Portfolio finance for asset managers

In an economic downturn, increased corporate misconduct and subsequent financial losses for investors will result in an increase in meritorious claims for asset managers. Asset managers can limit these losses through legal remedies; however, they often don’t because doing so requires shareholders to bear unpredictable costs or give up a substantial portion of the fund’s recovery to cover a law firm’s contingency fee.

The time and cost dilemma often results in valuable unpursued legal claims and unrealized recoveries. Legal finance offers a solution. When asset managers have meritorious claims they want to pursue, legal finance allows them to do so, without cost.

Common legal finance structures

Burford Capital helps the world’s leading institutional investors identify and pursue meritorious securities litigation with cost and risk sharing solutions that include:

• Single case finance : Burford can provide single-case financing to investors litigating individually or as part of a group of similarly situated claimants.
  
  
• Portfolio finance: Burford can provide capital on a portfolio basis, allowing investors to pursue recoveries globally under an umbrella agreement and unitary fee structure.

Portfolio finance has become a preferred tool among companies and law firms, since Burford invented portfolio finance in 2010.  Burford has funded 129 such capital facilities as of 2021, representing a $3.6 billion total commitment value.

How does a portfolio finance arrangement work in the securities context?

In securities litigation, Burford identifies eligible claims based on an asset manager’s predetermined criteria under an umbrella agreement, with each matter undergoing an individual assessment of merit and risk. While Burford identifies and evaluates meritorious claims, the client retains full discretion whether to pursue or not to pursue each claim with their counsel of choice. A portfolio arrangement is tailored to an asset manager’s needs and financing is available for investments in a series of individual arbitration and litigation matters, which can also include defensive matters.

Capital is then provided on a non-recourse basis—meaning repayment is contingent upon successful outcomes. The asset manager’s commitment to use Burford’s financing for all eligible claims that their funds pursue results in more favorable pricing than would be available under single case financing, since portfolio finance covers due diligence costs, litigation fees and expenses and insurance for adverse costs.

What are the benefits of portfolio finance?

Administrative relief

Portfolio financing relieves the considerable burdens placed on in-house counsel who must otherwise evaluate competing proposals from law firms or funders for every new case.

Immediate 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.

Defense costs

Portfolio financing may also allow funds to finance defense costs. For example, a mutual fund that holds a distressed debt security may have a claim against the issuer or underwriter if the security’s offering statement included material misrepresentations. The fund may also be involved in an unrelated inter-creditor dispute in which it is a defendant. The fund can enter into a financing arrangement with Burford whereby the anticipated recovery in the fund’s affirmative lawsuit finances defense costs in the inter-creditor dispute.

Cost of capital

In a portfolio finance arrangement, the cost of capital is typically lower, compared to single case financing, because the risk of loss is diversified.

Worked example

Challenge: A global asset manager had reviewed competing proposals from law firms and funders for each new securities claim—creating both cost and time inefficiencies.

Solution: In search of a more efficient solution, the fund manager entered into a portfolio financing arrangement with Burford, enabling it to pursue claims globally under a master agreement with a unitary fee structure.

Impact: The asset manager’s multi-year, multi-jurisdictional commitment with Burford enabled it to pursue recoveries for multiple claims efficiently and maximize the recovery for the benefit of fund shareholders while minimizing litigation risk and fund expenses.

This article was originally published on Burford’s website on January, 27 2021 and was updated on January 18, 2023.