As businesses continue to grapple with the financial impact of Covid-19, legal assets may represent an area of opportunity for generating liquidity and managing cash flow—but legal assets also remain largely invisible to many finance departments. As Burford begins work on what we hope to be a groundbreaking study of how CFOs think about this aspect of their balance sheets to be published later in 2021, we share below some of the initial perspectives we have gathered from finance professionals.
Given the current economic climate, specifically the uncertainty that comes with doing business in a Covid economy, how interesting is a financial product that adds certainty by removing downside risk from pending claims and awards?
Amanda Parness: For anyone other than the largest companies or those with PE or VC essentially guaranteeing other liabilities on the balance sheet, it has become challenging, and somewhat expensive, for many of these companies to access the capital markets in this time of Covid. Corporate advisors and CFOs of mid-market companies owe it to their clients and companies to explore alternative sources of financing.
Jim Kilman: A large part of what a CFO does today is managing risks: Liquidity risk, credit risk, rate risk, asset and liability management (ALM) risk. A financial product that provides funding while simultaneously de-risking has significant appeal in any environment.
A large part of what a CFO does today is managing risks. A financial product that provides funding while simultaneously de-risking as significant appeal in any environment. Jim Kilman
Michael Curran: The idea of creating certainty around cost and de-risking investments in litigation is appealing, because it has an immediate impact on the business. CFOs can't think three years out, so any solution that generates only long-term benefits is hard to get excited about—especially for public CFOs who manage quarterly and annually. For those CFOs whose companies were negatively impacted by Covid-19 and need to prioritize cash flow, litigation funding becomes even more interesting.
Does the Covid economy create a springboard for change insofar as there is more pressure on functions that are not typically perceived as commercial—like legal—to think more commercially?
Michael Curran: Covid-19 has been an accelerator for trends already underway. All functions are expected to think commercially, but the pandemic forced these same functions to act commercially. Real estate rationalization, contract renegotiations, increased focus on privacy and data tied to a remote workforce and asset monetization, has pulled legal ever closer to the commercial side of the business.
This change is not temporary and will certainly encourage legal teams to become even more creative and commercial in the coming year.
Jim Kilman: Many companies have been moving down this path for quite a while; Covid is certainly accelerating it. In a world where growth is challenged and margins are under pressure, most companies are taking a careful look at how to get increased efficiencies out of everything they do, whether by re-engineering, outsourcing or the like. Legal departments are no exception, which is why there has been so much interest in legal finance products that reduce costs and risks while improving liquidity, all of which reduce the “drag” from what has traditionally been a cost center for most corporates.
Burford is undertaking research in early 2021 addressing how corporations use legal finance. As a CFO, what questions do you think would be valuable to address?
Amanda Parness: There is a lot of opacity to litigation finance and the tendency for investors and companies alike to view it with suspicion. A transparent view of the process that finance providers such as Burford go through to assess the risks, and what further potential unforeseen monetary and timing costs could occur during the lengthy course of a legal case for those that accept litigation are table stakes information that should be laid out for all constituencies involved.
Jim Kilman: I’d start by asking: “What are the legal-related problems you’re looking to solve?” “What are the challenges you’re wrestling with in thinking about your legal function: Costs? Uncertainty of outcomes on commercial claims?” “What’s your appetite for non-recourse financing. How does that work within your capital stack?”
Michael Curran is Chief Financial Officer and Chief Operating Officer of Coleman Research. He previously served as CFO of Bloomberg Professional Service, Bloomberg BNA and Bloomberg Government and has two decades of progressive financial and operational experience, including CFO positions at MNG Health and TrialScope. He also is a Board Member of Collegium Holdings and a Mentor at First Round Capital.
Jim Kilman is Chief Financial Officer of Burford with responsibility for managing and overseeing Burford’s global finances and financial strategy. Prior to joining Burford, he spent 32 years in the investment banking business, including senior roles at Goldman Sachs, ABN AMRO and PaineWebber. Most recently he was Vice Chairman of Investment Banking at Morgan Stanely.
Amanda Parness is founder and Chief Executive Officer of Spring Advisory, where she works with companies at various stages of their development to prepare them for growth over the short and medium term. She has worked in the investment industry for over 25 years, including over 20 years as a Managing Principal at GoldPoint Partners, New York Life Insurance Company’s private equity investment arm, investing over a billion dollars through and alongside some of the best mid-market private equity funds in the US.