Law Practice Management

Law firms increasingly shun borrowing, relying instead on increased capital contributions

Law firms seeking to avoid bank debt are increasingly tapping their partners for greater capital contributions.

The American Lawyer confirmed financing data from 20 law firms and learned that seven of them do not borrow any money at all. They are: Dechert; Weil, Gotshal & Manges; K&L Gates; Day Pitney; Perkins Coie; Morgan, Lewis & Bockius; and Gibson, Dunn & Crutcher.

Six firms had increased capital requirements in the past few years, and several more were considering doing so.

“Attitudes have shifted remarkably since a decade ago, when borrowing by firms was on the rise, and banks found a willing audience for sales pitches,” the American Lawyer says. “After 2008, in particular, many firm leaders began to question the whole idea of bank debt.” The story quotes Perkins Coie managing partner Robert Giles. “After all the firms started to fail, starting with Brobeck, then Heller, we stopped borrowing from the bank,” he said.

K&L Gates had the highest capital contribution levels among the firms with confirmed financing data, the story says. The amount ranges from 35 percent to 60 percent of annual earnings; those with more seniority pay at the higher levels. The money is used for long-term expenses. The firm funds short-term cash needs with the help of a program in which lawyers voluntarily invest money in return for interest.

“We have $75 million in lines of credit,” K&L Gates chairman Peter Kalis tells the publication. “We’ve never used a dollar of it.”

According to a survey of 171 law firms by Citi Private Bank’s Law Firm Group, partner paid-in capital has increased by a third from 2007 to 2011, rising from an average of $229,000 to $303,000 per equity partner. The average for equity partners at the 20 largest firms surveyed increased from $423,000 to more than $500,000 over the same period.

A press release summarizes the American Lawyer article.

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