In 2006 Dechert was facing a potentially budget-busting task: During the next 18 months, it would need to relocate its three largest offices. Capital expenses were expected to skyrocket from single-digit percentages to a third of annual earnings.
But instead of turning to a bank loan to cover the cost of the moves and gut renovations, the firm went to its partners. For three years before the moves, partners kicked in more capital, producing a surge in cash on Dechert's balance sheet. The firm didn't have to borrow a penny.
Dechert's fixed-asset expenses returned to normal levels in 2008. But the firm held on to its higher capital requirement, evidence of the lengths to which it still goes to avoid bank debt. Today, equity partners must maintain 44 percent of their current compensation level in their capital accounts, up from 30 percent in 2002.
That capital cushion, combined with other cyclical cash management techniques, has allowed the firm to avoid even short-term borrowing during a period of high growth. "We were going to cancel our line of credit, but the bank convinced us to keep it," says Andrew Levander, chairman of the firm's policy committee.
If you think Dechert's pay-as-you-go approach is unique, you'd be wrong. Attitudes have shifted remarkably since a decade ago, when borrowing by firms was on the rise, and banks found a willing audience for sales pitches. After 2008, in particular, many firm leaders began to question the whole idea of bank debt.
"After all the firms started to fail, starting with Brobeck, then Heller, we stopped borrowing from the bank," says Perkins Coie managing partner Robert Giles.
Giles and others have long eschewed debt, relying instead on partner capital and other cash management techniques.
"I sleep better knowing we are not borrowing money," says Barry Wolf, executive partner of Weil, Gotshal & Manges, where 5 percent of each partner's pretax earnings each year goes into an interest-paying capital account. With the help of that capital, Wolf says, "we've always had enough to fund our hard assets, and we've always had a big cash cushion. We've never been caught short."
This past fall, Daily Report affiliate The American Lawyer spoke with dozens of leaders of Am Law 200 firms about their partner paid-in capital programs. It asked how firms are financing their businesses and whether their debt-to-equity mix has changed.
Of 20 firms for which details could be confirmed, six had bumped up or broadened capital requirements in the past few years. Several more said they were considering doing so in the near future. Seven, including Dechert; Weil; K&L Gates; Day Pitney; Perkins Coie; Morgan, Lewis & Bockius; and Gibson, Dunn & Crutcher, said they do not borrow at all, either for long-term expenses or for seasonal cash flow needs. Others have kept both kinds of borrowing at very low levels.
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