In the aftermath of an economic downturn, increased corporate misconduct and subsequent financial losses for investors will result in an increase in meritorious claims for asset managers. Asset managers can limit these losses with legal remedies; however, they often don’t because doing so requires shareholders to bear unpredictable costs or give up a substantial portion of the fund’s recovery to satisfy a law firm’s contingency fee. The time and cost dilemma often leads to valuable unpursued legal claims and unrealized recoveries. Legal finance provides a solution. With legal finance, asset managers can turn contingent claims into recognizable assets during a time when cash and liquidity are critical.
Financing from Burford is offered on two typical financing models: Single case financing or portfolio financing. Below, we take five minutes to discuss portfolio finance.
What is portfolio finance?
Portfolio financing enables asset managers to pursue multiple claims simultaneously, allowing investors to pursue recoveries globally under an umbrella agreement and unitary fee structure. A portfolio arrangement is tailored to an asset manager’s needs and financing is available for investments in a series of individual arbitration and litigation matters, which can also include defensive matters.
How a portfolio finance arrangement works
In securities litigation, Burford identifies eligible claims based on an asset manager’s predetermined criteria under an umbrella agreement, with each matter undergoing an individual assessment of merit and risk. While Burford identifies and evaluates meritorious claims, the client retains full discretion to pursue or not pursue each claim with its counsel of choice. Capital is then provided on a non-recourse basis—meaning repayment is contingent on successful outcomes. The asset manager’s commitment to using Burford’s financing for all eligible claims their funds pursue results in more favorable pricing than would be available under single case financing—this covers due diligence costs, litigation fees and expenses and insurance for adverse costs.
Key benefits of portfolio finance
- Administrative relief: Portfolio financing relieves the considerable burdens placed on in-house counsel who must otherwise evaluate competing proposals from law firms or funders for every new case.
- Immediate cash flow: Funds associated with a portfolio investment are immediately available for use where needed.
- Defense cost: Portfolio financing may also allow funds to finance defense costs. For example, a mutual fund that holds a distressed debt security may have a claim against the issuer or underwriter if the security’s offering statement included material misrepresentations. The fund may also be involved in an unrelated inter-creditor dispute in which it is a defendant. The fund can enter into a financing arrangement with Burford whereby the anticipated recovery in the fund’s affirmative lawsuit finances defense costs in the inter-creditor dispute.
- Cost of capital: In a portfolio finance arrangement, the cost of capital is typically lower because the risk of loss is diversified.
Challenge: A global asset manager had reviewed competing proposals from law firms and funders for each new securities claim—creating both cost and time inefficiencies.
Solution: In search of a more efficient solution, the fund manager entered into a portfolio financing arrangement with Burford, enabling it to pursue claims globally under a master agreement with a unitary fee structure.
Impact: The asset manager’s multi-year, multi-jurisdictional commitment with Burford enabled it to pursue recoveries for multiple claims efficiently and maximize the recovery for the benefit of fund shareholders while minimizing litigation risk and fund expenses.