In a panel with Burford CFO Jim Kilman, finance professionals share how they think about litigation assets and affirmative recovery programs.
As businesses continue to grapple with the financial impact of Covid-19, legal assets may represent an area of opportunity for generating liquidity and managing cash flow—but legal assets also remain largely invisible to many finance departments. As Burford begins work on what we hope to be a groundbreaking study of how CFOs think about this aspect of their balance sheets to be published later in 2021, we share below some of the initial perspective we have gathered from finance professionals.
What are the challenges that a CFO sees when a GC or head of litigation pitches an affirmative recovery? What do CFOs wish their legal teams and law firms would do differently?
Amanda Parness: A good strategic CFO has to manage cash flow and budgeting as well as weigh in on the impact a litigation can have on a company. As such, she needs to estimate both the cost and timing of these expenses. Any banded guidance bands around these two factors would be greatly appreciated. This is the reason why many companies pursuing litigation (and even defending them) are focused on alternative fee structures so that they can manage these elements. Law firms and a company such as Burford should be ready to give estimates, milestones and cost caps when they take on a case to help the CFO and GC together provide a cost benefit-analysis to the CEO or Board to help determine whether the potential benefits have a successful IRR/ROI probability given the estimated time frame of the litigation and potential appeals.
Michael Curran: The biggest challenge is trying to understand the chances of success upfront. Too often, the GC will focus on the risks, costs and process: Do we pursue it internally? Do we engage outside counsel? Is it worth pursuing? Contingency or not? There is a business case required to make the optimal decision, but because many GCs are not thinking about the legal department as a profit center, these muscles are not well developed.
Jim Kilman: Pursuing affirmative litigation poses a risk-reward challenge for a CFO. Yes, there might well be a significant cash recovery when the litigation is all said and done, but it’s pretty uncertain and will cost real dollars over the coming years to pursue. CFOs are typically interested in something the reduces the risk and lowers or eliminates the cost along the way. That’s why legal finance solutions have become increasingly of interest to Fortune 500 CFOs.
Pending commercial claims and awards can be extraordinarily valuable corporate assets, but they are obviously highly illiquid and come with significant cost and risk. How aware do you think CFOs typically are of pending commercial claims and awards as corporate assets?
Jim Kilman: For many CFOs, the potential value of this sort of commercial claim wouldn’t be on their radar. They’ll be acutely aware of assets on the balance sheet and very cognizant of liabilities, including contingent liabilities arising from claims against their company. But commercial claims, since they don’t appear as assets, are invisible to many CFOs, at least until they’re pretty close to turning into real cash. From that perspective, Burford’s ability to work a little alchemy and turn those non-assets into cash today could have significant appeal to CFOs.
Amanda Parness: Due to length of time appeals can take, I think most finance teams would heavily discount the value of their legal assets, if they value them at all. Most CFO’s I have come across are aware of only the costs and timing in defending or pursuing litigation, but do not think about their potential “win” as an asset with a monetary value that can be monetized.
Michael Curran: I believe CFOs look at a pending commercial claim and award as an opportunity but not necessarily an asset. The lack of certainty of an outcome adds to the complexity, so it’s difficult for a CFO to confidently value. Most CFOs will take a conservative view on valuation whereby they manage the risk of a less than favorable outcome and allow for the upside of a favorable outcome. Unless the CFO is familiar and comfortable with litigation funding, they will view these assets as illiquid.
We think of Burford as acting like an investment bank for law, in that we can help corporations identify and optimize the value of their legal assets. Do you think legal and finance teams are ready to embrace that opportunity? If not, what are the barriers, and are they the same for the legal and finance teams?
Michael Curran: Being able to translate the solutions and benefits into the language that finance and legal teams speak will be key for the acceptance and adoption of any innovative idea. Going beyond that and offering a consultative perspective is also valuable, because it helps CFOs and GCs both understand the solution itself and also focus on how it can help the company in question.
Having a credible partner who can help the CFO properly value the legal assets is important. As the funding industry matures, CFOs will become more comfortable leveraging this expertise. Creativity and flexibility will be highly valued.
For me, litigation financing provides an opportunity to monetize an illiquid asset and deploy that capital into a core business activity and increase the enterprise value. It also provides an option to hedge some of the risk of an adverse outcome.
Amanda Parness: I view Burford less as an investment bank and more as a smart receivables lender. They are making a loan against a future cash flow stream of the company. From the company perspective, Burford is taking on the risk and should rightly get some of the upside in lieu of interest. From the perspective of the defending company, there is very little risk and this is a source of liquidity; I think that many CFO’s would be happy to learn more about the terms of such financings. To be fair, I have not seen a Burford contract, so I may not be fully aware of the potential downside risks.
