Portfolio Funding for Legal Departments
Portfolio finance gathers multiple matters in a single funding vehicle. Capital can be used to fund legal costs associated with the underlying matters or for operating capital for the company. Capital is typically provided on a non-recourse basis, meaning that the funder assumes downside risk and earns its investment back and a return only in the event of the successful resolution of the disputes. The matters within the portfolio can be a mix of claims and defence matters, and cross-collateralisation generally lowers the cost of capital.
Portfolio-based capital facilities equip companies to fund high-value recovery programs.
Monetisation portfolio
Monetisation portfolios provide substantial upfront capital that can be used either for legal fees and expenses or for other operating purposes, collateralised by substantial existing books of litigation at a variety of stages in the litigation process, with additional cases of varying sizes and profiles. Monetisation portfolios are built around “anchor cases” that are large or close to maturation.
Risk-share portfolio
Risk-share portfolios are suited to companies that wish to pursue additional recoveries without exceeding their optimal risk profiles. Risk-share portfolios typically consist of at least four or five large cases which can either be all identified at the outset or added on a going-forward basis, with capital being used to pay a portion of fees or expenses as they are incurred.
How we help
- Create significant capital facilities
- Provide more flexible and lower-cost capital than single-case finance
- Fund recovery programmes
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A Short Guide to Monetization
Legal claims are valuable assets—but highly illiquid and with uncertainty as to timing and outcome. Monetization can de-risk and turn these liabilities into cash.
Pending claims often represent vast latent value to companies ranging from start-ups to the Fortune 500. Unfortunately, these claims carry a tremendous amount of uncertainty as to both outcome and timing. Because they are highly illiquid, traditional capital sources historically have been unable to assign asset value to them. With significant experience and expertise in assessing the value of legal assets, CDC can help companies unlock value through monetization.
To put it simply, monetization is the conversion of a portion of a pending claim into cash. In such an arrangement, CDC advances capital that would otherwise be captive until the resolution and payment of the claim in question.
Capital is provided up front, without the company needing to wait for outstanding claims to resolve—offering immediate liquidity. Unlike fees and expenses financing, in which money flows from the finance provider to pay legal fees and expenses, capital provided through a monetization can be redirected to fund defensive positions in the legal department—or to build warehouses, hire staff, shore up corporate balance sheets or any other corporate purpose. And because the capital typically is provided on a non-recourse basis, the company is obligated to repay the investment only following the successful resolution of the matter.
HOW IT WORKS
- Monetization advances a portion of pending claims or awards immediately
- Capital is paid up front or in tranches based on agreed future trigger events
- Repayment is contingent upon a successful outcome in the matter, meaning that nothing is owed unless and until legal processes resolve successfully
WHY COMPANIES USE MONETIZATION
- Mitigating risk: Companies can reduce their exposure to the risk of loss, a reduction of damages or a reversal set aside of a judgment
- Controlling timing: Companies gain access to capital based on their preferred timeline—cash they can then invest in the business without delay
- Unlocking better pricing: Should companies have multiple claims suitable for monetization, financing can be offered through a portfolio-based facility that provides more competitive pricing
SUCCESS STORY: ACCELERATING PAYMENT FOR A FORTUNE 100 COMPANY
A Fortune 100 company with a global footprint was a claimant in high-stakes, protracted litigation. By arranging for $75 million in non-recourse capital that could be used for general business purposes, CDC delivered an accelerated and guaranteed financial result ahead of the resolution of the case. CDC’s monetization was a complement to the client’s contingency arrangement with outside counsel in that the law firm covered litigation cost, while CDC’s financing delivered a timely and substantial cash infusion based on an anticipated value of the claim. This provided the client with a solution that simultaneously offloaded the cost of pursuing the high-value claim while generating significant capital with no downside risk. Flexible deal terms reflected the client’s business priorities and CDC’s alignment with the client’s success in the litigation.
