In the world of litigation finance, portfolio funding has been rumbling in the wings for a while. But two big developments last month – in which law firms signed multi-million-pound deals with funders – saw it burst on to stage as the headline act.
First, Shepherd & Wedderburn, which has a reputation as an innovator and was an early adopter of third-party litigation funding, revealed it had bagged an ‘eight-figure sum’ from funding giant Burford Capital. The deal, to finance a portfolio of the firm’s commercial litigation and arbitration, was hailed as the first of its kind between a top-100 UK law firm and a major funder.
Then a few weeks later global litigation boutique Lewis Baach Kaufmann Middlemiss, with offices in Washington, New York and London, trumpeted a $20m deal with another litigation funder: the keenly ambitious, UK-headquartered Woodsford. Again, the arrangement was to finance a portfolio of commercial cases.
Burford in particular has been very open about the fact that it is moving away from financing individual cases towards broader arrangements with law firms. According to its annual report, only 12% of its new commitments in 2016 related to ‘single’ cases. Burford is understood to have portfolio deals in place with a number of US firms. In 2015 it provided global firm Hausfeld with €30m to open up in Berlin, enabling the firm to capitalise on a surge in competition claims in Germany. In the UK, the funder announced a $45m deal last year with a ‘FTSE 250 company’ – reported to be BT – to fund a book of its current and future litigation; and it agreed another big deal with accountants Grant Thornton, providing £9m to fund a range of insolvency cases in which GT partners are trustees.
As the world’s largest litigation funder Burford certainly has plenty of cash to throw around; and like most funders out there, its primary focus is on big-ticket litigation. But portfolio funding is also thriving in lower-value claims, with Augusta Ventures having operated such arrangements successfully for some time in six-figure claims.
It is easy to see the benefits of portfolio funding from the litigation funders’ point of view. It spreads risk and the due diligence aspect is much more efficient. But what is in it for law firms and clients?
First, any law firm has a limit on how much risk it is prepared to take on. In full-service firms, the litigation partners may have a hearty appetite for risk, but their non-contentious colleagues might be uncomfortable with too much work in progress dependent on winning cases. Litigation boutiques may face fewer internal challenges, but they lack the ballast of steady fee income from other parts of the practice. So litigation funding can be useful to both types of firm, because they can share risk with a third party, in exchange for a share in the profits on successful cases. When teamed with a funder in this way, law firms can run far more cases under a conditional fee agreement.
Second, compared with single-case funding, portfolio finance has an extra advantage for the law firm – flexibility in how it chooses to spend the cash. Lawyers can decide how the money is best used within a book of litigation or, indeed, whether it should be used to expand the book itself. In some arrangements, funders will even go a step further: the litigation book is simply the asset class against which the money is advanced, but law firms are free to spend it as they see fit and not necessarily on those particular cases. At this point, litigation funding really morphs into corporate finance for law firms.
The downside of funding is that it is far from cheap. In single-case finance, a funder typically receives at least 30% of the claimant’s proceeds, or around three times the amount they invested in the litigation (whichever is greater). That reflects the risk of the claim failing and the funder receiving a big fat zero, plus potentially being on the hook for the opponent’s costs up to the amount the funder put in. So how much do these portfolio arrangements cost? That will clearly be deal-specific and kept tightly confidential. But it seems fair to assume that, as the funder is making efficiency savings and also spreading their risk, the overall cost to the law firm or client should be lower than in single-case funding, though it will still be significant.
So, firms may be thinking, hand us a pen and we will sign on the dotted line. But it is not quite that easy. There is one thing that lies at the heart of these portfolio deals and they cannot exist without it. Trust. Law firms need more than just a long list of court victories and damages recovered if they are to attract portfolio finance. They need an established relationship with a funder which trusts the judgement of its litigators.
We can expect many more of these portfolio deals to hit the headlines in the next few years. And the more prevalent portfolio deals become, the more the firms that are backed by funders will be gaining an edge over their rivals, able to carry out much more CFA work.
Firms without that backing may find themselves struggling to meet the new client expectations. So when the right case presents itself, this could be the time to dip a toe into the water of third-party funding. You never know, it could be the start of a very meaningful relationship.
Rachel Rothwell is editor of Litigation Funding magazine.