Law firms are cash businesses. When cash flow and liquidity are critical, portfolio financing presents a ready source of capital for firms to manage expenses and mitigate the risk of affirmative litigation.
Corporate clients increasingly want their law firms to work on some form of results-based engagement, in which whether, how much and when a law firm is paid tie directly to the ultimate success of the particular engagement. For some firms, this fee model aligns perfectly with their business model of working on high-value affirmative commercial litigation and arbitration on a contingency model in exchange for a portion of the often significant upside of a big judgment or award. For other firms, affirmative litigation carries the concomitant unpredictability of cash flow timing, and of course, managing cash flow is fundamental to law firm operations and profitability. Legal finance portfolio facilities provide the working capital necessary for law firms to win new clients, invest in firm growth and manage partner compensation so that litigation lawyers can work on multiyear contingency matters.
Firms that serve clients on contingency encounter two challenges. First, plaintiff-side litigators don’t get paid if the client’s case doesn’t win. Second, even when the client does prevail, the unpredictable timing of cash flow to the law firm impedes that firm’s ability to take on new business and grow. Other law firms—typically bigger, more full-service firms—are frequently unwilling or unable to take on any meaningful risk and prefer to continue to be paid using the standard billable hour model. These firms risk losing work to litigation boutiques and other firms that are willing to take contingent risk. Legal finance can help both types of firms evolve to give clients the results-based engagements they are looking for.
The inherent uncertainty of affirmative litigation can be sensitive, if not prohibitive, for full-service firms with higher fixed-cost structures.
Although many law firms (or their underlying clients) use legal finance for a single high-value, high-risk matter, they may be unaware that firms can also access capital through a portfolio financing facility. Such structures allow them to think beyond the hourly fee or pure contingency model. Portfolio financing bundles matters into a single diversified funding vehicle. The capital funding can either cover legal costs associated with the underlying matters or serve as operating capital for the law firm or company. As with all legal finance products, through portfolio facilities, the provider shares risk with the recipient.
Burford pioneered law firm portfolio finance in 2010. Here’s what we’ve learned about how portfolio financing helps law firms go to market and win business in more nimble and innovative ways.
3 Typical portfolio facilities
Legal finance providers tailor portfolios to a client’s specific needs and docket. In general, there are three common portfolio structures.
Contingency fees in unresolved litigation and arbitration matters represent valuable pending law firm assets that can be monetized to provide capital to the firm in advance of case resolutions and award payouts. A monetization portfolio is built around several “anchor cases” that are large or close to maturation. The legal finance company provides upfront capital based on its determination of the likely value of those legal assets and the firm’s corresponding anticipated fee. The capital can then be used by the firm to take on additional risk-based matters or be used as working capital for firm’s other operational needs. Law firms that have substantial existing books of contingency litigation at various stages, as well as additional cases of varying sizes and profiles, make good candidates for monetization portfolios.
In a risk-share arrangement, the portfolio typically consists of at least four or five large cases, all of which can either be identified at the outset or added on later. The capital is used to pay a portion of the firm’s legal fees and some or all of its third-party expenses as they are incurred. Law firms that want to invest in new business or expand their portfolios of matters taken on risk benefit from risk-share portfolios.
A law firm might take risk on its own legal fees but want to eliminate paying for third-party out-of-pocket expenses, which can be as much as 25% of a case’s costs and require firms to devote not just attorney time to a matter, but actually use their own cash on hand to pay for those expenses. An expenses-only portfolio facility eliminates or mitigates the financial strain of expenses increasing steeply over the life of the case, helping law firms and their clients to manage risk and cash flow.
Safety in numbers: Portfolio financing lowers risk and increases opportunity
After inventing the legal finance portfolio in 2010, as of 2021 Burford has funded 129 such capital facilities, representing a $3.6 billion total commitment value.
Legal finance empowers law firm litigators—no matter the cost structure or risk appetite of the firm—to serve clients on 100% contingency because the finance provider shares the risk. The exact percentage will vary according to how much of the upside the client wishes to keep. The immediate result will be the same: Money coming in to pay the bills until cases resolve.
Typically, portfolios comprise a mix of higher- and lower-risk cases and matters across different practice areas. A diversified portfolio of unrelated and uncorrelated but cross-collateralized matters presents lower risk to the finance provider, and thus the cost of capital is lower for the law firm. Law firms then have more agility to take on affirmative matters for their clients and increase firm revenue and profitability.
