The legal finance industry began as a claimant-focused financing solution in David-versus-Goliath-style litigation scenarios. For the past decade, however, Burford Capital has been at the forefront of the maturation of the industry, having expanded offerings to include innovative financing arrangements for law firms to solve challenges such as managing risk, smoothing cash flow and easing year-end partnership draws. One of the most versatile offerings for law firms is portfolio finance.
Burford pioneered portfolio financing, making the first publicly announced law firm portfolio arrangement in 2011. Since then, appetite for portfolio financing solutions has dramatically increased: In 2018 alone, Burford committed $458.4 million to portfolio-based investments.
Given the downturn, portfolio finance is a key tool for law firms
With the steep downturn in the global economy, law firms will face more pressure to do more for less with their existing clients and will also need to be ready to compete to win new business in highly relevant practices like litigation and bankruptcy. Portfolio finance is a key tool for law firms in this new normal, giving firms the flexibility to offer their current clients creative pricing solutions and the capital to invest in profitable growth opportunities. Still, many lawyers remain unfamiliar with how portfolio finance can benefit their firms. Below, we define portfolio finance and describe how law firms in the US and Australia put it to use.
Defining portfolio finance
Portfolio finance is simply this: The provision of capital tied to a pool of existing or future cases. Unlike with single-case finance, where a finance provider works with a client to pay part or all of the related fees and expenses related to a single matter, under a portfolio agreement, the law firm gains access to capital directly from the finance provider—allowing the firm to continue to get paid partially by the hour, but still maintain upside. Capital typically is provided on a non-recourse basis, meaning the financier assumes the downside risk and earns back its investment and a return only in the event of a successful resolution.
When building a portfolio, the law firm and finance provider agree on a set of parameters (e.g., matters relating to a practice area, cases of a certain size, matters coming from a specific office) and the firm brings all cases matching those conditions to the finance provider for potential inclusion in the portfolio. Portfolios typically include a mix of higher- and lower-risk matters, those across practice areas and may even include defense matters. Because portfolios are cross-collateralized—where each case serves as collateral for the others in the portfolio—the risk to the finance provider is lower than financing a single case. As a result, the cost of capital is likewise generally lower than when capital is provided on a single-case basis.
Portfolio finance gives law firms access to capital to grow—without taking on additional risk.
Why law firms use portfolio finance
Lawyers at boutiques and Global 100 law firms alike use portfolio finance for a variety of purposes beyond simply paying for legal fees and expenses:
- Financing operating costs. Portfolio finance functions like any other corporate capital source and may be used to fund law firm activity unrelated to the underlying matters in the portfolio, adding certainty in uncertain times.
- Developing new business. More than half of lawyers (52.8%) cite competition as a significant business challenge. This is particularly poignant during times of economic uncertainty, when clients are looking to their firms to do more with less. Portfolios enable lawyers to approach new and existing clients with attractive fee arrangements, without having to individually negotiate the terms of each matter.
- Preparing partners for success. Legal finance can arm emerging partners with tools to give them a competitive edge even in a downturn and gain the internal approval needed to pursue strong cases.
- Transitioning billing models. Whether a firm wishes to actively pursue more matters on a contingent basis or simply needs to accommodate individual clients’ desired fee structures, portfolio arrangements enable the firm to transition to new billing structures without increasing the firm’s risk exposure.
- Managing partner compensation. Legal finance helps firms manage the perennial challenge of compensating partners who work on multi-year contingency matters without a “robbing Peter to pay Paul” impact on other firm partners.
How portfolios work
Because there is no one-size-fits-all approach to portfolio finance, there are a number of factors law firms should consider when working with a finance provider.
Portfolios can be structured to meet firm needs
Capital provided under a portfolio arrangement can be used flexibly, and need not be reserved solely for paying lawyers’ fees or for the immediate costs and expenses of the underlying disputes. If the law firm needs an immediate influx of capital or seeks to smooth out revenue, Burford can structure solutions accordingly.
Matters may be related or unrelated
A diverse portfolio of unrelated and uncorrelated matters presents the lowest risk and is generally preferred, but Burford considers portfolios of similar cases as well.
Matters may be selected in the future
Portfolios can either be built around a group of existing cases or in anticipation of future cases to be added over time. In the latter instance, Burford partners with a law firm with a proven track record of success to commit capital at closing towards future new matters, which the firm will vet and put forward for financing. Burford and the law firm negotiate terms in advance and agree on the criteria for the types of cases the firm will propose for inclusion in the portfolio.
Portfolio arrangements can relate to a single department or practice area
While portfolios can span entire firms, they can also be tailored to apply only to a particular department or practice area that requires capital for growth. For instance, a portfolio may be tied to a firm’s international arbitration practice, where even cash-rich clients increasingly expect firms to share risk.
Regional focus: Law firm portfolios in the US
In the US, firms that take matters on contingency and firms that bill on an hourly basis use and benefit from portfolio finance differently.
Contingency fee firms typically use portfolio finance to increase the number of matters they are able to take on by removing the downside of taking new cases on risk—thereby increasing revenue without increasing risk proportionally.
Law firms increasingly recognize that the best way to increase profit is to find new ways of generating revenue, rather than cutting costs. To that end, hourly fee firms often use portfolio finance to expand plaintiff practices without adding risk to the firm. In fact, it is becoming increasingly rare to find a Big Law firm that doesn’t have some form of plaintiff-side offering, as even the most traditional defense firms understand the need to diversify their offerings and be ahead of the curve if they want to compete.
Regional focus: Law firm portfolios in Australia
In Australia the concept of portfolio finance is still in its infancy. Historically, law firms have been unable to charge damages-based contingency fees and thus they simply have not required solutions to remove contingent risk.
With Burford’s entry into Australia, however, the portfolio finance concept has already begun to gain traction, and we have worked with law firms there to explore applications of this concept in the class action context. As legal finance becomes increasingly common among Australian firms working on high-stakes commercial matters, we expect to continue to lead the evolution of portfolio-based legal finance in the region.
In the near term, we expect further demand for portfolio financing on the back of proposed legislation in the state of Victoria, which seeks to permit law firms to charge damages-based contingency fees instead of hourly fees in class actions. Many Australian firms will see this as an opportunity to undertake more plaintiff-side cases and will naturally look to legal finance as a way to mitigate the inherent risks associated with taking on such cases.
Portfolio finance is on the rise both in old and new markets and will continue to become key to the international growth of the legal finance industry. Burford’s depth of experience, particularly working with law firms in the US, ideally situates us to work with Australian law firms to explore a variety of options for law firm portfolio funding. To that end, we will be a key partner in the growth plans of a number of high-profile Australian law firms who are looking to do more plaintiff-side work.
 Burford Capital. 2018 Annual Client Report. Available at: https://burfordcapital.com/insights/insights-container/the-2018-annual-client-report/.
 Burford Capital. 2019 Legal Finance Report. Available at: https://burfordcapital.com/insights/insights-container/2019-legal-finance-report/.