Non-lawyers taking a stake in firms? For California, it’s not if, but when, say capital investors
The traditional law firm partnership model is under strain as firms seek new sources of capital, with litigation funder Burford Capital recently indicating it is pursuing equity investments through managed services organizations (MSOs) that skirt non-lawyer ownership prohibitions. It’s only a matter of time before these new entities appear on the stock market, according to Burford’s chief development officer, Travis Lenkner.
Lenkner emphasized that it is law firms, not Burford, driving demand for new financial solutions. Firms face intense competition, prompting them to explore alternatives to traditional debt. Burford “is quite far along in the process” of negotiating partnerships with firms, he said in a recent interview.
By his telling, two major pressures are fueling the demand for outside capital and forcing firms to face “probably the greatest point of change in the profession” ever. First, lawyer loyalty has eroded: Lockstep compensation and lifetime partnerships have given way to expensive talent wars and costly retention packages. Second, technology is putting the “final nail in the coffin” of the billable hour.
In effect, firms are having to invest in 21st century modernization initiatives while being constrained by a 19th century capitalization model, Lenkner said.
“Law firms are looking at the challenges they face and wanting options besides straight debt,” he added.
Skirting Restrictions
Most U.S. states, including California, prohibit non-lawyer ownership of law firms under rules like California Rule of Professional Conduct 5.4. Burford proposes bypassing this restriction by investing in spun-off MSOs.
Lenkner noted that many law firm functions – from IT to paralegal work – are not themselves the practice of law and could be provided by a non-lawyer-owned entity. An MSO would then charge the law firm a fee for back-office services.
“When you start to go down the list, there are a lot of parts of a law firm that are a result of vertical integration, and they don’t have anything to do with the definition of the practice of law,” he said.
Burford’s approach involves “merely bifurcating the business that today is the law firm into practice of law on the one hand and everything else on the other hand.” He confirmed the firm is in talks with law firms exploring this bifurcation. “This isn’t complicated from an attorney ethics standpoint … no one, in the vast majority of states where outside investment in law firms is prohibited, least of all, Burford, proposes to own a stake of a law firm in those states,” he said. “Today, a law firm is the practice of law and a whole lot more; we’re proposing to invest only in the whole lot more and not in the practice of law itself.”
He claimed such investment structures already exist in the U.S., particularly among smaller, closely held firms, though they are not yet widespread in larger practices. Lenkner said any Burford deal in 2025 “by no means would be the first” such investment. These structures do not require regulatory approval, and awareness is growing as they move upmarket, he said.
Cost-cutting Ahead
Legal strategist Peter Zeughauser noted that, regardless of professional rules, external investors in law firms face the challenge of generating returns without compromising the cash reserves firms need to retain high-paid partners. “Nearly all Big Law firms operate on a cash basis,” to keep their partners from being picked off by competitors said Zeughauser.
“Except in the very highest performing firms that theoretically pay above market, there’s no money left over to pay an outside investor a return on its investment, much less a preferred return like litigation funders are accustomed to reaping,” he added.
He explained that, “This is where the MSO model would be attractive. [It could] create incentives for the admin side of the practice to cut costs. I’m not sure why the partners themselves wouldn’t want to own the MSO themselves, but I suppose a very savvy law firm operator may be able to convince the partners that they’re better off doing what they do best and leave the buying of paperclips and investment in software, including AI, up to business professionals.”
Zeughauser also noted that “if there is a needle to thread for outside investors,” Jonathan Molot and Chris Bogart, Burford’s co-founders were likely to thread it.
The “Arizona Approach”
California’s approach to regulating external investments in law firms contrasts sharply with Arizona, which abolished the traditional ban on non-lawyer ownership in 2021 and created a licensing system for Alternative Business Structures (ABS). This allows outside investors to co-own and share profits with law firms under court approval. Firms must designate a compliance lawyer but otherwise operate like traditional firms.
California has resisted similar reforms. Earlier this year, state legislators introduced a bill, AB 931, which would ban California lawyers and firms from sharing legal fees with out-of-state alternative business structures like those permitted in Arizona. The State Bar declined to comment on Burford’s plans, noting the potential for future complaints related to them.
Lenkner said Burford is not exclusively pursuing the MSO structure and would be open to ABS investments where permitted. “This is not picking a lane to the exclusion of others ... in Arizona, ABS? Yes. A services organization in one of the basically 49 other states? Yes,” he said. He added that ABS remains rare in the U.S., and market solutions will likely emerge before nationwide adoption.
Public Listings on the Table
Burford is agnostic to practice areas and firm sizes, excluding contingency-fee practices. The firm does not seek controlling stakes in MSOs. “We’re not purporting to buy control stakes. This is not a private equity roll-up strategy. What we’re looking for, more than a practice group or a size, is strategic alignment with firm leadership and the partners and their plans for the future, and whether we think those are attractive from an investment standpoint, particularly because we won’t control you,” Lenkner said.
Asked about the market outlook for MSOs in five to 10 years, Lenkner was bullish. “In the market story here, there will be public companies that do this or a public company that is a portfolio of holdings in these tied service companies ... There will be publicly traded law firms in the U.S., just as there are in the U.K. and other markets. This is not if, but when. Our interest is in helping the market move in that direction but doing so responsibly and as a capital provider and investor, with a developed understanding of and appreciation for the legal ethics framework and the reason all of this works the way it does,” he said.
-Jack Needham, Associate Editor, Daily Journal
The Los Angeles/San Francisco Daily Journal is a publication for lawyers practicing in California, featuring updates on the courts, regulatory changes, the State Bar and the legal community at large.
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