In October 2019, Burford Capital will celebrate its tenth anniversary—a milestone we anticipate with understandable pride. When we met at a RAND conference in 2009 and discovered a shared interest in developing new ways for corporate legal departments and law firms to manage the cost and risk of high-stakes commercial disputes, we wouldn’t have guessed that the company we launched with a skeletal team, at the height of the global economic crisis, would grow so much or so quickly.
To give you a sense of that growth, Burford is now a $5 billion company with a current investment portfolio of $3.2 billion. Since launching with a modest $130 million IPO on the London Stock Exchange in October 2009, we have worked with hundreds of law firms and corporations, including 90 of the world’s 100 largest law firms. Annual inquiries from law firm and in-house lawyers have increased over 1,000 percent. Our team has grown from five people at the end of 2009 to 114 people today, including 55 lawyers, in offices in New York, London, Chicago, Washington, Singapore and Sydney.
Burford is not the only provider of commercial legal finance, and we weren’t the first. But we are, without question, the largest. During the last two years, we did $2.6 billion in new business, making us one of the largest purchasers of legal services in the world.
Given that scale, Burford’s tenth anniversary is a milestone not just for us, but also for the commercial legal finance industry writ large—and thus we welcome it as an opportunity to mark the industry’s progress and set a course for its second decade.
The next decade will indubitably bring further growth: Even though many law firms and corporations have become active users, as an industry litigation finance is still less well known and less well understood than it should be. Further, outside the legal industry, commercial legal finance is not well-known at all. As its value is communicated more broadly, more will benefit from its use, and growth will follow.
Below, we consider what growth will look like for commercial legal finance in the decade to come, as well as three key changes that will foster that growth.
The emphasis will shift from recognizing commercial legal finance as a business to celebrating it as pro-business
For much of its first decade, commercial legal finance has been discussed in the legal industry as “new”. It’s not exactly new—law firms that work on contingency, insurers and a wide variety of institutional capital providers have long been financial providers to litigants—but the advent of professional, specialized legal finance players has been a more recent phenomenon.
A decade on, we are no longer the new kids on the block. Legal finance has been firmly established in the mainstream of the legal industry. Between 2012 and 2018, the number of lawyers who said their firm or company had used legal finance grew from slightly under ten percent to at least 32 percent, according to Burford research last year.
But even so, there has at times been a degree of confusion about its distinction from an entirely separate industry—consumer litigation funding, in which funding companies provide individual lawsuit loans to people with personal injury or other individual claims. One sees this confusion particularly evident when the general, non-legal press covers the industry, and one even sees it being exploited by the tiny but vocal minority who are critics of the industry and who benefit from depicting commercial legal finance negatively. The distinction is, however, clear and crucial: Commercial legal finance and consumer litigation funding are as distinct as investment banking is from payday lending, with the former comprising multimillion-dollar non-recourse investments with law firms and corporations represented by world-class counsel, and the latter comprising cash provisions to individuals in economic distress who may not be experienced in or savvy about negotiating legal transactions.
Conflating these two separate industries is wrong and has consequences. Potential users of commercial legal finance, particularly in-house legal teams who are typically less aware of the industry than their law firm counsel, may assume that it is not a tool for corporate use—and lose the opportunity to use it. And lawmakers who do not appreciate the distinction may make bad laws. Imagine if the conduct of payday lenders toward individual consumers was used as a reason to regulate how investment banks work with corporations; such policy would be nonsensical and potentially harmful to businesses small and large.
In the decade to come, we expect this confusion to fade away as commercial legal finance becomes not only recognized as a business but celebrated as pro-business—because it is helping law firms serve their clients better and run their businesses more efficiently, and because it is helping companies use their capital more efficiently and deliver more value to their businesses, thereby enhancing shareholder and client value.
It is pro-business because commercial legal finance is providing a much-needed financial tool for buyers of commercial legal services—that is, for companies large and small that face the blunt economic reality that expensive commercial disputes are an unavoidable cost of doing business. Small or low margin companies may lack the cash to pursue claims when their businesses are harmed. Large companies with plenty of liquidity may be dogged by the impossibility of budgeting to resolve a commercial matter with an uncertain timeframe, an unpredictable outcome and any number of potential surprises along the way. Commercial legal finance solves these problems—offloading cost and risk to a third party and providing a tool to manage risk, achieve certainty around legal budgets and manage P&L legal expense.
Commercial legal finance is also pro-business because it is reshaping law firms’ ability to serve clients and invest in growth. Since the 2008 recession, firms have faced intense client pressure for efficiency, alternative fee models and cost effectiveness. But law firms aren’t always able to meet client demands for innovation and cost-sharing due to their capital structure: They operate as cash-based partnerships, without access to capital markets, and are severely limited in their ability to make long-term client risk-sharing arrangements or investments in business growth. Commercial legal finance addresses this structural problem. Large firms that have traditionally competed on an hourly fee basis use it to provide clients different economic models and to pitch new clients with favorable terms in place. Boutiques and smaller firms use it to manage their cash flows so that they can continue to share risk with clients and invest in expansion, hiring and business development.
