Finance provided on a portfolio basis—which follows the model of single-case litigation finance but with financing collateralized by a pool of multiple matters—is increasingly popular. Data from Burford’s 2017 Annual Report clearly demonstrates this trend, showing that over half (63%) of current committed capital is invested in portfolio arrangements. We anticipate interest in the portfolio approach to continue growing as legal teams increasingly embrace it as a tool to move legal costs off balance sheets and address perennial C-suite complaints about litigation spending.
A case study exemplifies this trend. An FTSE 20 company traditionally paid for litigation out-of-pocket and suffered negative accounting consequences as a result. Without financing, litigation was impairing its financial performance because of the way that accounting rules regard treatment of litigation expenses and awards.
Legal expenses paid by the company were immediately recorded as expenses, thus reducing its earnings. Exacerbating the situation, litigation recoveries were recorded “below the line” as non-recurring or extraordinary items. That was problematic for the large corporate—as it is for many businesses, particularly for EBITDA-based businesses—because while the accounting result of a successful claim may result in a permanent reduction in EBITDA, recoveries do not increase it. The FTSE 20 company was reducing its operating profits by self-financing its litigation, the and needed a solution that would help take legal costs off its balance sheet.
Litigation finance provided the solution in the form of a £40 million non-recourse financing arrangement backed by a portfolio of pending litigation matters. This transformed how the multinational company subsequently managed litigation expense and provided multiple corporate benefits. The company not only had the flexibility to use third-party capital to relieve legal expense budget pressure or to implement unrelated corporate activities but could also book the capital as income received—rather than waiting for the result of underlying litigation matters—because it was provided on a non-recourse basis.
As this case study suggests, the portfolio approach to litigation finance offers corporate clients many advantages. One of these advantages is a lower cost of capital: Because risk is diversified across multiple claims, financing is less expensive. In addition, portfolio financing is inherently flexible because capital can be used to finance matters within the portfolio or for broader business purposes.
Approaching finance on a portfolio basis can enable companies to reinvent their legal departments and budgets, transforming the impact of meritorious litigation from revenue-destroying to profit-enhancing—an avenue that will undoubtedly drive increased innovation and pickup of litigation finance in the years ahead.