The Multimillion-Dollar Expense Private Equity and VC Firms Are Under Pressure To Cut

“More than half of VCs surveyed do not actively manage a cost that averages $7.5 million per firm annually,” according to Apperio.

Mark Kauzlarich/Bloomberg

Mark Kauzlarich/Bloomberg

Private equity and venture capital firms are seeking to reduce their legal bills amid declining deal volume and rising expenses, according to surveys of 200 private market professionals.

The two surveys included responses from in-house legal teams at 100 private equity firms and 100 venture capital firms in the U.S. and U.K. Both groups indicated that scrutiny on legal spending has increased over the past five years, a trend that they expected to continue through 2022.

The surveys were conducted by research firm Coleman Parkes on behalf of Apperio, which provides analytics to help clients manage their legal spending.

“The results reveal a similarly challenging picture: multimillion-dollar annual legal bills, increasing scrutiny on legal spend, and pressure to cut costs,” Apperio said in a report on the findings.

According to the report, private equity respondents spent an average of $9.5 million on legal fees last year. Venture capital firms, meanwhile, averaged $7.5 million in legal bills.

But the surveys found that a majority (55 percent) of senior legal leaders at venture capital firms believe that their companies did not make efforts to manage their legal spending. Among private equity respondents, 42 percent did not think their companies tried to manage legal costs.

“It’s concerning to see that more than half of VCs surveyed do not actively manage a cost that averages $7.5 million per firm annually,” Apperio said in the report.

The two main sources of legal spending, Apperio said, were merger and acquisition deals and fundraising. According to the report, fundraising fees eat up 3.6 percent of the value of venture capital funds and 4.3 percent of private equity fund assets.

[II Deep Dive: The ‘Inconvenient Fact’ Behind Private Equity Outperformance]

This year, however, both private equity and venture capital firms reported plans to cut back on legal spending in response to pressures including increases in other costs and reduced deal volume.

A majority of private equity respondents (53 percent) said they expected to reduce external legal spending by between 6 and 10 percent, while 15 percent aimed to cut costs by more than 10 percent. Similarly, 60 percent of venture capital respondents had targeted a legal budget decrease of at least 6 percent.