WORKED EXAMPLE: CAPITAL INFUSION ADDS VALUE FOR A COMPANY
After being overcharged nearly $1 billion by an anticompetitive supplier, a company decided to pursue an antitrust claim. The company had a strong case and ample resources, so it decided to engage a top litigator at a leading firm and to pursue its claim on an opt out basis. As the claim passed motion to dismiss, the company still faced a potentially lengthy delay to remuneration. Facing a quarterly reporting deadline, the CFO wished to access some of the cash from the asset. The GC secured a $100 million monetization through CDC on a non-recourse basis, in exchange for a portion of the potential recovery. The monetization injected $100 million of immediate cash into the business, which was used to fund a combination of defense matters and a recovery program.
WHY CDC?
With access to investment portfolios of $14.2 billion, CDC has unmatched capacity to monetize commercial litigation and arbitration. We conduct diligence in-house and draw on multiple funding sources, speeding the process and optimizing pricing. We are the institutional-quality legal finance partner— consummate professionals respected for our high standards and careful approach to sensitive matters.
Contacts us: frank.mulder@commercialdamagesclaims.com
Litigation Finance for Law Firms
Here are a few reasons why a law firm may want to consider litigation financing:
Financing allows lawyers to compete for business that they otherwise would not be able to handle. Many law firms are not set up to offer contingent-fee arrangements.
When a law firm litigates for a client on a contingency basis or with a discounted billing agreement, the matter can quickly become very costly for the firm. And without a significant war chest, firms may struggle to pay ongoing operating expenses while waiting years for contingent fees. Law firm funding allows the law firm to offer contingent-fee arrangements to clients without sacrificing the cash flow required to pay operating expenses.
Financing helps to reallocate the risk of contingent-fee arrangements.
Financing is flexible enough to allow law firms to create “hybrid” arrangements where most of the cost of litigation is financed. The law firm offers a small discount on its standard “rack” rates during the litigation in exchange for a modest success fee should the litigation prove successful. This arrangement gives the law firm the potential to recover more than 100% of its rack rates without having to take on significant risk for that potential upside.
Financing can allow law firms to invest in their future.
If a law firm is considering opening a new office, bringing in new talent, or improving its marketing efforts, it will need capital. With financing, the law firm can grow, add clients, and stay competitive in the marketplace, while satisfying its ongoing operating expenses.
Financing can make cash flow more predictable.
Litigation funding can offer law firms a steady stream of revenue to pay expenses associated with either a case or the firm. It can also help if the firm has an unanticipated need for capital.
Litigation finance can be used as a law firm business development tool.
As more clients ask for alternative fee arrangements, an understanding of various litigation finance options can help a law firm craft a fee proposal that is more likely to appeal to the client and win the work.
The Rise of Monetization in Asia
Legal finance remains a relatively new concept in Asia, and yet the Indian legal market already recognizes the value in monetizing legal assets: 2019 saw the widely reported transactions by Hindustan Construction Company and Patel Engineering, in which arbitration award portfolios (collectively valued at hundreds of millions of dollars) were monetized to reduce debt and enhance access to working capital. And it’s likely the practice will continue to gain traction in the current economic environment.
Monetization is a form of legal finance that enables companies to turn the future asset value of pending legal claims and awards into immediate cash. While the 2019 transactions in India showed that Asia was already at the forefront of monetization, the value of this financing technique became evident amidst the global macro-economic downturn triggered by the COVID-19 pandemic, which provided a further catalyst accelerating the growth of the market.
What is monetization?
Monetization is a form of legal finance that allows companies to convert commercial litigation and arbitration claims, judgments and awards into cash. The rights associated with these legal assets are transferred to the legal finance provider, in return for upfront payment of amounts reflecting the expected cashflows and inherent risks of the recovery.
The key benefits for companies include:
- Timing and certainty: Companies can control the timing and certainty of cash flows back to the business
- Upfront capital: Companies can secure immediate liquidity to invest in the business without waiting for legal processes to resolve
- Mitigated risk: Companies reduce their exposure to the risk of loss, reduced damages or a reversal set aside of a judgment
- Non-recourse capital: In the event of an unsuccessful resolution, the company owes nothing to the legal financier
- Flexibility: CFOs may use the cash generated from these intangible assets for revenue-creating purposes, such as building warehouses, hiring staff or reinvesting in technology or R&D
At CDC, we have seen an influx of requests for monetization capital from large global companies.
