Here’s a paradox: Even as more lawyers become aware of legal finance as a tool to offload cost and risk, many of them remain unfamiliar with one of its most potent uses, the monetization of pending claims.
Lack of awareness of claim monetization is all the more surprising given that it alleviates one of the biggest frustrations faced by companies involved in major commercial disputes: Their inability to control the timing and certainty of cash flows back to the business when they pursue recoveries through litigation. This has relevance in the broader C-suite. According to the 2021 Legal Asset Report, the majority of finance professionals (56%) don’t think that they are able to control timing of cash flows from litigation—suggesting a lack of exposure to tools like monetization that make this possible.
Why then are so many lawyers unaware of claim monetization? Perhaps because so much discussion of legal finance focuses on its most common use, in which a third party pays lawyers’ fees and expenses so that claims may proceed. In-house lawyers who only see legal finance as a tool to pay their lawyers may mistakenly conclude that unless they can’t or don’t want to pay their lawyers out of pocket, legal finance isn’t for them. Far from it: Legal finance enables companies to unlock the asset value of pending claims—including companies that can afford to and do pay their lawyers out of pocket. In doing so, monetization gives companies (and their firms) the ability to control the timing and certainty of cash flows back to the business by accelerating a portion of a pending claim.
What is monetization?
Monetization is simply the conversion of a portion of a pending claim into cash, with a legal finance provider essentially advancing capital that would otherwise be captive until the resolution and payment of the claim in question.
Pending claims often represent vast latent value to the organization. Unfortunately, they carry a tremendous amount of uncertainty as to both outcome and timing—and because they are highly illiquid, traditional capital sources historically have been unable to assign asset value to them. Because legal finance providers have experience and expertise in assessing the value of legal assets, they can help companies unlock value through monetization.
How does monetization work?
Monetization accelerates an organization’s access to capital. Capital is provided upfront, without the company needing to wait for outstanding claims to resolve. This offers immediate liquidity that may be used for virtually any business purpose.
Unlike fees and expenses financing, in which money flows from the finance provider to pay lawyers as costs are incrementally incurred, capital provided through monetization is paid to the client in a lump sum upon investment and can be redirected to fund defensive positions in the legal department—or to build warehouses, hire staff, shore up corporate balance sheets or any other corporate purpose. Since capital is typically provided on a non-recourse basis, the company is obligated to repay the investment only following the successful resolution of the matter.
What claims are suitable for monetization?
Claims suited for monetization tend to be large-scale matters with significant damages. These claims must meet the standard criteria for legal finance, which for Burford include:
- Strong merits
- Type of matter (complex commercial litigation, including antitrust, securities, fraud, contract, patent and intellectual property, trade secret and other business tort matters, as well as international arbitration)
- Experienced litigation counsel with successful track records and a strategic approach
- Jurisdiction (matters filed or expected to be filed in domestic courts in a common law jurisdiction or in an internationally recognized arbitration center)
- Damages supported by solid evidence of loss and large enough to support our investment and returns with the client keeping most of the proceeds if the case goes well
Claims can be monetized at various pre-settlement stages, but as a general matter, more capital can be provided for matters that are more advanced through litigation.
What are the benefits of monetization?
For companies with high-value claims, monetization offers several obvious benefits:
- Mitigating risk:Companies can reduce their exposure to the risk of loss, a reduction of damages or a reversal/set aside of a judgment.
- Controlling timing:Companies gain access to capital based on their preferred timeline—cash they can then invest in the business without delay.
- Unlocking better pricing:Should companies have multiple claims suitable for monetization, financing can be offered through a portfolio-based facility that provides more competitive pricing.
How to find the right legal finance partner?
Companies seeking to monetize claims should take care in identifying a reliable legal finance partner with a clear track record and capital sources. GCs say that reputation and experience are the two most important factors in choosing a legal finance provider, followed by cost of capital, according to the 2022 Affirmative Recovery Programs Report.
Monetization presents unique requirements of a legal finance provider. Many well-capitalized finance firms lack the expertise or the willingness to provide a lump sum investment for a legal claim because they lack the expertise to value that claim. Conversely, few specialist legal finance providers have the capital to monetize significant claims. The 2022 Affirmative Recovery Programs Report found that 8 out of 10 senior in-house lawyers able to name any legal finance companies cite Burford as the commercial legal finance company with which they are most familiar.
It is therefore important for companies to work with a finance provider with sufficient valuation expertise and talent, and with sufficient resources to provide the requisite capital—and when timing is of the essence, working with a provider that has access to its own permanent capital (as Burford does) helps ensure the process moves swiftly and smoothly.
This article was originally published on Burford’s website on Jan 22, 2020, and was updated on Oct 04, 2022.