An asset management approach to litigation allows law firm partners to spend less time worrying about how to cover legal expenses and more time doing what they do best: being lawyers. One way to manage litigation as an investment asset is to collaborate with a litigation funder and create a portfolio of cases. This strategy can improve cash flow, reduce risk, and maximize returns.
A law firm’s litigation portfolio may generally contain multiple contingency or partial contingency matters. Having multiple cases in a portfolio allows firms to cross-collateralize, and thereby reduce, litigation risk. This can attract substantial investment from a litigation funder. Bentham IMF, for instance, provides funding of $2 million or more for litigation portfolios consisting of three or more cases.
From the earliest stages, the relationship with a funder can help a firm evaluate and improve the value of its portfolio. The rigorous due diligence process performed by funders as they consider a potential investment can give firms an unbiased view of their cases, including their potential for a successful resolution and maximum return. As the global law firm Freshfields wrote in a report last year, “the involvement of a funder adds an additional layer of diligence at an early stage of the process, leading to greater rigor in risk and cost-benefit assessments.”
With funding in place, litigation assets immediately increase in value. Traditionally, a law firm might incur bank loans or use partners’ equity to cover expenses over the course of litigation. Unlike a bank loan, funding is non-recourse. That means the firm’s partners are not required to personally guarantee anything, and they only repay financing from the returns received if a case is successful. This arrangement frees up a firm’s capital for other expenses, including hiring lateral partners and associates, adding practice groups, or making additional investments in contingency matters.
A funded litigation portfolio can also allow a law firm to take managed risks in diversifying its litigation investments with more payment flexibility for clients. For example, a firm can convert a full contingency case to a hybrid fee arrangement, allowing it to take a more measured risk. Conversely, a firm may also be able to convert cases from hourly billing to a contingency arrangement. By using a portfolio with rigorously selected cases, the firm guarantees that a portion of revenue is received immediately with a chance to see significantly more income if the cases perform well.
The portfolio approach is particularly valuable for complex contingency cases that are likely to stretch over a long period of time. As such cases mature, the risks increase for law firms. Expenses mount along with non-billable time, and firms without the necessary capital may be forced to settle early for pennies on the dollar or abandon claims altogether. With funding, the firm has the capital necessary to pursue cases to a successful conclusion for optimal recovery on the merits. From an asset management perspective, a series of litigation investments with measured risks that successfully mature at various intervals is highly desirable because partners can bring in a steady stream of revenue for the firm.
In the end, however, litigation is not just about dollars and cents. Lawyers want to ensure that they are providing the best possible representation for their clients. That requires ample resources. By thinking of litigation as an asset that can be managed and financed, firms can, for example, afford to hire the best experts for a case or combat scorched-earth litigation tactics by a well-funded adversary. A funded portfolio can allow law firms to take on more complex cases and offer services to clients who may not be able to afford to pay ever-increasing hourly fees.