As the Funding Industry Evolves, Portfolio Financing Grows in Popularity

As the Funding Industry Evolves, Portfolio Financing Grows in Popularity

An Evolution from Single-Case to Portfolio Financing

Nearly two decades ago, Bentham’s parent company, IMF Bentham, began financing litigation to address a need in Australia. As a “loser pays” jurisdiction, claimants were required to post a bond to ensure they would be able to pay their opponent’s attorneys’ fees should the outcome of their case be unsuccessful. IMF set out to afford the capital needed for the bonds, becoming one of the world’s first companies providing funding for large, single-claimant lawsuits.

Since then, litigation funding has evolved into a tool that funders also use to help law firms and companies finance portfolios of litigation, including occasional defense-side matters, to reduce risk and maximize potential recoveries.

While many parties continue to use single-case funding for large cases, portfolio funding is quickly becoming commonplace in the US legal industry. According to Law 360, nearly 40 percent of litigators who obtained litigation funding have used the capital received to finance portfolios containing several cases. And most in-house counsel who have used funding reported that they “used it to finance portfolios of cases—not single, one-off lawsuits.”

These survey results align with trends Bentham sees in inbound requests for funding. Companies and law firms show increasing interest in opportunities to obtain financing for portfolios of cases. This indicates a shift towards seeing funding as a strategic finance tool used for business purposes, rather than one worth considering only when grappling with how to afford one-off large-scale cases.

The Mechanics of Portfolio Financing

So, what exactly is portfolio financing and why is it fast becoming a go-to tool for both in-house counsel and litigators alike? In a nutshell, portfolio funding helps increase cash flow, reduce the risk of taking on multiple contingency cases, and turn litigation into an asset rather than a drag on the bottom line.

Generally, a portfolio consists of multiple plaintiff-side cases financed on a full or partial contingency basis. Putting multiple cases into a portfolio and using that portfolio as collateral for the financing, makes the investment less risky, yet more attractive, for funders.

Another appealing benefit of portfolio funding is the option to create a hybrid-portfolio containing plaintiff and defense-side cases. This allows a firm to use the funding obtained based on the potential recoveries in the plaintiff-side cases in the portfolio to offer creative alternative fee arrangements in defense-side matters added to the portfolio. This solution is particularly helpful for firms that already handle their clients’ defense-side cases and are looking for a means to extend discounts in those matters while also broadening the client relationships to become go-to counsel for plaintiff-side matters.

In an ideal scenario, all the cases in the portfolio produce strong results. When this happens, the funder takes their return and leaves the firm the opportunity to continue collecting returns from the remaining cases in the portfolio as they resolve. This allows the firm to recover significantly more than the funder, while having enjoyed the benefit of mitigating their risk by using the funder’s capital to bring the cases.

However, a firm using portfolio funding can also do well if the portfolio produces mixed results. For example, let’s imagine that Lawyers, Inc. obtains portfolio financing from a litigation funder and places five cases into the portfolio. The funder may receive its return from the successful recovery in any one of the five matters. The first case proves unsuccessful, but the funding served to limit the firm’s exposure, allowing them to earn more in the case than they would have earned had they funded it themselves with a full contingency fee. Shortly thereafter, a separate matter in the portfolio returns a favorable result, which is large enough to pay the funder its return. Lawyers, Inc. can choose to repay the funding with the proceeds from this case, completing its obligation to the funder. On the off chance that none of the cases in the funded portfolio return successful results, the firm enjoys the benefit of losing substantially less money than it would have lost had it taken the cases on full contingency. We further explain how this works in this recently published case study.

By bundling cases into one portfolio, claimants improve the chances of attracting substantial investment from a litigation funder. At Bentham, for instance, we provide funding of $2 million or more for litigation portfolios, with the average investment being much higher.

Here are five other ways portfolios can benefit firms, corporate law departments or both:

Rigorous Due Diligence: The thorough due diligence process performed by funders as they consider a potential investment can give firms and companies an unbiased view of their cases, including whether they’re likely to yield successful recoveries.

Immediate Revenue with Upside Potential: For law firms, obtaining portfolio funding affords guaranteed receipt of a portion of the potential revenues from the cases, plus a chance to see significantly more income if the cases perform well.

Fee Flexibility: Firms can use portfolio arrangements to offer hybrid fee arrangements, giving their clients a break on hourly fees without sacrificing the revenues they would otherwise receive for charging full hourly rates.

Cost management: For companies, one of the greatest deterrents in bringing litigation—even meritorious, high-potential claims—is its impact on the financial statements. With financing from a funder, companies move litigation costs off their balance sheets.

Optimized returns: Portfolio funding allows litigants to hire the best possible counsel and cover expenses over the lifespan of multiple complex cases. It also saves them from settling cases for pennies on the dollar or abandoning claims altogether due to insufficient resources.

To learn more about the benefits of portfolio financing and how it works, contact us for a consultation.