Law firm primer: How to talk to your clients about legal finance

Portfolio finance

September 10, 2024

Liz Bigham

Nearly 15 years after Burford’s inception, legal finance has transitioned from being relatively unknown to an increasingly important corporate finance tool for companies and law firms. In 2024, our research showed that nearly three-quarters of CFOs and GCs have either used legal finance or are open to considering it.

Law firm lawyers are right to proactively educate their clients about legal finance, as clients expect their law firms to know about it and educate them about it. One general counsel from a healthcare company expressed, "We want to know the options. You don’t need to be an expert but should be able to answer questions about it."

Clients are also seeking both answers and guidance on which financial products best meet their needs. For example, while nearly half of in-house lawyers are very aware of fees and expenses financing, only a quarter are very aware of monetization and just a third when it comes to portfolio financing.

Burford supports law firms in this effort by preparing them to start the conversation with their clients, jointly presenting to clients or helping pitch for a specific opportunity. Below, we outline common questions and concerns clients may have, and provide guidance on how to address them.

How we work with law firms

Hannah Howlett explains how law firms can use legal finance to build their business.

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#1. How does legal finance affect existing client-lawyer relationships and control over litigation?

Law firms are understandably eager to provide assurance to clients that bringing on a third-party provider of legal finance does not interfere with the client-lawyer relationship—a concern that gets resolved as clients learn more about how legal finance works:

Client confidentiality and privilege: Burford enters strict confidentiality agreements with clients, and a strong body of law protects communications between legal finance providers, lawyers and clients. In the US, this protection falls under the attorney work product doctrine, while outside the US, it is known as professional legal privilege.

Transaction structure: Legal finance can be provided either to a client (the commercial litigant) or a law firm. For example, in a basic legal finance arrangement for a single matter, Burford provides financing to a corporate litigant using our capital to pay its lawyers. The transaction structure underscores that Burford’s financing does not interfere with the client-lawyer relationship.

A key concern for clients is whether legal finance will impact their control over litigation and settlement. It is important to clarify that Burford is a passive investor and does not control litigation strategy or settlement. Our transaction documents explicitly state that we do not control and do not seek to exert indirect control.

#2. Why should companies use legal finance—even if they have plenty of liquidity?

Fifteen years ago, legal finance was primarily used by small companies needing capital to pursue claims against much larger, bad-actor defendants. Today, large, Fortune 500 and FTSE 350 companies routinely use legal finance for various reasons, from risk-management to value-generation to department innovation. However, many clients still have limited understanding of the opportunities to use outside legal funding as a corporate finance tool.

Legal finance means companies need not leave money on the table

Pursuing a claim may be the only way a wronged company can be made whole. Yet clients often fail to pursue recoveries due to cost concerns: According to the 2023 Litigation Economics report, 65% of senior in-house lawyers say the impact of claims on cash flow and liquidity is an important factor as to whether or not to pursue a meritorious claim. With legal finance, the provider assumes the cost and downside risk of pursuing claims, so that clients can maximize recoveries without risking the company’s capital.

Legal finance helps clients manage legal cost and risk with certainty

Even clients with ample budget for pursuing recoveries may struggle with unpredictable costs and duration of high-stakes commercial disputes. Research shows that 83% of finance and legal professionals agree that even large companies benefit from reducing the impact of litigation from the P&L. This is an ever-present challenge for in-house counsel, especially as CFOs and CEOs demand budget certainty. Legal finance removes that unpredictability by allowing legal departments to reduce or cap legal spend.

Companies can monetize legal assets

Clients can also choose to monetize outstanding matters on a non-recourse basis to receive cash from an anticipated recovery on an accelerated timetable. Even companies that are financially capable of paying their lawyers may still choose to monetize their pending claims, judgments or awards. This can improve a company’s cash flow, especially during economic uncertainty. Waiting to be paid on these claims means companies miss out on the chance to invest that money back into their business right away.

We see tremendous demand for monetization from companies precisely because they know that their core business can generate higher returns than the funds tied up in litigation. Monetization can unlock that capital and use it for immediate business needs or opportunities.

Companies can use legal finance to drive innovation across the legal department

GCs seek innovative ways to add value to their organizations, as litigation is often the largest expense for legal departments. Legal finance helps clients to manage costs and risks associated with affirmative recoveries. Clients can use legal finance on a portfolio basis to offset the cost of defense-side litigation by bundling plaintiff and defense matters together. This leverages the value of affirmative claims to finance the cost of litigating claims across the entire portfolio, limiting overall expense and improving profitability.

#3. Why does finding the right legal finance provider matter?

Given the high stakes and potentially years-long duration of commercial disputes, clients need to know that choosing the right legal finance provider goes beyond the cost of capital. Law firms must carefully assess a range of factors when recommending a finance provider:

Financial capacity: Because capital is often invested over time, clients must undertake financial due diligence on the funder to ensure it will have capital available when needed to meet its investment commitments; and that the fund’s structure will not drive a funder to seek an early exit to meet investor demands.

Portfolio size and diversification: The size and diversification of the finance provider’s other investments should be considered. A small portfolio with only a handful of investments or over-concentration of capital in any one area increases risk when one large or several smaller losses can lead to the failure of the funder.

In-house investment diligence: Law firms and clients should be cautious about finance providers that outsource their diligence of client matters. Outside lawyers cannot match the day-to-day expertise of in-house reviewers and can slow down the process, potentially exposing client matters to law firm competitors.

Value-add: Although Burford is a passive investor, we provide feedback on investment throughout the underwriting process and monitor our investment portfolio. While some finance providers offer only transactional support, Burford’s team offers a value-add that many of our clients and law firms actively seek out. When invited to play that role, we enhance client outcomes and support law firm services.

Data insights: Our extensive experience and proprietary data provide unmatched insights into complex litigation. We leverage critical information on settlement values, arbitrator preferences and other factors not available in the public domain, helping clients navigate complex cases more effectively.

Talking to clients about legal finance positions law firms as better partners

Both finance and legal teams view it as important that the legal department find new ways to recover value, according to Burford research. Proactively educating clients about legal finance is an important step law firms can take to provide that innovation and demonstrate real partnership. This not only demonstrates law firms’ sensitivity to clients’ business needs but can open opportunities for law firms to pitch new business with the client.

This article was originally published on Burford’s website on October 12, 2019 and was updated on September 10, 2024.