McDermott’s Outside Investor Talks Augur Big Law Transformation

The possibility of outside investors taking a stake in McDermott Will & Schulte nudges rivals to consider a similar step and possibly change the way the legal industry operates.

Small firms have already begun to embrace the idea of having non-lawyer investors own back-office operations, said Fredric Litwiniuk, chief growth officer at Litco LSO. His Phoenix-based company handles functions such as accounting, technology, and marketing for three firms and plans to add two more by the end of the year, he said.

But McDermott’s possible embrace of outside investment as a large law firm “is incredibly meaningful for the industry,” Litwiniuk said in an interview. It “could be something that paves the way for a lot of other people.”

McDermott’s chairman acknowledged Nov. 12 that the firm is “fielding inbound interest” and “we always listen to new ideas,” while stressing talks were preliminary. His comments sent shockwaves through the industry because the biggest law firms for decades have resisted having outsiders take stakes in their operations. Rules in all but a few states that require lawyers to own firms have further complicated prospects for investors.

The McDermott approach reportedly under consideration would get around non-lawyer ownership prohibitions by splitting the firm into two businesses. One would be lawyer-owned and advise clients, and the other would be a so-called managed service organization for administrative tasks and be run by an outside investor.

Should McDermott close a deal, it would “legitimize and validate” the MSO model for law firms, said David Holt, a lawyer that advises on such structures. The law firm would gain a source of funding other than partner capital to upgrade administrative functions and lawyers could focus on serving clients, he said.

Jordan Furlong, a legal sector analyst and forecaster based in Ottawa, Canada, said that while McDermott’s consideration of the model “would at least encourage and accelerate conversations in other firms,” the lawyer owners need to understand what’s at stake.

“This is not getting another line of credit from your bank,” Furlong said. “You are severing a significant chunk of your law firm and handing it over to a third party. That is not a decision I would take lightly if I were running a law firm.”

A McDermott spokesperson didn’t immediately respond to a request for comment. The firm chairman, Ira Coleman, in his Nov. 12 statement said that “we’re excited to learn from other leading organizations as we challenge the status quo.”

Private Talks

McDermott formed out of the combination of two legacy operations this year with a combined revenue of $2.8 billion in 2024. While rankings by the American Lawyer for 2025 have not yet been released, the firm’s revenue will likely place it the 20 largest firms in the US by that measure.

That such a large law firm has publicly acknowledged outside investment considerations is rare. Still, there have been ongoing industry considerations under the surface.

“From our conversations with leading global firms, it’s clear that larger, more sophisticated firms are actively exploring how to use MSOs to secure long-term competitiveness,” said Travis Lenkner, chief development officer at Burford Capital, which is interested in working on alternative models with law firms.

Big capital providers have flocked to Arizona, one of the few states that have allowed non-lawyer ownership of law firms. Litco LSO’s customers are small to midsize firms in personal injury and wills and estates law based in Canada and the US. The company also has an alternative business structure in Arizona. It has a significant minority investment from the Canadian Business Growth Fund, but Litwiniuk declined to specify the amount of that stake.

Private equity already has a footprint in law firm’s vendor relationships, evidenced by firms such as Renovus Capital.

Renovus, a Philadelphia-area private equity company with over $2 billion in assets across its sector-focused funds, announced this week that it acquired three organizations that provide back office services in the legal space and will combine them into one company. With the acquisitions, Renovus has outsourcing contracts with the majority of the AmLaw 200 law firms, said Lee Minkoff, a managing director at the company.

“All major law firms are having these conversations,” Minkoff said. “They’re not saying we should do it, they’re saying, well, we need to learn what it means and what it looks like and what others are doing.”

Ethical Worries

Part of the concern for law firms that team up with non-lawyer entities are the ethical boundaries involved. An MSO deal with private equity would have to be structured to avoid breaching the profession’s prohibition against fee-sharing with non-lawyers, said Stephen Younger, former president of the New York State Bar Association and a senior counsel at Withers.

“They clearly cannot share legal fees, which is the bulk of the revenues of a firm like McDermott,” Younger said.

The dynamic between law firms and non-lawyer investment is so new and radically different, it’s difficult to know the end game, Furlong said. “We’re very early in a process that, if it really takes off, will be transformative of legal services in the United States,” he said.

Minkoff said “there’s been a lot of chatter in the market” around private equity finding a way to invest in law firms through the MSO model.

“I do think the MSO transactions will begin to happen in Big Law,” he said. “I thought it was a couple years away. I think it could be potentially sooner.”

— With reporting by Justin Henry.