Extending Deep Defense-side Discounts with Hybrid Portfolio Funding

The Scenario
Consider a scenario in which a law firm represents a potential client that has requested a 50% discount off hourly rates in a defense-side case. Unfortunately, the firm can only afford to offer a 30% discount. Yet it is eager to take on the client's defense-side work. A key reason: The firm is pitching the client to take on three plaintiff-side cases in exchange for a 40-percent contingency per case. The recoveries in the plaintiffs' cases are expected to hit $10 million each, for a total of $30 million, with the plaintiff-side costs for the three cases combined expected to be $3 million. The exposure in the defense-side case is expected to hit $10 million. The expected fees in that case are $1 million.
CASE PORTFOLIO
Plaintiff's Case 1 Plaintiff's Case 2 Plaintiff's Case 3 Defense Case 1
$10M Potential Recovery $1m Attorneys' Fees & Costs 40% contingency fee $10M Potential Recovery $1m Attorneys' Fees & Costs 40% contingency fee $10M Potential Recovery $1m Attorneys' Fees & Costs 40% contingency fee $10M Potential Exposure $1m Attorneys' Fees & Costs 50% Discount

The Funding Proposal
The firm approaches Bentham IMF to discuss how it can extend the discount the client wants in the defense-side case without bearing the full cost. Bentham offers hybrid portfolio financing in the amount of $3.2 million: $3 million to cover the costs in the plaintiff-side cases while taking them on full 40% contingency, and $200,000 to cover the difference between the defense side discount requested by the client ($500,000) and the amount of discount the firm can afford ($300,000).

The Upside of Using Funding
Effectively, the funding will allow the firm to be paid 70% of the fees in the defense-side cases and 100% of the fees in the plaintiff-side cases. While returns vary by the deal, assume here that the firm will return to Bentham 2x its investment upon recovery in the plaintiff-side cases. If the firm wins the defense-side case, the client agrees to make it whole on the 50% of fees discounted throughout the case.

Investment Return - Hybrid Portfolio Funding
 
Using hybrid funding could allow the firm to extend the deep discount the client desires for the defense-side case and handle the plaintiff-side cases. While it puts just $300,000 at risk, the firm has the potential to earn $16.2 million in gross revenue from the portfolio, being $13 million in total recoveries from the client (the 40% contingency fees from the three $10M plaintiff side cases), plus $1M from the defense case, plus the $3.2 million Bentham investment. Its net revenue potential from the portfolio is $9.5 million ($16.2 million in gross revenue potential, less the sum of the $6.4 million return to Bentham and the $300,000 that the firm invested into the defense-side case via the amount of the discount that was not covered by Bentham's investment).

This course of action would also yield the firm smoother case flows and the benefit of working with a client that is incentivized to make reasonable settlement decisions. The firm also enjoys potential for significantly higher net revenues if at least one of the plaintiff cases exceeds expectations for a $10 million recovery. For example, a $50 million recovery in one of the three plaintiff-side cases could increase the firm's return by $16 million.

Without funding, the firm would be forced to refrain from taking the cases and risk losing the client.