India is at the forefront of monetization
In most jurisdictions, the entry product for legal finance is single case litigation finance—where the financier provides capital for case-related fees and expenses. Indian companies, however, have already demonstrated a sophisticated understanding of the potential of legal finance by securing monetization capital.
Hindustan Construction Co Ltd
In 2019, Hindustan Construction Company entered into a transaction with BlackRock to monetize a pool of arbitration awards and claims in exchange for an upfront cash payment in excess of $200 million USD. The capital provided allowed the construction giant to deleverage its balance sheet and invest in future business growth.
Patel Engineering
Patel Engineering entered into a similar agreement. The company transferred both a pool of its actionable claims along with other real estate asset rights to a special purpose vehicle, in which an Eight Capital group entity held a 51% stake. The move improved the company’s financial liquidity for ongoing operations.
Use of legal finance will continue to increase
Dispute resolution is often time consuming and costly. Claimants that have spent years and considerable expense to obtain a favourable outcome in court or in arbitration often find themselves having to make further significant investments in time and money in the enforcement process. The situation is exacerbated when claims are pursued against parties that, whether for financial, organizational or strategic reasons, do not honor judgments or arbitral awards until all avenues of appeal are exhausted.
The monetization transactions in India and other jurisdictions demonstrate that, in markets with limited liquidity, companies are exploring new ways of raising capital—and innovative legal finance products such as monetization are on the cusp of gaining widespread popularity.
Against this background, we expect increased demand for award and claim monetization in Asia, particularly given the precedent set by Indian construction and infrastructure companies and the ongoing global economic uncertainty caused by the Covid-19 pandemic.
Why CDC?
With access to investment portfolios of $14.2 billion, CDC has unmatched capacity to monetize commercial litigation and arbitration. We conduct diligence in-house and draw on multiple funding sources, speeding the process and optimizing pricing. We are the institutional-quality legal finance partner— consummate professionals respected for our high standards and careful approach to sensitive matters.
Litigation Finance & Legal Departments
Corporate legal departments are generally measured by their ability to control legal costs, manage risk, and deputize external litigation resources, especially when their company is involved in litigation. Although a common feature of modern business, litigation is an increasingly costly proposition that is fraught with risk.
In recent years, commercial litigation finance has emerged as an effective means of shouldering case costs and redistributing risk. While the number of law firms that have seized the advantages of this type of financing has grown exponentially, general counsels (“GCs”) and corporate legal departments have been slower to recognize the many benefits that it can offer, which has handicapped their companies by keeping a potent tool needlessly out of reach. Here are three things every GC should know about litigation finance.
Litigation Finance Offsets Risk
Litigation costs and other financial risks inherent to the legal process pose a daunting challenge to GCs. As a result, companies often forgo bringing lawsuits due to their impact on financial performance. Yet even when legal departments decide to forge ahead with legal claims, their outcome is often far from certain. The decision to bring a lawsuit, therefore, has the power to make or break entire companies.
This risk is even more acute for smaller companies and those facing financial headwinds. A victory could revive a company’s fortunes, while a poorly conceived effort might precipitate the firm’s demise. Litigation finance mitigates that risk through funding “without recourse,” which allows a company to shift costs to a third party and only share an agreed-upon portion of proceeds with the funder at the successful conclusion of the claim. If a case is lost and no proceeds are recovered, the company is under no obligation to repay the funding amount.
Litigation Finance Can Transform Legal Departments into Profit Centres
Under GAAP, litigation costs are reflected as expenses, which can negatively impact a company’s financials and quarterly performance. This is especially troublesome for public companies that are valued on earnings or cash flow or require certain financial criteria to be met to comply with credit covenants. For such companies, litigation costs paid from company funds must be recorded as expenses immediately when incurred, thereby diminishing reportable earnings.
