As outside counsel to private fund advisers, law firms are pivotal in driving the adoption of artificial intelligence (AI) within the private equity (PE) industry. However, they face a unique dual challenge of incorporating AI into their own operations while also guiding PE clients through the implementation process.
While AI adoption in the legal industry is still in its early stages, big law firms are already making significant strides by focusing on efficiency, cost reduction, and generating greater value for clients. By using AI to automate and streamline the most manual and routine parts of the law firm’s workload, lawyers are reclaiming valuable time for more strategic work.
Law firms are also a driving force in helping private fund advisers implement AI tools safely and confidently by understanding the technology’s benefits, risks, and regulatory landscapes for their clients.
This article explores how law firms can align their AI knowledge and adoption with their PE clients’ needs.
The AI adoption curve is ramping up at law firms
In Thomson Reuters’ 2023 Future of Professionals Report, 70% of the legal professionals surveyed said AI would have a transformative or high impact on the profession — more than the economy, regulations, or environmental, social, and governance (ESG) issues.
While many surveys and statistics show how law firms and in-house legal teams use AI, it’s impossible to settle on a realistic figure for their adoption rate. In all likelihood, adoption is currently similar to the customary tech adoption curve.
That’s not to say AI adoption will always follow a traditional bell curve. In 2023 and early 2024, many law firms were cognizant of the risks but willing to explore new AI vendors and tools. Experts believe that adoption will move swiftly as generative AI (GenAI) capabilities advance dramatically in weeks and months instead of years.
In another Thomson Reuters report, ChatGPT and Generative AI within Law Firms, Jason Adaska, Director of the Innovation Lab at U.S. law firm Holland & Hart, said: “The biggest delta I’ve seen is just people understanding that the realm of the possible has sort of shifted in a monumental way.” He added that this means GenAI education has become critical. “This is actually the most important thing for us, strategically the most important thing for the firm and our department, is to put resources out there.”
In another indication of AI’s growing importance, some BigLaw firms are now training summer associates on GenAI. Bloomberg Law reported that K&L Gates, Dechert, and Orrick Herrington & Sutcliffe have all incorporated AI training into the 2024 summer associates class, which includes teaching them how to use AI research and chatbot tools.
“That’s the whole idea about the training program: You need to teach people how this is going to impact the way they come to work,” Brendan McDonnell, a K&L Gates partner and member of the firm’s AI solutions group, told Bloomberg.
Why PE firms expect law firms to be trusted AI advisers
AI’s transformative potential means a law firm’s AI strategy should align its services with its clients’ needs and strategies. For several reasons, private equity firms are looking for law firms to be strategic partners in adopting generative AI.
1. Undeniable efficiency gains
GenAI solutions can automate repetitive tasks like due diligence document review, speeding up deal processes and saving time for both lawyers and PE professionals. Many private fund advisers are feeling the pressure of heightened scrutiny from both the U.S. Securities and Exchange Commission (SEC) and limited partners (LPs). Meanwhile, operating costs are also rising, driving advisers to look for ways to maintain or cut spending.
AI cannot replace experienced attorneys in providing complex legal services to PE clients, but it can serve as a valuable tool for augmenting legal professionals’ capabilities and improving overall efficiency.
When law firms drill down, efficiency is a matter of speed and convenience for their clients. PE firms want their law firms to perform tasks faster and with less lift on their part. AI tools could enable law firms to reduce the turnaround times on routine, repetitive tasks while limiting the input they require from their clients.
2. Greater value
Given how much private fund advisers invest in their relationships with outside counsel, advisers expect the firm to continuously provide value. The priority here is for the law firm to deliver value above what the AI tool offers. While AI will benefit clients by streamlining low-level tasks and reducing the law firm’s fees associated with those tasks, what new strategic work or expertise can the law firm provide to add value? For many lawyers, this is an exciting opportunity rather than a concern.
3. Enhanced deal analysis and deeper insights
AI tools can analyze vast amounts of data to identify potential risks and opportunities in deals that lawyers might miss. With a more comprehensive view of a deal, PE firms can make more informed investment decisions.
4. Deliver differentiated value and a competitive advantage
Law firms that demonstrate expertise in AI are likely to be seen as more innovative and attractive partners by PE firms. By leveraging AI, law firms can offer PE firms a unique value proposition that goes beyond traditional legal services.
Future-proofing the practice: BigLaw’s approach to AI implementation
While AI has tremendous potential for all law firms, BigLaw is where we’re already seeing significant moves in AI experimentation and implementation. Many global firms have developed specific practice groups dedicated to AI, technical innovation, and data analytics. Some firms have spent the last few years hiring data scientists and tech-savvy lawyers. A few have developed AI tools in-house with varying degrees of success
According to a recent Thomson Reuters Report, Stepping into the future: How generative AI will help lawyers improve legal service delivery: “Some tasks will be automated, but the fundamental transformation will be how legal work is reimagined and improved. AI presents an enormous opportunity for legal because so much of what lawyers do today can be further enhanced with AI, and client outcomes can be improved.”