Legal finance also helps law firms be more entrepreneurial and opportunistic in finding cases and clients. With a legal finance portfolio in place, litigators can partner with their corporate colleagues to develop new business that might not have otherwise existed or that the firm would not otherwise have been in a position to win. Indeed, many companies have unpursued affirmative litigation that they may be unaware of or don’t consider economical to pursue. For example, in Burford’s 2022 Affirmative Recovery Programs Report,1 three of five GCs interviewed said their companies neglected to purse meritorious recoveries in the year prior and cited the cost of pursuing claims, judgments and awards as a deciding factor. Even the most sophisticated commercial actors can be plaintiffs. Corporate lawyers can bring in their litigation partners to meet with their firm’s existing corporate clients and review valuable affirmative claims that can now be asserted on a contingent or other alternative basis because the pursuit is backstopped by a portfolio deal. Having ready money to disburse via a portfolio facility can make litigation pitches and proposals more attractive to these clients.
Portfolio finance: No one size fits all
A portfolio’s composition generally reflects a law firm’s size and propensity for alternate fee arrangements (AFAs). Boutique litigation shops are often comfortable living in a world of contingency engagements, but they may struggle to maintain steady operating capital while they wait for matters to resolve. Portfolio financing smooths out the cash-flow lumpiness inherent in contingency practices and allows these firms to continue taking on risk and growing their client base and case load.
At the other end of the spectrum, Big Law firms, with some notable exceptions, are typically reluctant to consider AFAs for plaintiff-side litigation. The inherent uncertainty of affirmative litigation can be sensitive, if not prohibitive, for full-service firms with higher fixed-cost structures. For instance, at these firms, corporate lawyers, who bill hourly and get paid regularly, may not be willing to shoulder the cost of protracted litigation for years on end. That said, we are seeing more Big Law firms recognize the opportunity in complex, high-value plaintiff litigation and adopting programmatic approaches to legal finance, for example, through the creation of contingency or litigation finance committees. For these firms, portfolio financing can prove a ready solution to help evaluate potential AFA or contingent cases and streamline and bring discipline and process to case financing decision-making. In this manner, portfolio financing helps firms avoid ad hoc decision-making around which cases to take on risk and making legal financing decisions in a cash crunch.
All capital is not equal: Greater experience increases value
Law firms are cash businesses. When cash flow and liquidity are crucial, portfolio financing presents a ready source of capital
When sharing the risk through legal finance, the source of capital makes all the difference. An experienced external financier will have analyzed a higher volume of cases worth a greater total value combined than any law firm or in-house legal department would have the opportunity to review. A finance provider decides with the law firm on criteria to determine which cases are suitable for potential portfolio inclusion. These parameters may cover specific practice areas, certain sized cases and matters originating from a specific office or region. A provider’s due diligence includes discerning whether the funded counterparty has sufficient skin in the game based on that particular law firm’s appetite for risk. An experienced legal finance provider will then analyze the potential matters and determine which to include and at what price based on the data set and knowledge amassed through reviewing thousands of potential investments. After inventing the legal finance portfolio in 2010, as of 2021 Burford has funded 129 such capital facilities, representing a $3.6 billion total commitment value2.
Law firms are cash businesses. When cash flow and liquidity are crucial, portfolio financing presents a ready source of capital for firms to manage expenses and mitigate the risk of litigation. Further, portfolio financing provided by a sophisticated legal finance partner like Burford creates flexibility to win new business with attractive fee arrangements, invest in the firm and manage the compensation of partners working on multiyear contingency matters.
Read case studies and worked examples that illustrate how law firms use portfolio finance.
Patrick Dempsey is a Director with responsibility for originating new business with US law firms and companies. Prior to joining Burford, he was the US Chief Investment Officer and a Board Member at Therium Capital Management. He also worked as a litigator at Hogan Lovells and Proskauer.
 Burford Capital. 2022 Affirmative Recovery Programs Report. https://www.burfordcapital.com/insights/insights-container/2022-affirmative-recovery-programs-report/
 Burford Capital 2022 Client Outlook. https://www.burfordcapital.com/insights/insights-container/2022-burford-client-outlook/