Commercial legal finance will look more like financial services than legal services
Many early commercial legal finance companies were founded by lawyers who were frustratingly aware of in-house legal teams’ challenges and law firms’ capital limitations in managing legal cost and risk. That includes us—as a former Fortune 50 GC, as a scholar of legal economics and as veterans of some of the world’s largest law firms.
In the industry’s first decade, by Burford’s estimate, the number of companies providing commercial legal finance grew from about ten to nearly 30. While it’s difficult to be precise given that many are private and release little information about their business operations, we have encountered many opportunistic players as well as tiny enterprises founded by former law firm partners—often litigators who had used commercial legal finance in their practices.
While we applaud entrepreneurialism born of business need and the drive to solve it, commercial legal finance requires a lot more than a few lawyers getting together to try to pick some cases—it needs more scale, more capital and more professionalism. For that reason, in its second decade we expect commercial legal finance companies to behave a lot more like financial services companies than legal services companies.
Burford already does: Like any other segment of the financial services industry, we are clear about our scale, our structure and our financial position. We are a publicly traded capital investment company with the scale of an established, long-term business. We make public filings in onshore jurisdictions; we have audited financial statements; we have instituted internal financial, legal and compliance controls; we have major institutional investors; and we have adequate long-term capital to be a true and reliable partner to our clients. For example, Burford closed 2018 announcing its next $1.6 billion in capital, including a major and strategic commitment from a sovereign wealth fund. Such long-term capacity matters greatly in an industry where clients need to know that their finance partners will have the longevity and the available cash to honor their multi-year commitments to legal matters.
We have always erred on the side of transparency in helping our counterparties understand how much capital we have, where it comes from, how we’ll work with them and how we run our business. This transparency helps Burford’s in-house and law firm clients make informed decisions and is cited by them as a clear differentiator. We expect and hope that in the years to come, more commercial legal finance providers will follow our example, to the benefit of our clients and the industry. We will continue to set standards of transparency: To that end, we recently released an unprecedented store of information about our investment data. This wealth of information—truly unique in our industry—provides an in-depth look at the types of matters that we finance, the amount, durations and industry sectors involved.
Commercial legal finance providers should increasingly act like investment banks for law
Arguably, one of the most important shifts in the commercial legal finance industry in the decade to come will be the tendency of leading providers to act increasingly like investment banks for law—in no small part by seeking to add value beyond the capital they provide.
Some of this shift will originate from law firm and in-house clients with the elevated expectations that are a natural outgrowth of experience in actually working with commercial legal finance companies. We have noted that while those without experience may at first seek simply the least expensive provider of legal capital, more seasoned users of commercial legal finance know better. Naturally, they still seek competitively priced capital, but they also know to seek commercial legal finance providers who offer something more: The ability to structure novel financing deals, expertise in financial modeling for specific types of commercial disputes, the capacity to conduct diligence and case management in-house, freedom from exclusivity arrangements, and the insights and proprietary data that only a seasoned commercial legal finance provider can bring to the investment and case management processes.
The shift to an investment bank for law model also reflects Burford’s natural evolution alongside our clients as well as the business of law. In 2018, we made record-breaking commitments to the most “traditional” form of commercial legal finance, single case financing—a total of $173.7 million of new investments, representing a 175 percent increase over 2017. At the same time, we continue to be the leader in financing portfolios—to which we committed $458.4 million to new investments in 2018. Burford executed its first portfolio-based investment—and we believe the first in the industry—in 2010. We originated portfolio-based arrangements to offer value and flexibility to our law firm and in-house clients, and we have been delighted by the impact we have already had on the marketplace with this approach. In addition to our widely diversified portfolio—with 108 current balance sheet investments and more than 1100 underlying litigation and arbitration claims—Burford has also broadened our investment approach. In 2018 half of our commitments were to traditional litigation finance, with the remainder to asset recovery, post-settlement financing, legal risk management and principal investing strategies.
The industry’s second decade
As Burford and the commercial legal finance industry enter their second decade, we are committed not only to continuing the successes of the last ten years, but also to expanding our efforts to educate the legal community, the business community and the larger communities in which we operate about what we do, for whom we do it and why it can help businesses of all sizes and types do better.
More importantly, in our second decade we will also continue to lead by example, setting and meeting high standards for our work. In Burford’s second decade we will continue to embrace the standing that comes with being one of the largest purchasers of legal services in the world—by leading the maturation of the industry, by acting as a true financial services partner and by following world class standards for business transparency. We enter Burford’s second decade proud of what our team has accomplished in the commercial legal finance industry and eager to continue to earn the business of corporations and law firms around the world.