Leverage; Equity Partner Growth; Capital Contributions

Citi and Hildebrandt released their 2025 Client Advisory, predicting that 2025 will be a "very good year" for law firms (Citi Hildebrandt Client Advisory "Client Advisory", Greta Rusanow & Brad Hildebrandt, 12/5/24).  They anticipate continued demand in practices that have fueled a strong 2024 (namely litigation, regulatory (particularly anti-trust), funds/investment management, bankruptcy and restructuring); they also forecast the "return of M&A, corporate and transactional work broadly across all segments, as interest rates continue to fall and market conditions improve" (Client Advisory).  Additionally, Citi and Hildebrandt expect firms to continue to grow through lateral additions and mergers, to better serve clients across geographies and practices, and to help defray the escalating cost of compensation and operations such as investments in A.I.

Leverage

Lawyer leverage increased 2.9% from 2018 to 2023 (Client Advisory, citing Citi's Law Firm Leaders Survey).  61% of large law firm leaders expect leverage to continue to increase through 2026 (Client Advisory).  88% of these firm leaders expect to grow associate headcount, while 54% expect to grow income partner ranks (Client Advisory).  Only 39% expected to grow their counsel cohort, despite counsels often being more profitable than income partners; counsels are billed at similar rates to income partners and are "generally more productive and earn less" (Client Advisory).

Equity Partner Growth

73% of large firm leaders expect to grow equity partner headcount through 2026 (Client Advisory).  Although the overall size of the equity partner class may grow, many analysts expect some level of de-equitizations to continue, as firms make room for high-performing income partners ('This Trend Isn't Over': Law Firm Partner De-equitizations Expected to Continue, Samson Amore, 12/4/24, American Lawyer).

Capital Contributions

The Citi Hildebrandt Client Advisory noted both paid in capital and net income have grown over the last five years; however, net income at many firms has grown at a greater pace, resulting in a decline in the ratio of paid in capital to net income.  Accordingly, Citi and Hildebrandt expect that many firms will increase capital contribution requirements to help fuel growth and to offset the coming retirements of partners with large capital positions.