Law Firm Outside Capital: Survival for Mid-Market Firms

Caught between global megafirms and nimble boutiques, mid-sized law firms are confronting structural limits on growth, risk and investment. Outside capital – once taboo – is increasingly viewed as a tool for survival rather than a threat to professional identity.
Mid-market law firms don’t usually talk like venture-backed startups. They talk like partnerships: about culture, client relationships, and the discipline of living within what the firm can earn and distribute by year’s end. But the legal market is pushing even the most traditional firms toward a more corporate vocabulary – capital stacks, liquidity, investment horizons, risk tolerance, and increasingly, outside money.
The pressure is becoming especially acute in the middle of the market – firms with fewer than 200 attorneys and a limited geographic footprint. One high-end recruiter who regularly places large books of business at the biggest firms told me glumly last week that, in an era of cross-border mega-law firms, these regional players must take a harder look at themselves.
“What is their value proposition? How do they compete? What is their market positioning? What is their true goal? I don’t know,” the recruiter, Larry Watanabe of Watanabe Schwartz, said.
Big Law can pay for technology, lateral growth and geographic reach out of current revenues. Small firms can sometimes remain nimble enough to dominate niches. Mid-sized firms, by contrast, can feel squeezed – large enough to need scale, systems and staying power, yet not large enough to fund every strategic move internally without turning the partnership into a perpetual capital call.
That squeeze is why a once-esoteric question is becoming practical, even urgent: could mid-sized firms benefit from taking on outside investors – and, more immediately, from partnering with litigation funders to spread risk?
There are different paths toward “outside investment.” Some involve altering ownership rules so nonlawyers can hold equity in law firms. Others rely on structures that keep ownership with lawyers but bring in external capital through service companies or financing arrangements. And then there is litigation finance, which doesn’t buy the firm but can, in effect, underwrite the risk of its most expensive bets.
What unites these approaches is an attempt to solve what Crispin Passmore, a former U.K. legal regulator who now advises U.S. firms, describes as a structural problem.
“There’s three challenges that law firms faced in 2025, I think,” Passmore said. “One is technology. Two is how do you attract and retain talent, and third is how do you grow – how do you grow fast enough to meet the needs of your clients.”
“It is really difficult to meet those challenges if you distribute all of your money at the year end as profits to partners,” he added. “You distribute your balance sheet to zero, you can’t have long-term investment.”
In that framing, the mid-sized firm’s issue is not a lack of ambition. It is a lack of patient capital.
Passmore’s comparison stings because it feels uncomfortably accurate. “People say to me, ‘Private equity’s got a five-year time horizon. It’s all short-term,’” he said. “Well, that’s a four-year longer time horizon than law firm partners. They’re just looking to the end of the year and distribute the cash.”
If one accepts that premise, outside investment starts to look less like a philosophical threat and more like a tool – one that could make a firm more durable, more competitive and perhaps more innovative. Passmore casts the push for alternative business structures in the U.K. as being “about competition … innovation, competition and the people market,” rather than a narrow access-to-justice initiative.
“Professional monopolies aren’t a good consumer protection,” he said. “Competition’s a good consumer protection.”
Even supporters of change, however, emphasize that “outside investment” is not a single concept – and not an unalloyed good.
Leah Wilson, the former executive director of the State Bar of California, embraces investment as a driver of innovation while stressing the need for rules around it. “Investment in the practice of law is not inherently bad,” she said.
Her argument is grounded in realism about where the market already is. “You go on ChatGPT right now – you get legal advice from these platforms completely unregulated,” she said.
That reality, Wilson argues, should push regulators and firm leaders away from binary thinking. “I do think that we need to change our thinking about the nature of good and evil,” she said, “and think instead about what are the guardrails that we should put in place so that we can embrace the benefits that come with private investment.”
For mid-sized firms, though, the immediate decision point may not be ownership reform at all. It may be whether to deploy a narrower, more tactical form of outside capital.
Litigation finance – especially portfolio finance – doesn’t buy the law firm. It buys exposure to the outcome of cases. And for contingency-heavy litigation shops, it can function as a balance-sheet stabilizer.
Andy Lundberg of Burford Capital describes the distinction succinctly. “Litigation funding these days is both single-case propositions and so-called portfolio propositions,” he said. “Single-case propositions are typically for claim owners. Portfolio propositions are more typically for law firms.”
