Private equity’s workaround to buy law firms

0:01Good morning from the Financial Times. Today is Friday, February 13th, and this is your FT News briefing. The U.S. plans to roll back some of its tariffs. And how do you buy something that's not for sale? We look at one strategy to acquire a storied U.K. asset manager, and we see how private equity is taking stakes in American law firms. It's the last sector, basically, of the professional services that private equity has not come into. And they have a lot of money and they want in. I'm Victoria Craig, and here's the news you need to start your day.

0:46U.S. President Donald Trump plans to scale back some of his steel and aluminum tariffs. It comes as sources say administration officials believe the tariffs are hurting consumers by raising prices for food and drinks packaging. People familiar with the matter say the administration plans to exempt some items on the tariff list and prevent new ones from being added. Instead, sources say the administration will launch more targeted national security probes into specific goods. The president is battling an affordability crisis ahead of the November midterm elections. Research from the Federal Reserve Bank of New York found U.S.

1:23businesses and consumers paid nearly 90 percent of the cost of his tariffs last year.

1:35British wealth manager Schroeder said on Thursday it's being taken over by U.S. asset manager Nuveen. It's a deal that would end the independence of one of the city of London's most historic names. And it would be the latest blow to the domestic market. But before the deal was announced, Schroeder's boss gave the U.K. Treasury a ring. The call was to reassure policymakers of the company's commitment to the nation's capital markets. Here to explain what all of this tells us about the industry and the future of London as a financial center is the FT's Robin Wigglesworth. Hi, Robin. Hi, Victoria.

2:09How are you? I'm good. Thanks for being here. So it was less than a year ago that Schroeder's CEO insisted that the company was not for sale. Just tell us a little bit about Schroeder's and why it's had this change of heart. Well, I mean, the Schroeder's family's been a fixture in the city of London for a very long time. And sort of one of the more famous businesses in the city, and frankly, one of the few remaining of the old names like Warburgs and Casanova that have been gobbled up by foreign banks and investors over the years. And it's been a successful business, but it maybe kind of found itself in this, what people call the muddled middle or the valley of death, where it's not a small, hot, sexy boutique in private equity or private credit, but it's not one of the massive American juggernauts either.

2:59And that's been a really tough spot to be in. So the family got a good price and the time was right, I guess. So they just decided to sell it. And there's been a little bit of consternation over the buyer, which is an American firm. What can you tell us about Nuveen? I think Nuveen is probably one of the better buyers they could hope for. It's a very old American firm, also started by a family, a guy called John Nuveen over 100 years ago, that's now owned by TIA, which started off as the pension system for American professors. And, you know, it does look like a pretty good marriage because Naveen is very American-centric and Schroeder's, frankly, has a very tiny business in the US and is bigger in Europe and the UK.

3:40So actually, I think if I was working at Schroeder's, this is close to one of the ideal acquiries I could think of if I was going to get bought up. What does this deal say about the future of the city of London? and really the city as a financial center? Well, nothing immediately. Because, I mean, foreign firms have been acquiring pedigreed UK names for a long time, and London has continued to thrive. Its skill has been marrying the best of emerging markets of Europe, of the UK and the US. Naveen also doesn't have a big European business or a European or UK business at all, pretty much. So it is saying now that Schroder's is going to be the head of its international operations.

4:23It's going to be bigger in the UK than it is in the US. So this could be a great thing. But, you know, Schroder's is a big listed UK asset manager. There have been fewer companies going public and more and more companies going private for a while. And, you know, just as this general vibes based thing, it's not great, right? And Robin, what does this deal mean for competition in the industry? Will this newly combined company be able to rival big names in this industry, like BlackRock, for example? Well, it's important to remember that even Naveen and Schroeder's combined won't actually make it into the top 10 of the asset management industry.

5:07It still is slightly behind the likes of Amundi and Allianz in Europe and far behind a capital group or a state street or Fidelity, let alone a BlackRock or Vanguard, which are just juggernauts. But it does show how these mid-sized players fear that to survive, they need to be far bigger than we ever thought was necessary before. That a trillion dollars is kind of table stakes in the asset management industry now. So this is probably not going to be the last big deal we see here. we're probably going to see a lot more over the next few years. Robin Wigglesworth is the editor of the Financial Times finance blog, Alphaville.

5:48Thanks so much for your time, Robin. Thanks for having me on.