While many large, global law firms see AI’s potential benefits, some concerns remain about accuracy, data privacy, and ethics. Overall, law firms are interested but still figuring out how GenAI can fit into their practices.
GenAI tools aren’t performing legal analysis for clients, but they’re good at analyzing language to provide draft documents or answer questions. However, GenAI can’t fully interpret and apply the law to a client’s unique circumstances just yet.
Become a trusted AI adviser to clients
Whatever AI strategy a law firm develops for itself, it’s also essential that the firm becomes a trusted adviser on AI for its clients. Private fund clients are looking to understand how AI works, what it is and isn’t good at, and if it’s trustworthy. Private funds often don’t have the internal bandwidth or expertise to navigate these questions on their own.
Becoming a trusted adviser regarding AI takes considerable effort and time. The first step is to understand what AI tools are appropriate for private market firms. Thomson Reuters’ 2023 Future of Professionals Report noted that given law firms’ relationships with corporate clients, firms have a unique ability to ensure that businesses implement AI in a trusted way.
Also, pay close attention to the following:
- The SEC’s proposed AI regulations
- The Biden Administration’s AI-related executive orders and proposals
- The American Bar Association’s guidance on AI use
- State bars’ and bar associations’ proposed or final rules on AI use
What private equity firms want from law firms
Here’s what PE firms want to see from their law firms regarding AI adoption:
1. Understanding of AI applications
Law firms should clearly understand how AI can be applied to different aspects of the private equity deal process. PE firms expect law firms to invest in AI tools and train their lawyers on how to use them effectively. Law firms should be transparent about AI’s limitations and have lawyers with the expertise to interpret and validate its outputs.
2. Identifying and evaluating AI tools
Developing an internal knowledge base: Law firms are building expertise in AI tools relevant to private equity, like due diligence software, contract automation platforms, and legal research assistants. This allows them to advise clients on which tools best suit their specific needs and workflows.
Conducting pilot programs: Leading law firms should partner with AI vendors to pilot specific tools with select private equity clients. This allows them to assess the effectiveness, identify integration challenges, and provide valuable feedback to clients about the AI’s capabilities.
Curating a trusted vendor network: Firms are compiling a list of reputable AI vendors offering solutions with proven track records in the private equity space to empower clients to make informed decisions without extensive independent research.
3. Addressing data privacy & security
Some fund managers are wary of AI using their proprietary and sensitive data or, even worse, somehow making it publicly available.
During implementation, law firms should work to ensure any AI tool their lawyers or staff use doesn’t retain their clients’ proprietary, or sensitive information. Clients need their data to be safe and secure, and firms can assure them of that throughout the law firm’s digital transformation.
With any new AI tool a firm implements, leadership must be prepared to explain to clients how they’re protecting client data. Not only is this imperative to continuing the relationship, but it’s also a great way to help clients become more comfortable with the idea of adopting AI solutions internally and navigating the use of AI at their portfolio companies.
4. Bolstering data management and quality assurance
Advising on data preparation: Law firms can guide clients on the importance of high-quality data training sets for AI tools. This ensures the accuracy and effectiveness of AI outputs for private equity tasks like due diligence or contract analysis.
Implementing data governance policies: Law firms are developing data governance policies for managing client data used with AI tools to ensure data privacy, security, and compliance with relevant regulations. These can be shared with clients to help them establish their own policies.
Implementing quality assurance checks: Firms are developing processes to assess the accuracy and reliability of AI outputs used in client work. This helps ensure legal teams don’t solely rely on AI results without verification.
5. Sharing knowledge and thought leadership
Organizing AI-focused workshops: Law firms can host workshops or seminars for private equity clients to educate them on the benefits and applications of AI in their investment process.
Publishing thought leadership content: Firms can publish articles, reports, or webinars showcasing how private equity clients can leverage AI for better outcomes.
Contributing to industry discussions: Firms should be participating in industry conferences or forums to position themselves as leaders in the conversation around AI integration for private equity success.
Choosing wisely — not all AI tools are created equal
By taking these steps, big law firms are becoming valuable partners for private equity clients in their journey toward adopting and maximizing the benefits of AI tools.
While many AI solutions are currently available, not all of them will accurately and efficiently address a private fund manager’s specific legal use cases. For example, a variety of contract management platforms use AI to streamline repetitive contract workflows. These platforms aren’t structured for private fund contracts, such as limited partnership agreements and side letters. Law firms and their PE clients are better off with a contract and obligation management solution built for their specific industry needs, or they’re unlikely to see a good return on investment.
In addition to having a good grasp of what’s available for PE clients, leading law firms can form strategic partnerships with the top AI providers. Whether formal or informal, a firm could generate value for clients by advising them on industry-specific AI tools and connecting them with trustworthy AI vendors.
Interested in exploring a relationship with Ontra? Schedule a demo of our Legal Operating System for Private Markets today.
