Akin Gump Strauss Hauer & Feld, the international law firm with one of the largest lobbying operations in Washington, is moving to bolster its cash reserves by expanding the pool of lawyers required to take an equity stake.
Top U.S. law firms are increasingly asking their partners to contribute more capital than in years past, according to a recent survey of firm managers. Between 2007 and 2011, partner capital contributions jumped 32 percent, from an average of $229,000 to $303,000, according to a survey of 171 law firms by Citi Private Bank’s Law Firm Group. Meanwhile, debt levels dropped steadily between 2009 and 2011.
“As banks have begun to tighten up lending requirements for law firms, it’s putting pressure on law firms to have capital or not borrow as much,” said Tom Clay of the legal consulting firm Altman Weil. “You’ll see more of this happening over the next year or so.”
Operating a law firm is more capital-intensive today than it has been in the past, Clay said. Firms must invest more in business development, new technology and lateral hires — highly paid star lawyers whom firms poach from competitors, often by offering big pay packages.
“Those things add up pretty quickly and put pressure on budgets,” Clay said.
Akin Gump, which has about 250 lawyers in the District, has what firms call a two-tier partnership, made up of equity partners and non-equity partners. Equity partners receive a portion of the firm’s profits, while non-equity partners — also called “income partners” — are salaried employees. Starting January 2014, the approximately 75 non-equity partners at Akin Gump will have to “buy in” to the partnership — meaning they will have to contribute what will probably be at least tens of thousands of dollars each.
At most law firms, only equity partners contribute capital, and the amount is typically a percentage of a lawyer’s earnings, which can vary greatly depending on their book of business. Capital contributions are usually a one-time contribution that gets returned when an attorney leaves the firm, either through retirement or for another job. Law firms also periodically ask partners to kick in additional capital on top of their initial contribution to pay for expenses, such as technology upgrades.
By shifting non-equity partners to equity, Akin Gump is widening its source of partner capital, generating cash that is not tied to bank debt.
The move was both cultural and financial, said Akin Gump’s chairman, Kim Koopersmith.
“We felt it was culturally important and desirable to have all our partners have a vested interest in the success of the firm,” she said. “From a financial point of view, it was certainly beneficial to have additional capital in the firm.”
Even though all partners will be contributing capital, the firm will maintain a two-tier partnership because current non-equity partners will be asked to contribute a lower percentage of their earnings than current equity partners.
The capital will be collected in April 2014. Koopersmith said that the exact amount has yet to be determined, and that there are no specific plans for what the capital will be used for. Non-equity partners’ compensation after the switch is not expected to be less than their current compensation, she said.