Worse yet, recoveries from successful legal matters may not offset the adverse impact of lawsuit-related costs because such recoveries are generally treated as below-the-line items that do not increase earnings. Moreover, some actions may result in favourable judgments which then take months or years to enforce, leaving a temporary hole in a company’s cash flows despite a successful ruling.
It is no surprise then that corporate legal departments are frequently perceived by management as cost centres, necessary to put out fires or navigate the laws applicable to a particular industry, but not as potential revenue generators. Traditionally, GCs who have identified a roster of affirmative litigation likely to yield significant recoveries will still need to convince their c-suite to take on the risk and immediate financial burden of funding lawsuits from the company’s own balance sheet.
Enter litigation finance. When both the risk and burden are shifted to litigation finance providers in exchange for a portion of any recoveries, a company’s legal department can focus on unlocking the hidden value of its legal matters without the risk of negatively impacting its financials, becoming a potential profit generator for the company.
An Experienced Litigation Funder Can Help Optimize Litigation Outcomes
The quality and breadth of resources that litigants are able to deploy can greatly impact outcomes in legal disputes. For example, the skill of the legal team, the quality of expert witnesses and other litigation consultants are important drivers of how courts and juries perceive the merits of legal claims. With litigation financing mitigating the burden of paying for legal costs, GCs have greater flexibility in assembling a first-rate litigation team.
A legal department buttressed by litigation finance can focus on the skill and effectiveness of its team without worrying about negotiating for the lowest possible fees. Access to the support of top-quality counsel and litigation consultants can improve a company’s overall likelihood of success and the magnitude of any recovery.
Experienced litigation funders can provide access to these top litigation support channels by leveraging their network.
In addition, they can provide an invaluable outside perspective on the merits of a case during the due diligence process and throughout the pendency of the claim. When choosing a litigation funder, consider the expertise of the funder’s team and if there are any practice areas which they target in their investment strategy.
A trusted litigation finance firm should demonstrate the highest professionalism, abide by the explicit understanding that a third-party funder should have no involvement in the litigation or strategy, and should protect attorney-client privilege and confidentiality at all times. When these essential confidences are met, engaging with a third-party funder can be enormously helpful in assessing the merits and risk of a case, budgeting litigation spend, and providing access to first-rate litigation support.
Conclusion
As litigation finance continues to gain popularity among law firms, GCs should also take notice. As businesses continuously seek to gain a competitive advantage over their peers, the ability to mitigate the risks associated with litigation should be an important consideration, especially since poorly conceived strategies can often carry existential consequences. GCs, therefore, should recognize litigation finance as an indispensable asset that has the potential to offset the risk of litigation, provide effective balance sheet management while unlocking the hidden value of prospective legal claims, and improve outcomes for meritorious cases.
Litigation Funding 101
Litigation finance (also called litigation funding) is the practice where a third party unrelated to the lawsuit provides capital to a plaintiff involved in litigation in return for a portion of any financial recovery from the lawsuit.
Litigation finance unlocks the value of legal claims by providing capital to plaintiffs before their cases are resolved. This type of financing has existed for more than 20 years and is increasingly becoming a mainstream funding solution that helps equalize access to the legal system. Fortune 500 companies, major universities and businesses of all sizes have benefited from commercial litigation funding.
The capital provided by monetizing a legal claim may directly pay for some of the costs of litigation, including attorneys’ fees, expert witness fees and court expenses. Litigation finance may be used to fund working capital for companies involved in litigation or even help business owners pay for personal expenses.
Unequal access to the legal system
In much of the world, access to justice requires abundant capital because litigation is expensive. Many factors contribute to the cost of commercial litigation: attorney fees, research, depositions, interrogatories, motions, conferences, witness preparation, trials, subpoenas, appeals, as well as expenses associated with court fees, consultants, and investigations.
