Over the last decade, third-party litigation funding has established itself as an important and profitable product for funders, their investors, law firms, and clients alike. However, the funding model first introduced to the legal world looked significantly different than the deals seen in headlines today. Among other factors, this evolution can be traced to the emergence of “portfolio financing” – arguably the defining trend in litigation funding over the past year. Several of the largest players in the funding arena are now investing less than 15% of their litigation investment portfolios in single-case deals.
Until recently, litigation funding was utilized for class actions and individual personal injury cases and not much more. Today, commercial litigation and arbitration matters make up an increasingly large percentage of a funders’ legal investments. Portfolio financing enables law firms and lawyers to take on large-scale commercial disputes – typically indicative of higher risk – without adding risk to the firm, for all the same reasons that the portfolio model reduces risk for funders themselves.
This shift away from single-case funding toward multiple-case, or “case portfolio”, funding may simultaneously help clarify the role of litigation finance in furthering access to justice, as well as bring new, large-scale commercial players into the funding relationship.
Portfolio financing is useful for parties who don’t necessarily need the financial assistance, but seek to offset risk, reduce their legal expenditure, or bring cases that their every-day budgets don’t allow for.
This funding model offers many well documented advantages to funders such as diversifying risk, an even flow of profits and losses, and long-range stability with predictable returns. It broadens the types of cases that get funded.
But what’s in it for the lawyers?
As the legal market becomes increasingly competitive, law firms are forced to turn their minds to innovation and retention. With only so many cases to go around, the pressure is put on pricing and cheaper financing is an answer. Firms that engage in portfolio financing can attract clients with alternative fee arrangements which offer flexibility and efficiency, attractive terms, and lower pay-out prices. This is possible because the risks and rewards for the funder are spread amongst multiple claims, decreasing their reliance on any one case to provide a return. Financing in “bulk” thus allows funders to offer lower prices to both firms and clients.
Similarly, portfolio financing permits claims that would otherwise not qualify for funding to receive it. The ability of a firm to aggregate claims in order to reach the minimum funding threshold required by the funder is attractive to clients who would otherwise consider funding beyond the scope of possibility. This model can entice clients with strong claims but without the pockets to match.
Portfolio financing is also more efficient. Law firms can offer a standard funding agreement to a group of clients, decreasing the lengthy process of negotiation and due diligence on both sides. Or, the pool of money and corresponding funding agreement already exists, meaning the firm does not need to seek funding for every new claim they retain – the existing pool offers resources to any claims that fall within its purview, allowing the lawyers to apply the money where it is needed most.
In terms of flexibility, multiple-claim investing allows for variance within a group of cases. Law firms can decide which parties and cases within the portfolio require, for example, more funding but less expertise or vice versa, and resources can be spread unevenly within a portfolio to better achieve access to justice for the group as a whole and optimize chances of success. Lawyers and clients are thus free from the constraints of any individual funding agreement, as the portfolio as a whole is the investment. Thus, whatever give and take is required within the portfolio can be achieved with no downside to the funder. This allows law firms to boast flexibility in their third-party funding models, where single-case funding cannot.
Thus, portfolio financing brings a lot more to the table than money. From the prospective client’s perspective, firms who offer this funding model may just jump to the top of their list. From the lawyer’s perspective, they are broadening the scope of their practice and attracting new clients by offering alternative fee structures, lower prices, and flexibility and efficiency in terms, all the while managing their own financial risk in a commercially rational way.
Litigator Lincoln Caylor of Bennett Jones LLP focuses on high-stakes cross-border financial crime disputes.
The author acknowledges contributions to this piece by Bennett Jones articling student Nina Butz.