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5 minutes on... Portfolio finance

While single-case financing remains the manner in which most lawyers first experience legal finance, portfolio finance is an area of growing interest and opportunity for clients and law firms.

Yet despite clear demand for portfolio finance, many lawyers and in-house legal teams are still unfamiliar with what it is, how it works and why they should be using it.

What is portfolio finance?

Portfolio finance gathers multiple litigation or arbitration matters in a single funding vehicle. Capital can be used to fund legal costs associated with the underlying matters or for operating capital for the firm or company. The matters within the portfolio can be unrelated—indeed it is better if they are—and can be a mix of defense- and plaintiff-side matters.

Capital is typically provided on a non-recourse basis, meaning that Burford assumes downside risk and earns its investment back and a return only in the event of the successful resolution of the disputes.

How does portfolio finance work?

Portfolios are structured to meet the capital needs and risk tolerance of an organization and can be built around an identified pool of matters or on a going-forward basis. There are three typical structures:

  • Monetization portfolio—Monetization portfolios are suited to companies or law firms that are seeking substantial upfront capital to be used either for legal fees and expenses or for other operating purposes, and that have substantial existing books of litigation at a variety of stages in the litigation process, with additional cases of varying sizes and profiles. The portfolio is built around several “anchor cases” that are particularly large or that are close to maturation.
  • Risk-share portfolio—Risk-share portfolios are suited to companies that wish to pursue additional recoveries without exceeding their optimal risk profiles, or to law firms that want to invest in new business or expand their portfolios of at-risk matters. The portfolio typically consists of at least four or five large cases which can either be all identified at the outset or added on a going-forward basis, with capital being used to pay a portion of fees or expenses as they are incurred.
  • Expenses-only portfolio—Expenses-only portfolios address the financial burden that paying case expenses out of pocket can place on law firms that take on high-stakes commercial litigation on a contingency basis. Although many firms are willing to take the risk on fees, they may want to hedge on the out-of-pocket expenses, which can account for 25% of case costs and which do not generate ROI. Portfolio finance alleviates the burden of expenses increasing dramatically over the duration of the case, helping companies and law firms manage risk and cash flow.

Why use portfolio finance?

Access flexible capital at a lower cost of capital

Portfolio finance gives firms and companies access to capital that can be used to finance matters within the portfolio or for broader business purposes—flexibility that would be unusual in single-case financing. In addition, because risk is diversified across multiple claims, a portfolio arrangement may deliver a lower cost of capital.

Manage risk exposure

Portfolio finance enables law firms to invest resources in building out a practice or to increase the proportion of at-risk or contingency matters while also managing risk exposure by paying a portion of fees or expenses as they are incurred, in a similar manner to traditional litigation finance.

Create budget certainty

Companies increasingly use portfolio finance both to relieve legal expense budget pressure and to shift downside risk away from the business. Because capital is typically provided on a non-recourse basis, legal departments have no downside risk exposure if the disputes resolve negatively. And if matters take longer than expected, there is no extended drain on the company’s cash resources.

Pursue affirmative recoveries

According to 2018 research, more than two-thirds of all respondents (70%) say their organization has chosen to forgo claims due to the impact of associated legal expenses on the bottom line. [1]  Commercially-minded legal departments can use portfolio finance to support affirmative recovery programs—pursuing potentially valuable claims that the company otherwise would not have the resources to pursue without adding expense or risk to corporate balance sheets.

How has portfolio finance evolved?

Burford pioneered portfolio finance in 2010. In an industry under steadily mounting budgetary pressure and an uncertain economic climate, law firms and legal departments that want to manage cost and risk have embraced portfolio finance, and in the years since Burford’s first portfolio, it has grown to become a significant portion of Burford’s investment portfolio. In 2018 alone, Burford committed over $450 million to portfolio finance investments.[2]

[1] 2018 Litigation Finance Survey, available at http://www.burfordcapital.com/2018-litigation-finance-survey/.

[2] 2018 Burford Annual, available at http://www.burfordcapital.com/2018-burford-annual/.