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Recently Greenberg made a Capital Call to its partners. Of course, the market reacted with an expected “Is this the next Dewey?”
My thinking – that is unlikely. Looking beyond the Dewey angle, I think there is a much bigger issue looming here. The issue: The extreme limitations on the ability of law firms to raise capital.
Firms can really only raise capital in two ways: capital calls to the partnership and debt.
Stepping back, you might question why this is an issue. Firms have been doing fine for the past 50 years living under this restrictive environment. Well obviously, things have changed. Firms must start behaving like a business. Absent that they will be going out of business. And healthy businesses view capital and debt as necessary tools.
When a business needs capital it has a litany of options – with everything from angel funding, venture capital, private equity funds, private equity offerings up to IPOs. Each method of raising capital is suited for different situations. Business restricted to only raising capital from existing owners would have a difficult time competing in any market.
Which brings us back to law firms. The Bar is still operating in a world where they think money does not influence a law firm’s decision making. Or at best, they think money’s influence can be kept in-check by requiring that it come from licensed lawyers, given their ethical standards. IMHO – the prohibition against non-lawyer ownership survives in a dreamland where the legitimate needs of a business to raise capital, needs that ultimately serve a client’s best interest, are patently bad since the money comes from ‘tainted sources.’ The Bars’ fear that the influence of money will lead to client-harming decisions is leading to an environment ripe for client-harming decisions.
Law firms trying to stay competitive so they can serve their clients are forced in to odd decisions, like the Greenberg Capital Call. This is not to say that Greenberg is in dire straits, but only that they have one option for raising capital and they just exercised it. If they need additional capital for client-facing KM tools or the like, they will have to make another Call (not likely), opt for more debt (not very likely) or go without (most likely).
The bottom-line here is that law firms are extremely limited in the ways they can invest in their business to better serve their clients. And this limitation is held under the guise of protecting clients.
Again –the apparent safe path is the one leading to bad outcomes.