5:57Goldman Sachs General Counsel Kathy Rumler told the FT she will resign on June 30th. Her departure comes after the U.S. Department of Justice released a tranche of documents last month that revealed the extent of her ties with sex offender Jeffrey Epstein. Documents showed she had extensive discussions with him between 2014 and 2019. That was years after he pleaded guilty to state charges of soliciting prostitution from a minor. Rumler joined Goldman in 2020. Rumler has said she regretted ever knowing Epstein and had, quote, no knowledge of any ongoing criminal conduct on his part. She said media coverage about her links to Epstein had become a distraction from the bank.

6:36On Thursday, she told the FT she made decisions based on the information available to her and that she has an enormous amount of sympathy and heartache for anyone who Epstein hurt. The company's chief executive, David Solomon, meanwhile, said in a statement he accepted Rumler's resignation. He added she, quote, will be missed.

7:01private equity has become a major investor in many industries real estate retail hospitality even sectors where rules have traditionally prevented outside investors like health care and accountancy law firms also fall into this latter category because ethics rules are built to prevent commercial considerations from tainting legal advice but as is sometimes the case where there's a will, there's a way. And the FT's U.S. accounting editor, Stephen Foley, has been finding out how to buy a law firm when you're not allowed to buy a law firm. Hi, Stephen. Hi there. So if we're asking you this question, it means there must be an example here.

7:39So what set off this latest reporting mission for you? Where there's a will and where there's money, there's a way. All the things. Yeah. Well, as you said, I'm the accounting editor, right? So I've been following Private equities march in the accounting sector for several years. And the way it's done in the accounting sector is you ring fence the audit business from the rest of the business. You keep everything that has to be described under the ethics rules as the practice of law. You keep all of that in one core law firm, but everything else you put into an organization called a management services organization.

8:17Now that's the back office, that's the technology. And you could also put the brand into that business and then license it back to the law firm. And law is a very significant sector of the U.S. economy. And it's the last sector, basically, of the professional services that private equity has not come into. And they have a lot of money and they want in. And so what are some of the firms that private equity is interested in? Well, a lot of the deals that have happened up to this point are very, very small. They're very, very regional, and they have tended to be in the personal injury law space. But what we've seen in the last few months is an explosion of interest in this model, in this idea, amongst full-service law firms.

9:03There's a very interesting white-collar defense firm called Cohen & Gresser in New York, which has gone public and said that it is already talking with bankers about trying to bring in private equity. What has caused this growing interest by private equity in law firms? I think there's a couple of reasons. As I said at the outset, this is kind of the last frontier for private equity. It's the last unconquered territory. People have made money out of being the first into accounting. So you want to be the first into law as well. If you're a private equity partner thinking, what can I do with my career?

9:40So there's that. I think there's also some changes in the practice of law, too. This is an industry, like a lot, right, that is thinking a great deal about how AI is going to disrupt the technological investments that law firms have to make. So part of private equity's pitch is that they can bring capital to law firms that will help them invest in this new technology at a time when some of these professional services are becoming just a little bit more capital intensive because of that investment requirement. Gosh, I didn't think we would be talking about AI in this interview. Sorry. Surely you talk about AI in every interview.

10:14Almost every day. So, Stephen, I guess just the last question is, is there a concern that this boom in private equity involvement in law could somehow change or reshape the industry in a meaningful way? Well, for sure. And look, I have to say right at the outset, there's been a small number of deals so far of small firms. If we see a very big law firm exploring this idea, then we could see the floodgates open. Now, you don't have to look very far in the comments section on the articles that I've been writing about this over the last few months to find FT readers who worry about the impact of private equity on law firms and whether or not the commercial drive and the efficiencies that private equity will want to bring to these firms could compromise the practice of law.

11:00There's plenty of people who see private equity's investment in healthcare in the U.S., for example, as having been a negative for the quality of service. So that's one aspect also to keep an eye on as well. Can always rely on the FT comments section for the skepticism. Stephen Foley is the FT's U.S. accounting editor. Thanks for diving into this for us, Stephen. Thanks so much. You can read more on all of the stories in today's podcast for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back next week for the latest business news. The FT News Briefing was produced this week by Julia Webster, Sonia Hudson, Fiona Simon, Mark Filipino, and me, Victoria Craig.

11:42Our show is mixed by Alex Higgins and Kelly Gary. We had help this week from Peter Barber, David DeSilva, and Gavin Kallman. Our executive producer is Topher Forges. The FT's global head of audio is Cheryl Brumley. And our theme song is by Metaphor Music.

12:01Thank you.