Litigation Finance Spurs Innovation by Moving Past Single Cases

Binary Outcomes

Funding pays the costs associated with pursuing a claim in litigation or arbitration, usually provided in the form of non-recourse financing. In exchange, the funder receives a pre-agreed share of recoveries made, usually a multiple of the amount invested or a percentage of the recoveries. Crucially, the funder will only receive their investment back, plus any return, if the case settles or succeeds at trial and money is actually recovered from the losing party.

The risk posed to the investment is high, and the outcome is binary—a case will either win, or it will lose. Even when a case wins at trial or settles, there is no guarantee an award will exceed the costs of bringing the claim. Pricing of the investment reflects that high risk, as well as the fact a funder’s capital is tied up for the long duration over which a case moves to conclusion.

That means individual claims generally need to be for substantial amounts for the economics of an investment to work for all parties. But clearly those claims are only part of the business of litigators, and law firms more generally.

Funders’ relationships with law firms have naturally evolved to discussions of financing for purposes other than single cases. Litigation finance has evolved into legal finance: Litigation funders are evolving to provide funding for the wider business of law.

Portfolios, Not Cases

Funding for single cases has expanded into portfolio funding, which includes a whole group of cases. That might involve a group of specific cases, or it could be for a more open-ended commitment, where some cases already exist, and a law firm or corporate department plans to pursue cases with similar characteristics in the future. The structure is flexible and can apply to a large group of low-stakes cases, or a smaller group of high-stakes cases.

In a portfolio, it is the performance of the group of cases rather than the individual cases that are front of mind, so the portfolio can include both claims and defenses. Claims can be cross-collateralized, meaning the financial loss arising from an unsuccessful case is mitigated by success in the other cases. Reducing risk by spreading it across several cases, can result in lower pricing, too. In a similar vein, the insurance industry is also exploring new products to mitigate risk.

Benefit to Legal Departments and Firms

Large corporate legal departments are increasingly taking advantage of third-party capital— particularly in the US, but the UK is catching up. With third-party capital, legal departments can secure funding not only for the costs of litigating, but also secure additional working capital against the outcome of those cases. Litigation can unlock an income stream, keeping cost and risk off the balance sheet. And legal finance can reduce the cost of capital. 

While some US law firms have participated in a litigation funding model for a while, even the traditionally risk-averse UK legal market is now seeing this shift. Legal funders pay firms a share of their work in progress—which the firms keep regardless of the outcome of the case—but the funders can still benefit from a successful outcome and share a success or contingency fee with their funding partner.

Pay Now, Not Later
Litigation or arbitration is never quick nor inexpensive. CFOs often sigh when they see a meeting request from their general counsel, as delays and requests for budget increases in litigation can be a regular occurrence. But legal funders are now providing products to monetize ongoing litigation. They might buy a share of future recoveries for a cash sum now, or buy an award in its entirety—perhaps at a discount to the face value.


Funding Legal Businesses

In an exciting recent development, litigation funders have evolved into funders of legal businesses. Obtaining finance for growth can be more difficult as interest rates rise. But legal funders, often staffed largely by lawyers, offer a different understanding of the requirements of law firms and other legal businesses like alternative legal service providers.

Lawyers are turning to legal funders for credit facilities—or indeed equity stakes—to monetize work in progress, to recruit teams and lateral hires, for financing succession planning or de-equitizing outgoing partners and founders, and to open new offices or to merge with or acquire other firms.

Law firms are approaching legal funders to invest in products they are developing like managed legal services and legal tech to streamline routine work. Lawyers spinning out of Big Law and setting up their own firm often can’t find competitively priced funding for start-up costs and working capital because of their limited track record. In those cases, legal funders can step in as they have a higher risk appetite based on their understanding of the legal market.

For creative and entrepreneurial lawyers, whether working in private practice or commerce, finding an equally creative legal funder may be the key to unlocking serious growth.

_{Reproduced with permission. Published 16^th March 2023. Copyright 2023 Bloomberg Industry Group 800-372-1033.}