How do law firms use portfolio finance?

Since 2009, when Burford was founded, the legal finance market has matured to meet the needs of the legal industry. In the beginning, most of Burford’s investments fell under the category of “traditional” fees and expenses legal finance: Burford provided capital to a firm’s client to fund a single case, often due to financial necessity when a firm had a client that was unable or unwilling to pay the firm’s hourly fees.

However, more recently, firms have pursued outside capital as a smart business and risk-management strategy, seeing it as a way to be more proactive about managing firm finances, increase profitability and help limit firm risk. As a result, firms have sought increasingly creative financing arrangements—including portfolio finance. 

Even as traditional single-case financing remains the manner in which most lawyers first experience legal finance, portfolio financing is an area of growing interest and opportunity for clients and law firms. Burford’s own investment portfolio reflects this trend. Since pioneering portfolio finance in 2010, Burford has financed 129 such capital facilities as of 2021, representing a $3.6 billion total commitment value.^. Yet many lawyers remain unsure of how portfolio finance works, and when it is best used.

Portfolio finance structure

Two common approaches for law firms considering portfolio finance, which reflect varied needs and risk tolerance:

#1. Monetization portfolio

• Purpose: A firm wants flexible capital that can be used for a variety of potentially non-case-related purposes, including partner distributions, firm overheads, etc.
• Who it’s for: A firm with a substantial existing book of full or partial contingency cases at a variety of stages in the litigation process.
• Case profile: Portfolio includes several “anchor cases” that are particularly large or that are close to maturation, which form the principal collateral for the portfolio, with additional cases of varying sizes and profiles.
• Investment size: Burford provides upfront capital based on its determination of the likely value of those legal assets and the firm’s corresponding anticipated fee.
• Diligence process: Diligence is prioritized based upon the value of cases to the portfolio, with a closer review of the anchor matters and a lighter-touch process for other cases.

#2. Risk-share portfolio

• Purpose: A firm wants to invest resources in its practice or increase its proportion of at-risk or contingency matters while also managing its risk exposure.
• Who it’s for: A firm that wants capital to pay a portion of fees or expenses as they are incurred, with matters early in the case lifecycle (similar to traditional single-case legal finance).
• Case profile: Portfolio consists of at least four or five large cases, which can be identified at the outset or added to the portfolio on a going-forward basis.
• Investment size: The firm and Burford agree on risk allocation and an overall portfolio commitment amount. Burford then invests that share of fees and expenses as they are incurred in litigating the cases in the portfolio.
• Cross-collateralization: If a case in the portfolio loses, Burford and the firm recover investments in the losing case from the next winner, reducing the binary risk of loss.
• Diligence process: The value of cases to the portfolio, the review of anchor matters and a lighter-touch up process are all considered during the diligence process.

While these are two common portfolio approaches, Burford regularly customizes solutions to meet specific firm needs.

What are the benefits of portfolio finance?

Business development and investing in firm growth

More than half of lawyers (52.8%) cite competition as a significant business challenge. This is particularly poignant during times of economic uncertainty, when clients are looking to their firms to do more with less. Portfolios enable lawyers to approach new and existing clients with attractive fee arrangements, without having to individually negotiate the terms of each matter.

Cash flow

Portfolio finance enables the firm to manage annual cash flow by generating revenues as expenses are incurred—instead of waiting for a resolution, the timing of which is largely out of the firm’s control.

Expense management

Because law firms operate as cash businesses, when a firm advances out-of-pocket expenses for a client, they are paid with after-tax earnings. Portfolio financing that covers out-of-pocket expenses effectively lowers the firm’s investment costs in addition to lowering its risk.

Ultimately, portfolio finance is a form of corporate finance that helps a firm efficiently manage its income and expenses.

Ethical considerations

Privilege

“What about privilege?” is often one of the first questions lawyers ask about legal finance. There is broadly recognized work product protection for communications with outside providers of legal finance. Despite the strong caselaw we are also circumspect about what we request in the diligence process to avoid any risk of a waiver, out of an abundance of caution.

Control

Burford’s Legal Finance 101 outlines how the use of legal finance generally does not alter control of decision-making or attorney-client relationships. Burford makes a portfolio deal directly with the firm, but Burford’s role is that of a passive investor. Therefore, Burford does not control the litigation or settlement strategy and decision-making, except when agreed to by our client.

A new tool for law firms

Portfolio finance is emerging as a powerful tool for law firms ready to think beyond the traditional hourly fee or pure contingency models to increase profitability, invest in growth and actively manage the firm’s finances. And in a rapidly changing marketplace with increased pressures from clients and the competition, understanding how portfolio finance works is important for every firm.

This article was originally published on Burford’s website on July 18, 2017, and was updated on January 4, 2023.