Burford Capital Logo Light Burford Capital Logo Dark

Legal finance: An innovative financing solution favored by big business

October 11, 2019

Is legal finance used only by cash-constrained claimants in David versus Goliath-style legal disputes? Do companies with plenty of their own capital always pay for their own litigation instead of financing it?

The simple answer is no: Just as well-capitalized companies finance their real estate, equipment and other expenses, they are enthusiastic users of legal finance, a fast-growing type of specialist financing in which a third party assumes the cost and risk of a legal matter in exchange for a portion of the proceeds in the event of a successful outcome.

Indeed, new research confirms that CFOs at big companies with deep coffers are the most enthusiastic about legal finance.

The 2019 Managing Legal Risk Report: A Survey of CFOs and Finance Professionals reveals that companies with annual revenues over $10 billion are nearly four times more likely to say they would finance ten or more matters per year than those at companies with annual revenues under $1 billion. Larger companies are also more likely to seek more money per matter: One-third of finance professionals (32.2%) expect to use more than $5 million in legal finance per case per year—and that number increases to 41.5% among individuals at companies with revenues over $1 billion.

So, why is legal finance a tool of choice for the largest companies?

Legal finance is just another form of finance—and it helps big companies use capital efficiently

Ultimately, legal finance is nothing more than another form of corporate finance. In the same way that companies finance many other aspects of doing business, legal finance provides a much-needed financial tool as companies face the blunt economic reality of unavoidable and expensive commercial disputes. CFOs and finance professionals at the largest companies are most likely to recognize this. For example, a significantly higher percentage of CFOs at companies with revenues over $10 billion cited as a key benefit of legal finance that “it allows us to invest in growth and use our capital efficiently” (64.3% vs. 52.2%).

Big claims create big headaches—especially for large companies

When competitors or suppliers engage in anti-competitive behavior or other parties infringe on intellectual property or partners break contracts or commit fraud, such activity can result in staggering losses to the business. But many companies remain disinclined to take on the additional expense and uncertainty of making their organizations whole through litigation or arbitration—even if it means leaving millions on the table. It is difficult to predict when or how a matter will resolve, and that creates budgeting headaches for GCs even at the most well-capitalized companies.

Although it might seem counterintuitive, CFOs at large companies are even more likely to be concerned about the uncertainty and cost that pursuing such a claim may impose on the organization. A stunning two-thirds of CFOs and finance professionals (64.0%) say their companies have chosen to forgo claims due to the impact of associated legal expenses on the bottom line. Yet an even greater number of finance professionals from companies with annual revenues over $10 billion (77.3%) say that their companies have chosen not to pursue claims due to the anticipated legal costs.

Legal finance offloads the expense of recovery programs

Legal finance enables legal departments with large litigations to offload the cost and risk of pursuing claims to a third party and thus to create certainty around cost exposure regardless of the outcome. Legal finance thus addresses GCs’ and CFOs’ concerns about bottom-line impact.

Legal finance also helps companies of all sizes pursue affirmative recovery programs and actively add value to the organization. Companies like DuPont and The Home Depot have achieved success with such recovery programs—and legal finance has a role to play as recovery programs become more common.

Companies can use single-case or portfolio finance to pursue meritorious claims without added cost or risk. Companies with outstanding judgments and awards can recover millions in otherwise lost value through award monetization or engage in asset recovery services to pursue recalcitrant debtors.

Legal finance helps “recession-proof” legal departments

Research suggests that it’s no longer a matter of if a recession will occur, but when—finance professionals and in-house legal teams alike anticipate a recession within the next 18 months. And any economic downturn likely will have implications for the legal department: The Managing Legal Risk Report reveals that two thirds (66.9%) of CFOs and finance professionals agree that if the economy enters a recession, they will advocate the reduction of legal budgets.

Recessions force legal departments to do more with fewer resources. With legal finance, legal departments are able to do more with more—because the company offloads legal cost and risk to a third-party funder. So it should come as no surprise that CFOs see legal finance as recession protection for the legal department—most CFOs (66.9%) say that if the economy enters a recession, they will be even more likely to advocate the use of legal finance.