Jim Kilman: CFOs, especially of larger corporations, have a steady stream of bankers and advisors parading through their doors to pitch financing ideas and opportunities. Much of this is pretty generic, with the “same old” ideas pitched over and over again. What CFOs value is someone with deep expertise in a particular niche who can help them creatively solve their financing challenges. Burford is relatively unique in being able to offer solutions for many companies’ legal related financing challenges, including offering ideas that a CFO is unlikely to have heard elsewhere. And as importantly, Burford will put its money where its mouth is—by not only proposing the financing idea, but also executing and funding it from its own balance sheet. For many CFOs, that sort of one-stop-shopping is appealing, especially on an innovative idea.
Given the current economic climate, specifically the uncertainty that comes with doing business in a Covid economy, how interesting is a financial product that adds certainty by removing downside risk from pending claims and awards?
Amanda Parness: For anyone other than the largest companies or those with PE or VC essentially guaranteeing other liabilities on the balance sheet, it has become challenging, and somewhat expensive, for many of these companies to access the capital markets in this time of Covid. Corporate advisors and CFOs of mid-market companies owe it to their clients and companies to explore alternative sources of financing.
Jim Kilman: A large part of what a CFO does today is managing risks: Liquidity risk, credit risk, rate risk, asset and liability management (ALM) risk. A financial product that provides funding while simultaneously de-risking has significant appeal in any environment.
Michael Curran: The idea of creating certainty around cost and de-risking investments in litigation is appealing, because it has an immediate impact on the business. CFOs can't think three years out, so any solution that generates only long-term benefits is hard to get excited about—especially for public CFOs who manage quarterly and annually. For those CFOs whose companies were negatively impacted by Covid-19 and need to prioritize cash flow, litigation funding becomes even more interesting.
Does the Covid economy create a springboard for change insofar as there is more pressure on functions that are not typically perceived as commercial—like legal—to think more commercially?
Michael Curran: Covid-19 has been an accelerator for trends already underway. All functions are expected to think commercially, but the pandemic forced these same functions to act commercially. Real estate rationalization, contract renegotiations, increased focus on privacy and data tied to a remote workforce and asset monetization, has pulled legal ever closer to the commercial side of the business.
This change is not temporary and will certainly encourage legal teams to become even more creative and commercial in the coming year.
Jim Kilman: Many companies have been moving down this path for quite a while; Covid is certainly accelerating it. In a world where growth is challenged and margins are under pressure, most companies are taking a careful look at how to get increased efficiencies out of everything they do, whether by re-engineering, outsourcing or the like. Legal departments are no exception, which is why there has been so much interest in legal finance products that reduce costs and risks while improving liquidity, all of which reduce the “drag” from what has traditionally been a cost center for most corporates.
Burford is undertaking research in early 2021 addressing how corporations use legal finance. As a CFO, what questions do you think would be valuable to address?
Amanda Parness: There is a lot of opacity to litigation finance and the tendency for investors and companies alike to view it with suspicion. A transparent view of the process that finance providers such as Burford go through to assess the risks, and what further potential unforeseen monetary and timing costs could occur during the lengthy course of a legal case for those that accept litigation are table stakes information that should be laid out for all constituencies involved.
Jim Kilman: I’d start by asking: “What are the legal-related problems you’re looking to solve?” “What are the challenges you’re wrestling with in thinking about your legal function: Costs? Uncertainty of outcomes on commercial claims?” “What’s your appetite for non-recourse financing. How does that work within your capital stack?”
Participants
Michael Curran is Chief Financial Officer and Chief Operating Officer of Coleman Research. He previously served as CFO of Bloomberg Professional Service, Bloomberg BNA and Bloomberg Government and has two decades of progressive financial and operational experience, including CFO positions at MNG Health and TrialScope. He also is a Board Member of Collegium Holdings and a Mentor at First Round Capital.
Jim Kilman is Chief Financial Officer of Burford with responsibility for managing and overseeing Burford’s global finances and financial strategy. Prior to joining Burford, he spent 32 years in the investment banking business, including senior roles at Goldman Sachs, ABN AMRO and PaineWebber. Most recently he was Vice Chairman of Investment Banking at Morgan Stanely.
Amanda Parness is founder and Chief Executive Officer of Spring Advisory, where she works with companies at various stages of their development to prepare them for growth over the short and medium term. She has worked in the investment industry for over 25 years, including over 20 years as a Managing Principal at GoldPoint Partners, New York Life Insurance Company’s private equity investment arm, investing over a billion dollars through and alongside some of the best mid-market private equity funds in the US.