He started Quinn Emanuel 40 years ago and has built it into a business pulling in nearly $3 billion in annual revenue.

To be clear, it is against professional ethics rules in the vast majority of states for non-lawyers to own law firms. But that hasn’t stopped the idea from making its way to Quinn.

“They’ll say, you know, you’ve created this enterprise,” Quinn told me in a recent episode of our On The Merits podcast. “You do $2.5 to $3 billion in revenue at very healthy margins. If you could capitalize that and get even a conservative multiple, it’s worth $10 billion-plus as an enterprise. They try to paint the picture of, you know, dollar signs raining from the sky.”

Quinn’s timing may position him to be among the first Big Law founders to do something different: Sell equity (or something like it) in the firm to outside investors.

The concept he thinks will ultimately work out is called a management services organization, or MSO. That vehicle would be owned by outside investors and contract with a law firm to receive revenue for its back-office services. The law firm would get a chunk of cash to invest in growth and technology, or to compensate longstanding partners. Proponents of the structure say it can be done without changes to professional ethics rules for lawyers.

Quinn didn’t rule out his firm doing such a deal, while noting that there hasn’t been a fulsome discussion of it among his partners. He said he didn’t know how that hypothetical discussion would go. But, more broadly, he said the rules ultimately will change to allow more creative ownership structures.

At the moment, though, the legislative tide is beginning to turn against the idea.

Lawmakers in states including Illinois and California have introduced bills that would severely limit the creativity of MSOs. The Illinois proposal, introduced last month, would prohibit private equity funds or hedge funds from charging any amount to a law firm that is based on the fees, revenues, or profits of the legal operation.

The bill is widely seen as a reaction by trial lawyers to restrict personal injury law firms from using the investor model to pay for advertisements that generate cases.

Trisha Rich, a partner at Holland & Knight who represents clients on these types of deals, said the Illinois legislation is troublesome as currently drafted. If it becomes law, she said it will be challenged on the basis that the Illinois judiciary, not its legislature, regulates attorneys. Lawmakers may amend the bill to limit some of the problems, she said.

Regardless, she is confident that one of the 200 largest law firms by revenue will complete an MSO deal within the next 12 months.

“Mr. Quinn’s view that it is coming I think is accurate,” Rich told me.

Quinn also raised the concern that doing a deal could be seen by partners as allowing senior lawyers to “cash out.” Rich also notes that similar deals done by personal injury firms have been a way for law firm founders to do just that.

Big Law firms can mitigate such concerns by how they use the cash, she said. Rather than paying large sums to existing partners, big firms are likely to use the money to pursue growth strategies.

“When those Big Law firms start to transact, it’s just going to be a different thesis than what you’re seeing in the personal injury space where founding personal injury attorneys are using these as liquidity events,” Rich said.

Still, there are plenty of doubters. I’ve reported before on a litany of Big Law managing partners who were cool to the idea when large litigation funder Burford Capital publicly proposed it. A personal injury lawyer who drafted the Illinois bill said he did so after hearing what he described as a “chilling” presentation on law firm MSOs by an executive at Burford.

Dai Wai Chin Feman, a managing director at litigation funder Parabellum Capital, said he is skeptical that deals with large law firms will happen.

“You would have to change the rules for it to work,” said Feman, who also serves as US chapter chair of the International Legal Finance Association. “And in response to all this PR, the rules may change to prevent it.”

Worth Your Time

On Deals: Sullivan & Cromwell and Gibson Dunn & Crutcher catapulted to the top of Bloomberg Law’s league tables, thanks in large part to their work on Elon Musk’s combination of SpaceX and xAI, Mahira Dayal reports.

On Kirkland: The law firm is hiring 10 lawyers from Latham & Watkins, led by energy partners Christopher Peponis of Houston and New York-based Hamad Al-Hoshan, Eric Killelea reports.

On Wachtell: Wachtell Lipton Rosen & Katz is advising OpenAI on its latest fundraising round ahead of the artificial intelligence giant’s potential IPO later this year, Meghan Tribe reports.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.