Big Law Firms Shrink Equity Partner Ranks at Their Own Peril

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at how law firms perform when they add equity partners, even as non-equity rolls grow. Sign up to receive this column in your Inbox on Thursday mornings.

I’ve written before that the rate of growth in equity partnerships is one of the best predictors of a law firm’s long-term health.

I’m a believer in this simple counting statistic for a handful of reasons.

Growing equity partnerships signals that a law firm’s management is confident about the future. It implies success in the lateral partner market. It can boost associate and non-equity partner morale. And it usually indicates a firm is healthily growing revenues.

I wrote last year about these benefits. Yet new data show the largest firms, as a group, continue to shrink these ranks.

The total number of equity partners at the 100 top law firms by revenue fell by 1% last year, according to figures compiled by The American Lawyer. Meanwhile, the ranks of non-equity partners grew by more than 5%.

Firms that are in thrall to the allure of adding non-equity partners include Cravath, Swaine & Moore and Paul Weiss. While that doesn’t necessarily mean those firms will pull back on equity partners, similar changes among their rivals have already led to smaller equity partner increases.

Growing Vs. Shrinking

To demonstrate the long-term benefits of adding equity partners, I’ve created two hypothetical law firms.

One is Growing, Equity & Scale LLP. The other, Shrinking, Equity & Scale LLP.

Together, they are composed of the real-life 50 largest law firms by revenue in 2018.

The real-life law firms are sorted based on whether they grew or shrunk their equity partnership over the past five years. Growing, Equity & Scale is made up of the 27 firms that grew their partnership during that time, while Shrinking, Equity & Scale includes the 23 firms whose equity partnership dwindled.

The two firms don’t look much different when you focus on where they stack up today.

Here’s the current breakdown on Growing, Equity & Scale: In 2023, the law firm pulled in $2.2 billion in revenue, with each of its 1,442 lawyers generating $1.6 million in revenue apiece. Its 261 equity partners pulled in average profits of $4.3 million. All told, that meant the equity partnership was divvying up a profit pool worth more than $1 billion. (An explainer: These figures represent the averages of the 27 firms that grew their equity tier.)

And here’s the state of affairs for Shrinking, Equity & Scale: Last year, the firm did $1.9 billion in revenue, thanks to each of its 1,744 lawyers pulling in $1.2 million in revenue. The firm’s 272 equity partners brought home, on average, $3 million in profits. They divvied up a profit pool worth $764 million.

These two firms could reasonably compete for the same talent. Nobody would say either is on the brink of disaster. After all, these fake law firms are made up of the 50 largest law firms in the real world.

Zooming Out

The narrative changes pretty drastically if you zoom out.

Over the past five years, Growing, Equity & Scale has seen its revenue jump 53%. That’s nearly double the 28% gain experienced by Shrinking, Equity & Scale.

Although Growing has fewer lawyers than Shrinking today, it has a much better growth trajectory. Growing’s lawyer count has risen by 26% over the past six years. Shrinking is barely adding lawyers, having grown its headcount by 2.4% over a six-year span.

Of course, these figures are based on data that can incentivize firms to shrink their equity partner count to juice up their profits per equity partner metric. And a growing equity tier may be more of a result, rather than cause, of a financially healthy law firm.

Still, the results from this analysis might make law firm leaders think twice about the popular strategy of limiting entry to the firm’s most lucrative position—even if that trend shows no sign of fading.

No Panacea

By next year, there will likely be more non-equity partners than equity partners among the top 100 firms. While that isn’t a recipe for disaster, it’s also not a panacea.

Kirkland & Ellis, whose business model has been viewed as one reason why more firms are adding non-equity partners, has experienced tremendous growth in its larger non-equity tier, up 70% since 2018.

But the firm has also, with less fanfare, significantly expanded its equity partnership since 2018. It is one of only five firms to have grown that tier by 25% or more in that time. The others are: Holland & Knight, Goodwin Procter, Willkie Farr & Gallagher, and Wilson Sonsini.

Adding those equity partners has not held Kirkland back. The firm’s revenue has ballooned 90% since 2018, while profits per equity partner rose nearly 60%. And its “war chest"—the total profit pool its partners split—doubled to nearly $4.3 billion last year.

Law firm leaders who want their business to perform more like Kirkland’s likely can’t get there simply by adding non-equity partners. They must also promote or hire more talented lawyers into ownership positions.

Worth Your Time

On A&O Shearman: Mahira Dayal reports on what it will take for the new trans-Atlantic behemoth to compete with Big Law’s elite. And I wrote about how the other Magic Circle firms plan to grow in the US.

On Jones Day: Five Jones Day attorneys took to the US Supreme Court lectern this term, making it the firm with the most arguments, Kimberly Strawbridge Robinson reports.

On Houston’s Bankruptcy Court: A two-part Bloomberg Law investigation looked into former bankruptcy judge David R. Jones’ relationship with a local lawyer. James Nani and Ronnie Greene detailed the relationship and how four judges sealed a letter that contained allegations about corruption.

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