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Top questions about legal finance: Conversations with GCs

March 31, 2020

A year ago, Burford predicted that in 2019 legal departments would become more commercially minded and that, as part of that transition, they would increasingly become users of legal finance.

Based on our own experience those predictions proved true. In 2019, we had many conversations with legal teams who were equally focused on managing legal expenses to stay within their budgets as they were on generating recoveries to proactively add measurable value to the organization. We always welcome these conversations, because legal finance can be an essential tool to help in-house lawyers achieve both their cost management and value generation aims—by offloading the “money out” cost of litigation to a third party (through traditional legal finance), and by enabling the organization to pursue valuable recoveries and bring “money in” before a matter resolves without adding further risk to the company (through monetizations).

2019 saw an increase in corporate monetizations

Among the major trends was an increased interest in monetization, something of a new concept to many in-house legal teams but appealing to businesses that wish to de-risk their litigation portfolios and achieve greater control over the timing of their recoveries. As distinct from using legal finance to pay lawyers’ fees and expenses incrementally as a matter proceeds, companies convert a portion of a pending claim or award into cash, with a legal finance provider essentially advancing capital that would otherwise be captive until the resolution and payment of the claim or award in question.

By way of example, in 2019 Burford provided a $75 million monetization to a Fortune 100 company that wished to monetize a substantial litigation position.

Whist we welcome this increased interest in and use by in-house legal (and finance) teams of legal finance generally and monetizations specifically, there remains a significant gap in awareness and understanding in the market, particularly among GCs.

GCs are increasingly interested in understanding financing best practices

As we head into 2020, we remain focused on closing this gap by listening and talking to in-house lawyers and their corporate colleagues to ensure they understand the role that legal finance can play in their organization’s and their own success by demonstrating the legal function’s impact on reducing costs and securing recoveries. We anticipate that continued concerns about a potential downturn will bring urgency to these conversations.

Some of the top questions we often hear from GCs who are just starting to consider their financing options include:

  • Are we the first?
    For entirely understandable reasons, GCs are cautious about taking the risk of being the first to try something new. As noted above, Burford routinely works with companies that are financing legal fees and expenses as well as monetizing pending claims and awards, and these companies run the spectrum from startups to the Fortune 100. Although Burford never shies away from innovating on behalf of a client—and indeed we hear from clients how much they value our ability to structure novel deals to meet their needs—we have significant experience across company types and industries and across deal structures.
  • Why should we use your money vs. ours?
    GCs need only to talk to their CFOs to gain innumerable examples of ways in which companies routinely use financing to optimize and manage cash flows. Legal finance is no different—it’s just another form of finance. Even if a company has ample cash to pay lawyers’ fees and expenses, it may be advantageous to move the downside risk of loss off the company’s budget, especially in scenarios and jurisdictions where adverse costs apply. And in the case of monetizations, the company may prefer immediate liquidity over waiting potentially years to unlock the captive value of pending claims and awards.
  • Why should we work with you vs. a law firm working on contingency?
    Our starting point is how we can add value to a particular commercial matter. A client may be unable to find a firm willing to act on risk, or they might not be able to find the expertise they need from those firms prepared to act on a contingent basis. In such a scenario we can bridge the gap between client and firm needs by covering the fees and expenses for the client’s law firm of choice. Alternatively, we may arrive at a hybrid arrangement in which we share risk with the client and the firm (for example, if the firm wishes to work on partial contingency with Burford covering the remainder). In some situations, our financing pricing can be more competitive than a standard law firm contingency entitlement. We can therefore help companies to avoid overpaying for risk-sharing. And very often we may provide direct financing through a capital facility with the law firm (also described as portfolio-based financing) that enables the firm to offer flexible and competitive terms. In any of these scenarios, our focus is on how Burford can add value.
  • Will this impact control?
    Perhaps the question we are asked most frequently, the answer is very simply, no. Control of litigation and settlement strategy and decision-making remains with the client, and Burford acts as a passive provider of capital.
  • How do I know you will stay committed for the duration?
    Clients need to be sure that any legal finance provider they work with will remain a partner for the duration of the particular case: Commercial litigation and arbitrations are by definition complex, highly risky and can take years to resolve. We advise clients to select a partner with sufficient and readily available capital to finance their matters for the long haul. We also advise clients to verify that the legal finance provider has a track record of success and a contractual commitment not to withhold funding for strategic or other reasons. Burford is a publicly traded company with a ten-year track record, had deployed over $1 billion in each of 2018 and 2019 and has immediate capital availability.

Start the conversation with strategy

Equally important to the questions we answer are the questions we pose to in-house legal teams about their approach to managing litigation risk. As we consider how to add value to a particular client need, we ask GCs and heads of litigation to address the following types of questions:

  • What is your company’s current litigation posture?
  • How is your litigation strategy connected—or not—to business imperatives?
  • What experiences have you and your team had with legal finance? What worked? What didn’t?
  • Has your company declined to pursue litigation because of the cost?
  • Does your company have unpaid awards or judgments?

Not at all surprisingly, it’s our experience that starting the conversation about legal finance with an understanding of the company’s litigation and business strategy helps us to be more effective partners to the in-house legal teams with whom we work—and we look forward to having more of these strategic conversations as the year unfolds.