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Demystifying the litigation finance diligence process

October 17, 2019
Emily Slater

It’s human nature to want to start a journey knowing where you’re going, how you’ll get there and when you’ll arrive. And this line of inquiry is typical of our initial conversations with clients and law firms about litigation finance, when we are often asked:

  1. What are Burford’s investment criteria?
  2. What do I need to do to secure financing?
  3. How long will it take?

The journey to litigation finance is more straightforward than it may seem to those who are new to the practice. We work hard to make that journey clear, even as we recognize that securing non-recourse financing for multi-million-dollar, high-stakes commercial litigation requires expertise and effort. But we strive to create clarity around the process because, as our experience and research confirm, its absence can frustrate clients and firms seeking external capital.

Burford is unique in conducting the entirety of our diligence and investment process in-house. Our goal is always to complete the process as efficiently as possible. And regardless of the outcome, we strive in every interaction to create an understanding on which we can build in the future. In that spirit, we offer this guidance that we hope will be useful in “demystifying diligence” for both new and seasoned users of litigation finance.

What are Burford’s investment criteria?

The best candidates for litigation finance meet the following criteria:

  • Type of matter: We invest in complex commercial litigation at any stage, including antitrust, securities, fraud, contract, patent and intellectual property, trade secret and other business tort matters, as well as international arbitration.
  • Strong merits: We receive returns only when cases succeed, so we carefully assess the facts and legal merits of a claim, starting with an operative complaint or written summary.
  • Counsel: We value cases led by experienced litigation counsel with successful track records and a strategic approach. During initial review, we confirm that counsel has been retained and has performed an analysis of the factual background and legal issues of the case.
  • Jurisdiction: We invest in matters filed or expected to be filed in domestic courts in a common law jurisdiction or in an internationally recognized arbitration center.
  • Capital requirement: Clients, firms and Burford get the best value when the amount requested is at least $2 million. Most of our investments are between $4 and $10 million, and some are significantly larger.
  • Damages: Damages must be supported by solid evidence of loss, and should be large enough to support our investment and returns with the client keeping most of the litigation proceeds if the case goes well. Although the ratio of investment to expected recovery varies depending on the case, for an investment of $2 million, the expected compensatory damages should be around $20 million.

What do I need to do to secure financing?

At Burford, we work hard to provide the best expertise and client experience in addition to the largest pool of available capital. Ultimately, we approach the investment diligence process as a collaboration, not a transaction.

Clients and firms seeking financing can aid the process in four important ways:

  • Prepare a realistic budget: Matters in which we invest must have sufficient funding to get to the finish line. That requires a realistic, conservative budget through trial. The most frequent reason we reject good cases is that the ratio of necessary investment to expected return is too narrow. To confirm that the economics of the litigation investment are workable, we rely on our counterparties to provide clear budgets that do not assume early settlement.
  • Organize documents: Active diligence requires our review of the key documents underlying the dispute as well as financial information about the businesses involved. We can work more efficiently when our counter-parties provide documentation quickly.
  • Be responsive: The single most important way that clients and lawyers can aid the process is to respond quickly to questions and document requests—a commitment we make to our counterparties.
  • Understand the risk profile of the case: Burford is in the business of taking risk, but we invest in cases that have strong risk profiles (acknowledging that Burford may have a different risk tolerance from finance firms or lawyers). Some of the characteristics we look for include:
    • The case does not turn on a “he-said-she-said” credibility determination
    • There is more than one viable legal theory that could lead to a recovery
    • The legal theory is tested and has good support in statutory or case-law
    • The case theory makes sense in the commercial context of the transaction or course of dealing
    • The damages theory can be reasonably extrapolated from past performance of the damaged company or there is an established contract, statutory or royalty rate
    • The economics of the investment do not depend on the case settling early or on obtaining treble damages

How long will it take?

The timeframe to secure litigation finance depends on a variety of factors. Although we have financed cases in a matter of a few days, as a general rule, if cases are well worked up and information is provided in a timely fashion, commercial matters typically take four to six weeks from initial case review to investment. Patent matters typically take 30-90 days (with matters past PTAB or dispositive motion practice taking less time and patents that have not yet been tested taking more)

A variety of factors influence how long the overall process takes, including:

  • Client and firm: Again, the responsiveness of clients and law firms in answering questions and providing documents is among the most significant factors.
  • Stage: Matters with fewer unknowns (e.g., matters on appeal) require the least time (as little as a week to 10 days); yet-to-be-filed matters require more time.
  • Case type: International arbitration and patent matters typically require more time.
  • Single-case or portfolio: When a “going forward” portfolio is in place, the diligence process for new matters can be completed extremely quickly. For law firms, that provides speed that can be a significant advantage in competitive situations.

Snapshots: Quick facts about the diligence process

3 Steps to financing
  1. Initial review: Confidentiality agreement, background documents reviewed
  2. Active diligence: Discussion of merits and economics, usually culminating in term sheet for matters in which we wish to invest
  3. Investment: Definitive documentation and execution of deal
  • Because we execute a confidentiality agreement as the first step of our diligence process, our communications with lawyers and their clients generally are protected from discovery by the work product doctrine
  • For an overview of caselaw affirming work product protection for communications with outside providers of litigation finance, see “Work product protection for litigation finance” on Burford’s blog
  • Out of an abundance of caution, despite the strong caselaw, we are circumspect about what we request in the diligence process to avoid any risk of waiver
  • We do not request materials that are protected only by the attorney-client privilege
How Burford’s diligence adds value
  • Client: Receives an independent assessment of risk—insights that can give reassurance of the strengths of a case or highlight potential areas of weakness
  • Lawyer: Receives an economic analysis that includes the risk/reward of taking on the case—insights that can make the firm’s practice more profitable
Questions to ask when diligencing funders
  • How much available capital does the financier have to invest?
  • Does the fund have a defined exit period or sunset date?
  • What are its sources of capital, and how reliable are those sources of capital?
  • How quickly can it provide a final term sheet? (Pre-diligence term sheets are almost always revised.)
  • Does it conduct its diligence in-house?