Given the substantial size of global litigation revenues and ongoing demands from clients for alternatives to the traditional ‘billable hour’, the litigation funding industry appears poised for continued growth. While third-party funding has historically been utilised to provide access to justice for clients without the means to finance a strong case, the industry is evolving and expanding. Now too, from the perspective of sophisticated law firms, litigation funding offers a viable alternative to the cost burden of litigation and its associated uncertainty.
Often driven by client expectations, law firms now increasingly must consider alternatives to the standard billable hour such as Contingent Fee Arrangements (CFAs) or Damages Based Agreements (DBAs). Litigation funding can play a role in this context, helping law firms maintain cash flow and mitigate the financial risks and timing uncertainties inherent in pursuing complex and high-stakes disputes under such structures.
Additionally, in response to demand from law firms, sophisticated litigation funders are moving beyond individual case funding to also consider high value case portfolios. Portfolio funding essentially means that multiple claims may be considered and funded under a single facility, enabling a law firm to reduce risk and variability as it pursues client matters across its portfolio of engagements. Such an arrangement also reduces funding costs for law firms, as the litigation funder also shares in the benefits of portfolio diversification.
Reduced risk, steady cashflow
Portfolio funding has the potential to stabilise a law firm’s financial position by mitigating risk and alleviating cash flow challenges inevitably associated with alternative billing arrangements as described earlier. Portfolio funding can offer law firms often elusive visibility – that is, the ability to advance meritorious cases backed by the confidence that that certain legal fees will be paid in a timely manner. A representative portfolio funding facility might work as follows: The funder provides capital for use across cases in which the law firm is acting on a contingent or hybrid basis. The funder’s capital is used to cover for out-of-pocket case expenses plus a portion of the firm’s legal fees. Once its diligence is completed, the funder remains passive, while the law firm works with each respective client to manage cases through key milestones and to successful conclusions.
Building strategic and trusted relationships
Portfolio funding arrangements also may offer law firms a new area for potential differentiation from others in a highly competitive marketplace. In fact, when thoughtfully established, the relationship between a funder and the law firm can emerge as strategic asset for both parties which delivers increasing value over time. For example, as the relationship develops between the parties under a portfolio arrangement, the respective due diligence processes become more efficient, and the processes are often run effectively, yet independently, in parallel.
In theory, portfolio construction can vary widely and is often determined via iterative and open discussions between the law firm and funder, with diversification a key consideration. For example, a portfolio including multiple similar cases might be considered high-risk and less likely to deliver the desired benefits. By sensibly choosing the cases in the portfolio, an attractive portfolio can mitigate the volatility of returns for the funder and reduces funding costs for the law firm.
How law firms might explore portfolio litigation funding
How might law firms explore the potential opportunities associated with portfolio funding? As in many relationship development situations, it helps to start with the basics. In an initial discussion with a funder, where is the focus of the conversation? Does the funder emphasise its available capital and process or is the focus on developing a deep understanding of the law firm, its culture, case portfolio and capital needs? Once a fit may be apparent, the next step is often a discussion of the individual cases in the portfolio and the associated funding requirements. This may lead to an agreement on a portfolio financing facility and a commitment from the funder to conduct extensive diligence toward closing a transaction. Take note of the funder’s agility and responsiveness at each step of the process.
While the usage of portfolio litigation funding is growing and such capital can deliver a strong value proposition for law firms, sophisticated funders – with a long-term perspective on the market – recognise that the focus must be on meeting the unique needs of each situation and becoming a trusted partner of unparalleled professionalism and capability.
Josh Meltzer is Managing Director, Woodsford Litigation Funding, USA. Woodsford Litigation Funding provides tailored litigation and arbitration financing solutions for businesses, individuals, and law firms. This includes both single case and portfolio funding. Visit www.woodsfordlitigationfunding.com or follow on Twitter @WoodsfordLF or LinkedIn.