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Yes, legal finance is at an inflection point—but not the one you think

  • Christopher Bogart

In the nearly ten years that Burford has been in business, stories about legal finance have mostly followed two predictable story lines.

First, in the early days, stories were often existential in nature, asking whether “third-party litigation funding” could ever become an accepted practice. The answer quite rapidly was shown to be “yes”, with the result that the narrative then quickly shifted to the industry’s rapid and dramatic growth. It’s easy to see why the narrative has been stuck there ever since: There’s been a lot of growth. As our most recent research indicates, between 2012 and 2018, the number of lawyers surveyed by Burford who said their firm or company had used litigation finance grew from slightly under ten percent to 32 percent, according to one group of lawyers we asked, or even 70 percent, according to another group of lawyers surveyed. (More on that below.)

Now, legal finance is at an inflection point—but not the one you might think.

Many outside the industry mistakenly assume that the follow-on to dramatic growth will be commoditization, with more and more capital providers vying to enter the market, flooding lawyers with capital, thus resulting in lowered standards and race-to-the-bottom costs.

We believe the opposite is true. Even as the industry continues to grow dramatically, the shift in front of us is—and indeed must be—the maturation of legal finance. That maturation will come both from how lawyers think about and use litigation finance, and from the industry itself—with both feeding off one another in positive ways to generate further progress and evolution.

Lawyers will become more sophisticated users of litigation finance

Let’s consider the percentage of lawyers who say their firms and companies have used litigation finance. As noted above, among one group we spoke to (38 in-house and law firm lawyers whom we interviewed on a one-on-one basis), 30 percent said their organizations had used litigation finance; however, an astounding and indeed unbelievable 70 percent of the 495 law firm and in-house lawyers who participated in an online survey said their organizations had used litigation finance.[1]

I would hazard that the astoundingly high reported use doesn’t accurately indicate actual use but rather reflects a combination of lawyers’ aspiration to use what is perceived to be a cutting-edge tool, and their confusion about what “litigation finance” really is. Together, these signal ripe territory for a more sophisticated understanding of legal finance among lawyers.

More sophistication is needed. In my experience, lawyers are very sophisticated users of financial products in their lives as private consumers. They make clear distinctions between, say, JP Morgan and the corner credit union, and I’d bet that they’re more likely to conduct their banking with the former. They are also sophisticated on their clients’ behalf: They would never recommend the corner credit union over Goldman Sachs to work on a merger.

Currently, however, lawyers are far less sophisticated users of litigation finance. They would never choose an unproven entity over JP Morgan or Goldman Sachs just because it offered cheaper money—and yet all too often I see lawyers considering legal finance providers in this way. That’s dangerous and short-sighted. It’s dangerous because in doing so lawyers may neglect to consider carefully enough distinctions based on the source, reliability and duration of the capital being offered—and that can be seriously detrimental given the long time-frames of commercial disputes. It’s short-sighted because there is an opportunity cost in working with a merely transactional versus a potentially strategic partner—the latter can offer valuable advantages in the form of faster responses, more custom-fit economic structures and insights that add value to the process.

Arguably, lawyers—in-house and at law firms—are about to become a lot more sophisticated about litigation finance. As aspirational desire to use litigation finance increasingly becomes actual experience with it, they and their colleagues will gain more and more experience with the various types of providers. In doing so they will learn—but hopefully not the hard way—the costs and benefits of choosing one type over another.

Top legal finance providers will act more like established financial services brands

Simultaneously, there is a clear segmentation occurring among providers in the industry. In essence, a handful of litigation finance companies is behaving more and more like proper financial services firms, creating a big divide with other players and new entrants.

Legal finance is a capital investment business, and to obtain the necessary scale to be a long-term player, it needs to be treated as such—not as a few lawyers getting together to try to pick some cases.  Public filings in onshore jurisdictions; audited financial statements; internal financial, legal and compliance controls; adequate long-term capital; major institutional investors—these are just some of the hallmarks of an appropriate provider, and their absence should be red flags.

Another area where there will be a widening gap among legal finance providers is in business transparency: Arguably, there is simply not enough in our industry.

By that I do not mean to suggest that legal finance providers should publicize the matters that they are funding—that right belongs unquestionably to clients—or that they should be forced to disclose the fact and terms of their funding, as a tiny but vocal minority have advocated. Instead, I am arguing for the type of business transparency that is provided by and expected of typical financial services firms as a matter of course. There is absolutely no reason that we cannot behave like any other segment of the financial services industry in being clear about our scale, our structure and our financial position. Indeed, I believe that our clients—lawyers at law firms and corporate legal and financial executives—deserve that information so that they can make informed decisions.

Returning to my earlier analogy, this is exactly the kind of information that lawyers instinctually expect when dealing with JP Morgan or Goldman Sachs—the kind of company that Burford, as a leading legal finance provider, aims to keep. That is why we have always erred on the side of transparency in helping our counterparties understand how much capital we have, where it comes from, how we’ll work with them and how we run our business. Our transparency gives Burford a distinct and durable advantage in the marketplace, and one that’s cited by the lawyers we work with as a clear differentiator. We expect and hope that in the years to come, more legal finance providers will follow our example, to the benefit of our clients, the industry—and our business. We can only benefit when others follow our example.

This is an exciting time in the legal finance industry. We are helping to remake how the vast, global legal industry operates. In a strikingly short time, legal finance providers have risen to prominence in that enormous industry. Burford speaks to many thousands of lawyers every year, and has worked with 70 of the Global 100 law firms in the last 12 months. As an industry we now have billions of dollars of legal spending using and depending on our capital. And we have the satisfaction of providing lawyers the same capital options that every other business has, of helping businesses manage their legal risk and create much-needed certainty and reliability around that risk.

In the years to come, the more we can demonstrate and deliver at the highest standards to our clients, the more opportunity we will see—and the more that lawyers appreciate and understand our capacity to add value to their businesses, the more they will gravitate to the best among us, furthering the maturation of our industry.

[1]  Consider this an example of social desirability bias in action: People responding to surveys tend to answer questions in a manner that will be viewed favorably by others, and thus if people think they should exercise daily, they will tend to tell researchers that they exercise daily, true or not. Similarly, if lawyers perceive litigation finance as something that innovative companies and law firms should use, they will naturally tend to over-report its use.