In-house legal departments have become increasingly integrated and strategic, with responsibilities not only for risk management but also for value generation. Indeed, according to the latest research, 71% of senior in-house lawyers believe that the legal department needs to both manage budgets and risk and seek new ways of adding value.
Affirmative recovery programs can be an important means for in-house leaders to pursue value—and thus legal finance is becoming an increasingly critical tool.
To illustrate the myriad benefits and applications of legal finance for corporate legal departments, we’ve “done the math” on some case studies and hypothetical examples of the types of matters that can be financed. These examples demonstrate different use scenarios and associated benefits. While they do not provide an exhaustive list of all the ways legal finance can help solve business challenges, they do help illustrate how it works and why it can be a financial game-changer for the legal department.
Worked example: A company in restructuring finds hidden value
Rocky Waters Rafting is undergoing voluntary Chapter 11 reorganization. It is also in the middle of a preexisting legal proceeding that likely will return $80 million in damages to the business—but that will take at least two years to resolve, as it is unlikely to settle before appeals. The company recognizes that litigation will be critical to its reorganization plan, but it has been unable to obtain debtor-in-possession (DIP) financing to fund the continued prosecution of the claim. The company’s attorneys are unwilling to go on contingency and switching attorneys at this late stage will be costly.
Burford agrees to monetize 25 percent of the claim, or $20 million, enabling Rocky Waters to immediately free up liquidity to satisfy its creditors and to pay legal expenses. The capital is provided on a non-recourse basis in exchange for its investment back and a pre-defined percentage of the recovery net of the return of investment. Given the dire need for liquidity, management presents Burford’s financing to the bankruptcy court as part of the reorganization plan, and the monetization is approved.
With financing from Burford, Rocky Waters gains immediate access to $20 million, some of which it uses to repay creditors as part of a court-approved reorganization plan. Its legal matter concludes in three years for $65 million. The company repays Burford its investment back plus a return, leaving a $15 million recovery for the once-imperiled company.
Worked example: Legal department adds certainty to its legal spend while demonstrating value
Peerless Inc. is a mid-sized publicly traded company that is facing significant margin pressure and has asked its corporate departments to manage costs accordingly. The company’s GC has identified several commercial litigation and arbitration matters that could result in aggregate proceeds over $200 million, but the CFO has pushed back: It’s unclear when the matters will resolve, and the GC’s firm of choice is not willing to share risk or reduce its hourly fees beyond a token discount—creating undesirable uncertainty in Peerless’s litigation spend.
Burford provides $20 million of portfolio financing to offset Peerless’s legal fees across the pool of matters, enabling Peerless to pursue its recovery program without significant out-of-pocket spend. Under the terms of the agreement, Burford’s investment is returned on a first-dollar basis, plus a multiple of the invested amount. Because the investment is non-recourse, Peerless bears no risk of loss in an unsuccessful outcome. The portfolio financing arrangement allows Peerless to pursue its recovery program without adding significant cost or risk to the corporate balance sheet and with certainty as to its related litigation costs.
Over the following years, Peerless recovers $200 million across its pool of matters, remitting a portion to Burford according to the negotiated investment terms. By the end of the investment, the portfolio has generated $140 million in proceeds to Peerless, with minimal downside risk and without adding materially to Peerless’s legal budget.
Worked example: Financing affirmative and defense matters
The legal department at Apex Corporation has expanded rapidly to handle a growing slate of offensive and defensive litigation matters. Its increase has drawn the scrutiny of the CFO, who is anxious to keep expenses in check. Apex’s law firm of choice will consider a discount to fees with a corresponding uplift but will not take material contingency risk. The GC has now identified an additional slate of affirmative litigation to pursue, but despite the realistic expectation of significant recoveries, the company’s CFO lacks the risk tolerance to support the plan, preferring to allocate resources solely to defense matters, which are viewed as necessary expenses.
Burford diligences the portfolio and confirms a path to $100 million in recoveries—a number that dwarfs projected settlements from Apex’s defense matters. Burford offers a $15 million blended portfolio to cover the $5 million budget for defensive litigation costs and an additional $10 million of affirmative litigation costs, in exchange for its investment back plus a percentage return of the eventual recovery net of its investment. This return structure resembles the contingency arrangement with which Apex is familiar: Burford receives a defined entitlement from affirmative recoveries only, and Apex will owe nothing if the affirmative matters are unsuccessful.
With financing in hand, the GC secures the CFO’s approval to pursue the meritorious cases. Over the next several years, the portfolio generates $100 million of recoveries. Meanwhile, the defense matters financed through Burford settle for $20 million. Ultimately, Apex nets $30 million in proceeds, transforming the legal department from a cost center to a revenue generator without risking any up front investment.
Case study: Accelerating a Fortune 100 company’s claim value for immediate working capital
A US-based Fortune 100 company with a global footprint was pursuing a high-stakes litigation claim. The case had strong merits and was worth hundreds of millions of dollars but was in a relatively early stage and was expected to take two or more years to resolve. Until then, the company couldn’t recognize either the litigation value as an intangible asset or the expected future cash value of the litigation. The company did not need funding to pay for legal fees for the case, but it did want to accelerate into the current year a portion of the cash that it expected would result from a successful litigation outcome.
Burford provided $75 million in cash to the company at year end. If and when the company won the case and collected cash damages, the company would pay the $75 million plus a return to Burford and retain the expected significant remaining recovery from the case. In the meantime, the company could use the $75 million in working capital for any corporate purpose, allowing it to invest in growth, use the cash to defend unrelated litigation or any other business need.
Burford’s $75 million of non-recourse capital delivered an accelerated and guaranteed financial result ahead of the resolution of the case. This “monetization” was a complement to the client’s existing full contingency arrangement with its outside law firm resulting in the company simultaneously financing the cost of pursuing the high-value claim and generating significant liquidity for the company—all with no downside risk. If the case lost, the company would keep the $75 million in financing from Burford and have expended no legal fees to litigate the case.
Zero-cost pursuit of litigation and an immediate $75 million increase in liquidity—reducing the company’s opportunity cost and increasing its liquidity and growth trajectory.
Worked example: Helping a company assess and pursue claims
Innovation Inc. has identified numerous affirmative claims that it would like to pursue, and the company’s external law firms have done sufficient initial diligence to support bringing the claims, though all of the lawyers are on hourly fee arrangements and have not expressed a strong opinion that any of the claims will be successful. The combined cost of pursuing all the claims is significantly more than the legal department’s budget, and the GC is faced with the choice of which (if any) cases to pursue to maximize return on litigation cost. As an alternative, the GC approaches Burford for potential financing of all its claims.
Burford performs preliminary diligence on the claims and determines that one of the potential cases meets its investment criteria, although it presents significant risk. Burford agrees to finance the $5 million legal budget for that case in exchange for its investment back, plus a multiple on the investment with Innovation responsible for expenses anticipated at $1 million. The arrangement is similar to the contingency fee arrangements with which Innovation is familiar. The capital is provided on a non-recourse basis, meaning that Innovation must repay Burford only if the underlying matter is successful. The availability of financing makes the GC’s decision clear: Pursue the financed case and abandon the rest, which an independent third party has declined to fund.
The case financed by Burford results in a $40 million settlement in just under two years, offering the company a speedy path to a $19 million recovery, after it returns Burford’s initial investment and pre-defined multiple.