Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Fortress has expanded its equity investments in the US legal market with a stake in an Arizona personal injury law firm, using a financing structure designed to work around rules against non-attorney ownership.
The asset management group, most famous for debt investing and litigation finance, has acquired a $125mn stake in Rafi Law Services to back the firm’s nationwide expansion plan, according to people familiar with the matter.
The deal cements Fortress’s position as one of the most prominent users of so-called management services organisations (MSOs), a structure used to allow non-lawyer ownership of law firms.
Interest in MSOs has surged in recent months from investors keen to break into the last US professional service without significant private equity ownership.
Fortress has used the structure on previous occasions over the past several years, said people familiar with its investments.
Brandon Rafi, a personal injury lawyer whose image is emblazoned across billboards throughout Arizona, last month said he had sold a minority stake in an MSO called Rafi Law Services to an outside investor but did not name the buyer.
The investor had a “preference for keeping a low profile”, he told the FT at the time.
Financial investors looking to buy into US law firms have alighted on MSOs as the mechanism to do so while staying in compliance with rules that ban non-lawyers from owning equity or sharing legal fees. The prohibitions are designed to insulate the practice of law from commercial considerations.
Under the structure, the law firm is split in two: an attorney-owned business that manages legal casework and an MSO, which houses intellectual property and employs back-office staff.
The MSO sells services back to the law firm in exchange for fees that are large enough to make the entity attractive to an outside investor.
Lawyers say the structure was invented at least two decades ago, following a model used for private equity investments in medical practices and accounting firms, but its use by law firms has remained limited.
Rafi Law Services will house “non-legal operations, including technology, marketing and administration”, according to a press release. Without naming Fortress, it said the $125mn investment came from “a leading investment manager with expertise in the legal services sector” and valued the business at about $450mn.
Rafi will continue to be the sole owner of the entity providing legal advice, called Rafi Law Group.
Fortress was an early user of the MSO structure, said people familiar with its investments, but it remains a small part of its legal assets business, which provides debt finance and litigation funding to law firms. The unit has made about $7bn of investments over its 14-year history.
Fortress’s funds can invest in debt or equity issued by MSOs, said people familiar with the matter.
The asset manager has not publicised any of its MSO investments. Only one of Fortress’s other law firm investments is publicly known: a minority stake in a personal injury firm called Esquire Law, which uses a different, Arizona-specific arrangement called an “alternative business structure” for non-lawyer ownership.
That investment is part of a wider financing relationship Fortress has with personal injury firm Steinger, Greene & Feiner, whose lawyers own the majority of Esquire, according to public records.
Increasing interest in MSOs has attracted a backlash, with legislation under consideration in California, Illinois and Colorado designed to curb their use or set limits on the role of outside investors.
Rafi said the investment will be used to turn his law firm into a national force, adding that he expected a greater use of outside funding across the US legal profession.
“It’s not whether it’s going to go this way, but when it’s going to go this way, and I think it’s going to be a great thing for many people because it’s going to give them an opportunity to hire a great attorney,” he said.
