WHAT’S NEWS: Every funder worth its salt is talking about “portfolio” deals – but it’s critical to be clear how one defines the term “portfolio.”
Portfolio deals are unquestionably catching fire in litigation finance – but it is a particular type of portfolio structure that is gaining popularity, and it is important not to conflate different forms of portfolios. For reasons discussed below, it is portfolios for law firms – with the firm’s future contingency fees serving as collateral – that are now favored – and not portfolios for corporate claimants, as had been predicted by some.
OUR REACTION:
Lawyers learn early to define their terms, and all would do well to apply that discipline here. Law firm portfolio structures not only reduce risk and thus the cost of capital, but have a
simple and readily identifiable form of collateral and are easier to execute -- as they typically involve only two sophisticated parties. Corporate portfolio structures, on the other hand, typically have many different components (e.g., a mix of plaintiff and defendant funding, some level of monetization of existing cases, etc.) and need to pass through a maze of corporate approvals. (Burford’s $45 million deal with British Telecom is the often-cited example of this model.) While such corporate deals have promise, they have not become common place --the one major exception being portfolios of IP assets held by corporate entities.
WHAT IT MEANS:
For law firms interested in litigation finance, the increased appetite of funders for portfolios of future contingency fees is good news indeed. All types of firms can leverage this development.
Big Law Firms can use portfolio financing to hedge their exploration of significant advantages of contingency work; Boutique Firms can use such financing to provide much needed cash flows during their early stages of growth (e.g, for additional staff and case expenses); and Plaintiffs Firms can shift from their traditionally recourse-based forms of financing to an entirely non-recourse model.
FURTHER THOUGHTS:
Law firm portfolios are good for everyone – both our clients and for funders. Our law firm clients gain a lower cost of capital (because their fees are cross-collateralized) and an immediate non-recourse cash infusion; funders are able to lower their risk and significantly increase the amount of capital they can deploy (often in one tranche). Sticky issues do remain, especially as regards pricing and questions of adverse selection, but these can typically be worked through between sophisticated parties. As we will discuss in a future post, one of the more exciting uses of law firm portfolios is by Big Law firms, most of whom have traditionally eschewed contingency fees. By using third-party financing to hedge their risk, such firms have found they can stay competitive by offering contingency arrangements – while at the same time often generating significant spikes in revenue.