Portfolio finance gathers multiple litigation or arbitration matters in a single funding vehicle. This may result in a lower cost of capital to fund matters in a portfolio as compared to single matters.
Single case financing involves a greater level of risk
While single case financing remains the entry product for most clients unfamiliar with the full suite of available legal finance products, it presents a high level of risk for the legal finance provider and, thus, correspondingly higher returns are needed to offset that risk.
Legal finance is almost always provided on a non-recourse basis, meaning the finance provider will earn its capital back and a return only if the underlying funded matter is successful. The financier assumes the downside risk and loses its entire investment if the case is unsuccessful. Because a single funded case presents a binary risk scenario for the financier—either a win or a loss—it brings a high degree of risk. The financier’s pricing for single funded matters will thus reflect this greater exposure.
Portfolio financing diversifies risk
Portfolios have significantly less risk than single case investments because they are cross-collateralized, with risk diversified across multiple matters. Portfolio financing allows law firms to pool together claims of a varying risk levels for a fixed cost while at the same time allocating greater resources to cases which require more capital. For example, if Burford invests in cases A, B and C, but only cases B and C return proceeds, we can receive our entitlement for all cases from cases B and C. The risk and reward are spread across multiple claims, decreasing our reliance on any one claim to provide a return.
Consequently, portfolio financing arrangements diversify the risk of loss for the legal finance provider, and thus law firms can benefit from a lower cost of capital than if each case within the portfolio was individually financed. Likewise, because the law firm owes nothing back to the finance provider on losing claims, it also reduces its risk on a pool of cases. It is also more efficient: With a portfolio financing arrangement in place, law firms can add matters to the portfolio which match the original parameters set in the agreement without further negotiation over terms.
Since pricing is heavily dependent on risk, and because single case outcomes are more unpredictable that a series or group of cases, it follows that portfolio finance provides our counterparties with a lower cost of capital.
To read more about pricing download our guide to legal finance pricing.