With an increase in legal finance providers entering the market and a subsequent increase of available capital, you might assume that the industry is fated to descend to race-to-the-bottom pricing and commoditization. In fact, Burford’s new research reveals the opposite: The market is maturing as users of legal finance become more sophisticated in their understanding of providers and opt for trusted and experienced partners over servicers of commodity capital.
Burford entered “litigation funding” ten years ago, and its growth as the world’s largest provider of legal finance correlates with the industry’s maturation and lawyers’ evolved understanding and use legal finance. Legal finance is now increasingly accepted as a normative practice akin to corporate finance for law. Moreover, law firms and legal departments increasingly evaluate providers through a more critical lens and hold providers to a higher set of expectations—signaling a further maturing and segmentation in the marketplace for legal finance in the decade to come.
Lawyers value track record most
According to Burford’s 2019 Legal Finance Report: A Survey of In-House and Law Firm Lawyers, which surveyed 509 lawyers in the US, UK, Canada and Australia, the first and most likely to be cited as important when selecting a legal finance provider is “expertise and track record”, followed by quality and the amount of capital available (42.2% and 41.6% respectively). The importance placed on these features suggests that lawyers appreciate the benefits they bestow in ensuring that a legal finance provider can readily and reliably assume the cost and risk of their commercial disputes over the duration of their matters.
Conversely, just 33.3% cite “cost of capital” as an important consideration when choosing a funder, making it the least important factor cited and reinforcing that lawyers seek capital providers that are reputable, value-add partners.
As an additional element of the 2019 research on legal finance, Ari Kaplan of Kaplan Advisors conducted one-on-one interviews with 32 in-house and law firm lawyers. Among other topics, they addressed what they value in a legal finance provider:
“…The company is reputable and has the resources necessary to remain engaged for the long-term and the terms of the deal.” – Senior Counsel, Litigation
“Experience, liquidity and the ability to conduct due diligence quickly.” – Partner
“The question is what can be offered beyond money…” – Senior Counsel
The consensus: Cost of capital matters, but due diligence, access to capital and case strategy are what distinguish a partnership from a transaction.
Lawyers appreciate that top legal finance firms are selective
The research also reveals that lawyers increasingly understand that the best legal finance providers are selective for a reason: Given the heightened risk associated with providing their capital on a non-recourse basis, meaning that they lose their investment if the underlying matters are not successful, providers must carefully evaluate the risk and return of each investment. As the research demonstrates, lawyers understand this selectivity. The Litigation Counsel of a US company explains: “Funders are not in the business of loaning money that they will never recover. At the end of the day, there needs to be a decision made about the viability of a case. I actually think that the bar to obtain money from a litigation finance company on a non-recourse basis is quite high…the opposite of a frivolous case.” Echoing that point, a majority of lawyers (70.5%) agree that business necessity requires legal finance to be selective and provide capital only to meritorious matters.
Top providers make investment decisions based on expertise—and users of legal finance value that expertise, welcome funders’ selectivity and recognize its benefit to counterparties in the long run, given that funders that don’t make sound investments will not be around for the long run.
The 2019 research reveals a maturing of lawyers’ expectations of legal finance providers that is welcome and that augurs well for the future. As legal finance becomes an accepted and valued business tool by firms and legal departments, we can expect users of legal finance to become savvier and hold providers to higher standards, and they will in turn see the ongoing benefits of market leading track record and expertise.