All too often litigants who seek justice are unable to pursue their claims due to the high costs associated with lawsuits. Many plaintiffs who have a compelling case will choose to defer or ultimately abandon legal recourse. A great imbalance of resources exists between average and wealthy litigants, creating impediments to judicial access and a distortion of legal outcomes for the undercapitalized.
Litigation finance helps to resolve these problems
Portfolio Funding for Law Firms
One of your firm’s most valuable assets is the collection of cases it’s fighting. Typically, financial institutions rarely have the underwriting skills necessary to properly evaluate the probability of success in your firm’s cases. Thus, they won’t be able to offer your firm any non-recourse advances based on anticipated wins or settlements.
Through CDC’s partners, portfolio funding provides an infusion of capital, a non-recourse loan that allows your firm to manage both pre- and post-settlement expenses better. Best of all, funds can be used however you need, including for attorney fee acceleration, post-settlement funding, receivable factoring, fee minimization, and more.
No matter what kind of cases make up your portfolio.
Main Benefits
Bank loans for law firms are expensive, difficult to secure, and risky to take on. Yet, without the capital they provide, many law firms would struggle to grow. Through our non-recourse design and built-in collateral model, portfolio funding offers a proven alternative to firms that need increased cash flow without the risk.
Having a non-recourse portfolio funding plan means that your firm only repays the funds loan received upon successful judgment or settlement. Saving you from ongoing repayments and making interest expenses contingent upon winning your cases.
The flexibility created by portfolio funding gives your firms the ability to remain nimble while providing you with the necessary capital to:
- Take on contingency clients and offer alternative fee and flexible payment arrangements
- Expand to new markets
- Take litigation expenses off the budget sheets of corporate clients
CDC is a partner to law firms, providing the flexibility for contingency fee arrangements, marketing, or litigation expenses. Together, we help your firm leverage its case portfolio’s underlying value and turn potential into profits.
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The Future of Litigation Finance
It is always interesting to hear the perspective and prognostications of people that are monitoring the litigation finance market. I recently read a synopsis of Ashby Jones, chief of the Wall Street Journal’s law bureau, comments on questions concerning the future of the market, taken from a keynote speech he delivered at a litigation finance conference last year. I wanted to respond with an insider’s take on two of these questions: (1) Will the market continue to grow? and (2) Can litigation funders innovate off the initial model?
Will the industry continue to grow?
Jones admits he was taken by surprise by the growth of litigation finance, but nevertheless, he predicts its continued growth. There has been some question about whether the market is saturated with over 50 firms and increasing amounts of capital pouring into the space. While it is certainly true that the market has attracted many new entrants, there does not seem to a slowing of demand.
As a few commentators have pointed out, even with an estimated $800-$900 million in 2016 annual global litigation funding (according to research by Vannin Capital) this amounts to just 4 percent of global annual spend on litigation. This suggests that there remains significant growth potential in the space.
However, with ever more funding options available for meritorious claims, funders may start to lose leverage with individual relationships and will need to work on improving the user-friendliness of the funding process and reducing cost of capital in order to grow pipelines. Funders may also need to examine their underwriting criteria and explore ways of broadening the scope of potential funding opportunities. Is the market overly saturated? No, but it’s definitely getting more competitive.
Can litigation funders innovate off of the initial model?
Jones points out correctly that traditionally the industry has focused on commercial, single-case, plaintiff-side funding arrangements and he mentions the increased focus on arrangements that fund a portfolio of cases. From there Jones mentions the emerging and growing secondary market for litigation finance, where funders buy and sell interest in existing funding transactions.
While secondary markets may be of interest to funders and a sign of a maturing market, it doesn’t represent real innovation for the client. At our firm, we see a big opportunity to offer complementary financing products such as Litigation Insurance. This type of arrangement can be a great fit for clients looking to mitigate risk but not willing to part with a huge portion of a potential recovery. It can also be used in conjunction with traditional non-recourse loan funding to present a mix of risk and return to the client. True innovation benefits the entire ecosystem and I see the increased adoption of Litigation Insurance combined with traditional funding as a way to broaden the appeal and widen the application of litigation finance.