5 Things GCs should know about legal finance

However, many GCs either misunderstand or are unaware of the benefits of legal finance, often perceiving it merely as a tool for undercapitalized claimants to cover legal fees and expenses. Additionally, most GCs serve companies that face no immediate cash shortage and litigate more often as defendants than plaintiffs.

But these observations are based on a limited and outdated definition of legal finance. A broader understanding reveals at least five reasons why legal finance can become a relevant tool for in-house counsel at businesses of all sizes:

#1. Legal finance provides capital for legal assets.

The core concept of legal finance is using a legal asset as collateral for financing. A business with a legal asset can secure financing today in exchange for a portion of the proceeds from that asset in the future, typically on a nonrecourse basis (meaning that the financier’s investment return is contingent upon success). Businesses do this every day when making strategic and budgetary choices about when to spend their own cash versus seeking outside capital. They do it with all kinds of assets, from airplanes to office buildings. Legal finance allows GCs to secure capital based on corporate legal assets just as their C-suite colleagues do across all other areas of the business—without ceding control. Importantly, legal finance providers like Burford act as passive investors and do not control the legal assets they invest in, ensuring litigation and settlement control remains unchanged.

#2. Financing helps hedge against rate uncertainties and other future risk.

Rising economic uncertainty in recent years, driven significantly by geopolitical factors, has made alternative financial strategies increasingly attractive. For GCs, that means an increased use of legal finance, which moves risk off corporate balance sheets by providing capital that need only be repaid if underlying matters are successful. This structure protects against a loss in court while locking in the financier’s return without any correlation to interest rates or broader economic conditions.

#3. Legal finance can be used to fund plaintiff and defense-side matters, as well as transactional areas of law.

Legal finance is applicable not only to plaintiffs but can also provide crucial capital for other transactional areas of law and defense-side matters. While commercial legal finance companies are more likely to finance claimants and their counsel, defense financing is possible through bespoke solutions and structures.

The most common way to finance defense matters is by including these as part of a portfolio where a single set of terms is used to finance a mix of cases, including both claimant and defense matters. Portfolio finance is ideal for companies with significant litigation portfolios. While the legal financier might receive no return on the defense investment it can therefore offset this with higher returns on the claimant side matters. Because capital is typically provided on a non-recourse basis, meaning the funder assumes the downside risk and earns its investment back and return only in the event of successful resolution, portfolio financing can help GCs manage the impact of litigation on the company’s bottom line and risk profile.

Increasingly, portfolio-based legal finance is also being used areas such as tax disputes, mergers and acquisitions and other “success fee” arrangements.

#4. Legal finance could improve how litigation costs are accounted for—a huge benefit for public companies.

GCs who work closely with their CEOs and CFOs to control legal spend will recognize the accounting problems litigation presents. Without financing, litigation can permanently impair financial performance because of accounting rules regarding the treatment of litigation expenses and awards. Legal expenses paid by a company are immediately recorded as expenses, thus reducing earnings. Even worse, litigation recoveries often are recorded “below the line” as non-recurring or extraordinary items. That is an unhappy result for many businesses—particularly for EBITDA-based businesses: The accounting result of a successful claim can be a permanent reduction in EBITDA, because legal expenses reduce EBITDA but recoveries do not increase it. Legal finance could remove that hit to profits, enabling companies to remove the expense drag of litigation—a particularly powerful tool for public companies.

#5. Finance can convert a company’s litigation department into a profit center.

GCs who use legal finance in the most straightforward way can pursue profit-enhancing claims without adding cost or risk to the business. But GCs who use legal finance more ambitiously can potentially zero out the cost of litigation altogether. By leveraging legal finance on a portfolio basis, GCs can obtain nonrecourse financing for multiple matters. They may be plaintiff- or defense-side, existing or anticipated matters, from as few as two to a company’s entire portfolio.  For example, a Fortune 500 company recently secured a $325 million monetization facility from Burford, using high-value litigation claims as collateral to boost liquidity and augment the company's affirmative recovery efforts. Portfolio financing is inherently flexible: Capital can be used to finance matters within the portfolio or for broader business purposes, and pricing is generally lower because risk is diversified.

As the legal market increasingly scrutinizes financing options to boost efficiency and improve risk management, GCs will need a greater understanding of the benefits of legal finance. The examples set forth here are just a few of the ways legal departments can harness the power of legal finance tools to generate results and improve the bottom line.

This article was originally published on Burford’s website on October 23, 2019 and was updated on August 20, 2024.