Lundberg also draws a critical distinction between commercial legal finance and consumer legal finance – an important point in a debate often muddied by terminology. Commercial finance, he said, is a suite of products addressed to commercial disputes, and can include funding lawyers’ fees, monetization of expected recoveries or combinations of both.
His description of the economic effect is vivid. “You find your classic contingent-fee lawyer, take a band saw, cut that lawyer in half vertically,” Lundberg said. “The half that used to take the litigation risk, pay the costs and make the investment in the legal work is now us.”
In that sense, mid-sized firms are not buying “money” so much as buying risk transfer. That matters because firms in the middle often cannot absorb the same kind of variance that large firms can.
“Mid-size firms may have to take a little more risk than big firms in order to move forward,” Lundberg said. “And then the question becomes: how much risk are they willing to take, and would they rather pay somebody to take some of that risk for them to protect the downside?”
Speaking on condition of anonymity, a partner at a litigation boutique with fewer than 100 attorneys and seven offices said this week that, in practice, decisions about litigation finance are still “client driven.” The partner said some clients prefer the firm to shoulder the risk through contingency arrangements, while others welcome third-party funding.
The firm can do some contingency work on its own, the partner said – but only up to a point. “A mid-size firm can take five to ten fully contingent cases, given its size,” the partner explained. “Business litigation firms typically aren’t set up to do more than that.”
Funding changes the math. “If we take litigation finance on, what that allows us to do is double the number of contingent cases we take,” the partner said. “So instead of taking five or ten, we can take ten or twenty.”
The logic, they said, is straightforward portfolio theory. “You think about it as any investor. You don’t want to be invested in one stock. You want ten.” More cases mean diversification across duration, subject matter – antitrust, IP – and jurisdictions.
“When we’re in 20 cases, that risk profile looks a lot different than when we’re sitting in five or six,” the partner said.
This is where litigation finance begins to resemble outside investment in everything but name. It enables a firm to reshape its economic model without formally changing ownership.
The cost, of course, is real. “If you love your five cases, the drawback is you’re giving up upside,” the partner said. Typical arrangements, they explained, involve giving up roughly half the contingency in exchange for laying off half the risk – while doubling case volume.
Lundberg is careful not to frame legal finance as a universal solution. Whether it makes sense, he said, “depends greatly on your risk tolerance.” Firms with high-risk appetites may not be attracted to financing. Others may see it as a competitive necessity, especially because “banks don’t lend money on the same assets we invest in.”
Traditional loans must be repaid whether cases succeed or fail, often with personal guarantees. Litigation finance, by contrast, is non-recourse.
Lundberg described legal finance as a way of providing advanced ability for a mid-sized firm to compete on two fronts: against large hourly-billing firms and against large firms that can offer contingency work at scale. In the first case, finance enables a “synthetic” contingent fee, shifting risk away from both client and firm. In the second, it allows mid-sized firms with comparable legal skills to compete for large, long-duration matters without betting the firm or the partners’ houses.
He also tied finance to lateral recruitment and firm combinations – areas where mid-sized firms often feel outgunned. Big firms can “sell futures” through guaranteed compensation. Legal finance, Lundberg said, can help bridge uncertainty around work in progress and smooth cash flow, effectively buying flexibility.
None of this comes without risk. The unnamed partner pointed to political and regulatory uncertainty around disclosure rules and funding oversight. Another concern is settlement distortion. “If the economics of the case get out of whack,” the partner said, “it really hurts your ability to settle.”
They have not experienced that problem, the partner said, noting that funders generally want cases to resolve efficiently. Still, diligence matters. The partner emphasized track record, underwriting depth, and – critically – capital stability.
“Cases take five to eight years,” the partner said. “You want to make sure that capital is still there four years from now.” Funders reliant on single-source capital can pose risks if market conditions change.
What is changing, perhaps most of all, is the cost of refusing. Passmore said the conversation has shifted from curiosity to urgency. “Eighteen months ago, I might have had this conversation once or twice a week,” he said. “Now it’s probably 15 to 20 times a week.”
His warning to firms is stark. “What would I do if my main competitor suddenly had $200 million or $2 billion sitting on their balance sheet?” he asked. “They can invest in technology, poach my best staff, offer equity – and it’s too late for me to respond.”