In their roles as Managing Directors of Burford, Craig Arnott and Emily Slater, based respectively in London and New York, have spoken to thousands of in-house counsel and private practice lawyers about billions of dollars of commercial litigation and arbitration assets. They sat down with the Burford Quarterly editorial team to discuss some of the questions that they encounter most frequently in their conversations on both sides of the Atlantic.
Do the questions you encounter about legal finance fall into certain categories? Do any patterns emerge in the questions you hear most often?
Craig Arnott: As one would expect, there’s a great degree of variation based on how much exposure there has been to legal finance. As a general rule, questions vary at the margins depending on whether one is speaking to a general counsel or a law firm, and if the latter, what type of firm. But even across those audiences there are commonalities: Generally, “How does it work?” is the most common type of question for newcomers to legal finance.
Emily Slater: It’s true that how legal finance works is a top question when lawyers first come to Burford. There’s even more urgency around that question when lawyers or in-house counsel are coming to us when funding is urgent, due to a shortage of funds needed to proceed with a piece of commercial litigation or arbitration. However, as more and more lawyers and in-house counsel think about legal finance as a proactive tool of choice—as “corporate finance for law,” if you will—the more questions we get about trends in how it’s being used, and especially among law firms: “How are my competitors using legal finance?”
One of the most common questions must be: How much does it cost?
ES: That is indeed a common question. Like anything, the cost of legal finance varies depending on a number of different factors. Risk as determined by a review of the merits and the stage of matters are the most important variable. Most of the capital we provide is on a non-recourse basis: If the underlying matters are unsuccessful, we lose our investment, and therefore, our returns reflect that risk. The earlier we invest in a case the more expensive the capital is going to be, because the risk is greater. The return expectation is generally a multiple of invested capital depending on the stage of the case at which it is invested.
CA: What I always reinforce when the cost question comes up is how Burford approaches this differently than our competitors. First and foremost, we can invest at any stage and we can wrap multiple matters up in an investment portfolio. That leads to a complementary and equally important point: We don’t have one-size-fits all pricing.
What about the questions that are more like challenges—Such as, “We’ve always self-funded. Why should we take money from a third party?”
CA: For corporates, the fundamental point is that cases are taking longer and costing more to litigate, so even well-funded organizations are eager to manage exposure and lay off some risk as their own investments take longer and cost more. The key benefit for corporates is that, with legal finance, litigation and arbitration are transformed into assets rather than liabilities. The negative accounting impact of litigation spend goes away, and the otherwise unpredictable cost and risk to the business is shifted off balance sheets. Instead of the legal department being treated as a cost center, the utilization of legal finance transforms it into a revenue source. That’s a pretty powerful reason to shift from “self-funding” to outside finance.
ES: When talking to law firms, when you unpack the question, we often find that there’s a need to expand understanding of what “funding” can be.
For example, even law firms that are happy to keep 100 percent of the risk on their fees don’t know that instead of “self-funding” case expenses they can finance just that aspect of their risk, which makes much more sense than paying
for case expenses out-of-pocket, with after-tax dollars.
We can also help law firms think about funding not as an “either/or” but rather a “both/and” scenario. Law firms may be very successfully self-funding many aspects of their work and business—but if they want to expand their business, or invest in a new jurisdiction or market where they haven’t previously done business, external finance can provide them with the capital to do that. Burford’s capital empowers the firm to grow the number of contingent matters on their books, to pitch new business or build a new practice area, or to take on a significant new risk with long-term value to the firm.
What about choosing one funder over another? Do clients and law firms show interest in where legal finance money comes from—and if they don’t, should they?
CA: As legal finance continues to mature as an industry, clients and law firms are certainly becoming savvier consumers of legal finance. Even a few years ago, it was more common to encounter lawyers who looked for the cheapest money available without consideration of the source of that money. One still encounters that from time to time, but as more and more lawyers gain actual experience using legal finance, they’re more and more adamant that capital source matters as much as capital cost. Commercial litigation and arbitration are long-term investments, and therefore the relationship with the funder needs to be one that the firm or the client is going to be comfortable with over the long term. It matters that clients and law firms have confidence in the quality and expertise of Burford’s team and know that they can work with us over a period of years—because our investments endure for the life of
ES: That’s a crucial point: Knowing that the funder you are working with has the capital you need immediately available is imperative. Knowing that the funder you are working with will continue to have available capital over the lifetime of your litigation is also imperative. As a publicly traded company, it’s a matter of public record that we have available capital and that it will be there for the duration of the litigation. Funds with limited investment periods and less understanding of the nature of commercial litigation and arbitration may offer pricing that looks great in the short term, but law firms and clients need to consider the suitability of their funding partners over the long term. Or, funds may put out a low rate and attempt to “lock in” a law firm or client with an exclusivity requirement during diligence—but again, that doesn’t serve the interests of law firms and clients.
You mentioned exclusivity. Does Burford require exclusivity during diligence, and if not, why not?
CA: We don’t absolutely require exclusivity during diligence, which is the part of the funding process where we enter NDA and consider the merits and economics of a potential investment. That sets us apart from many funders. I regularly caution lawyers and clients about being offered “teaser rates” to push them into exclusivity—rates that then change after diligence. Offering indicative terms before substantial diligence, from our perspective, simply does not serve the best interests of the client. Indicative terms almost always change after diligence, so a “teaser rate” is just that.
ES: As we see more funders come into the market who don’t have a litigation background, we see more requiring exclusivity during diligence. Exclusivity may be typical in pure finance but it doesn’t always translate in legal finance. When funders offer terms requiring exclusivity without fully understanding matters and then months later need to change their terms, this is harmful
to clients’ interests and not a good basis for building what will be a long-term relationship with the funder.
That said, from a business perspective we need to be mindful of the human capital resources that we must commit when we undertake diligence, so we’re cautious—just as many lawyers are—about entering competitive scenarios based solely on price.
You said before that law firms often want to know, “How are my competitors using legal finance?” How do you address that?
ES: That’s right—it’s a big question we hear from law firms, and for us, it’s one of the many indicators that legal finance has definitively entered the mainstream, because firms assume that their competitors are using it and therefore feel they need to get up to speed on it if they’re not already, or to be more ambitious in how they’re using it.
Needless to say, we never share competitive information, but we do note that Burford has never been busier.
CA: On both sides of the Atlantic, we know that law firms face ongoing pressure to be more competitive and provide innovative ways of dealing with pricing and managing costs for clients. The business of law is changing, and law firms need to adapt and meet client expectations for flexibility and innovation. We have found that those firms who are using legal finance often do so knowing that it will give them a competitive advantage in the marketplace. No firm wants to be left behind.