The following article was contributed by Peter Petyt, CEO of 4 Rivers Services, a third-party funding advisory and legal project management firm. Peter is undertaking part-time doctoral research at the University of Westminster in London to explore how law firms can ensure that they are suitable for portfolio funding and how can funders best evaluate which law firms to support. In his thesis, he will be examining the different ethical and regulatory challenges in various jurisdictions and analyzing the characteristics of legal case types which make them suitable or unsuitable for inclusion in a funded portfolio. The research will complement the existing 4 Rivers know-how which has been developed to help law firms and claimants secure third-party funding. Below is a Q&A with Peter on his doctoral research findings:
What led you to carry out this research? Third-party funding is becoming increasingly important, so I was particularly keen to create some thought leadership which would demonstrate how law firms can take benefit from portfolio finance and what criteria are necessary. This form of finance could be genuinely transformational for many firms.
How do clients benefit from law firms which have this sort of financing behind them? The fees and expenses of running disputes can be substantial, so clients often require the law firm to offer fee arrangements which are success-based. However, law firms are naturally cautious about risking their own time and third-party costs if payment for these depends on an uncertain outcome, and they must ensure that they have adequate operating capital to survive.
What is the essence of portfolio funding? Portfolio funding is a form of finance which is provided for, and secured against, a bundle of cases which are cross-collateralised. The cross-collateralization diversifies and reduces the funder’s risk, enabling the funder to reduce its overall cost of capital, especially when compared to single-case financing. A law firm can use portfolio finance to provide it with working capital whilst the cases are in progress; to pay disbursements of a case (including court and arbitration fees, experts, e-disclosure etc); and potentially to fund other initiatives such as acquisitions, recruitment, marketing, and IT. Unlike bank finance or shareholder equity, portfolio finance is aligned with the successes and failures of cases. It is therefore an attractive non-recourse and non-dilutive source of capital.
What are the traditional sources of law firm finance? Often, law firms simply use bank finance and other sources of debt finance which can be expensive and may not be attainable at all to plaintiff law firms. Banks do not accept unrealised contingency fees as collateral for credit, requiring instead more conventional security such as property and personal guarantees from the partners of the firm to counterbalance economic or financial risks or uncertainties.
Are public listings of law firms an alternative? Since 2012, UK law firms have been permitted to list and raise capital on a public stock exchange. A public listing provides cash which can enable a law firm to effectively back its own judgment when taking cases on a contingent or partially contingent basis. However, there has not been a flotation of a law firm on a UK market since 2019 and indeed the market appears to be generally less receptive at present. Additionally, the process of taking a firm to market is not straightforward and, post-listing, partners earn less per year. However, they do have equity ownership of a publicly quoted business which can have substantial capital value over time and can be more easily monetized than a share of a traditional partnership.
What about external equity investment in law firms? This is permissible in the UK, as well as in US states Arizona and Utah, so it may well become a trend in the future. However, there must be a concern that if a funder becomes an equity investor in a law firm, it will impact on a law firm’s independence. This important issue was illustrated when Burford purchased a minority 32% stake in PCB Litigation and provided capital to fund a portfolio of litigation cases. Equity participation brings with it a degree of control and influence over operations and strategy, and the question is therefore whether a firm in a highly regulated industry such as legal services should be allowed to take investment from a party which has a direct influence in the financing of its cases.
What are “pacts” or “best friends” relationships? These are where the law firm “partners” with a preferred funder which finances the law firm fees and expenses on single cases. One example was the Willkie Farr & Gallagher law firm partnership with Longford Capital in 2021, where a “facility” of US$50 million was made available. There was also Harbour’s venture with Mishcon de Reya, which was publicized as a “strategic partnership”; and a “strategic alliance” between Litigation Capital, DLA Piper and Aldersgate Funding to provide DLA clients access to £150m for funding large-scale litigation and arbitration. The “pact” structure is not a genuine portfolio structure, as the finance provided is for the client’s account, not for the law firm’s account. There is no cross-collateralzsation of claims and therefore the obvious benefits of diversification are lost. There is also no evidence that such pacts offer a better financial deal for a client than if the client were to conduct a competitive process either directly or through an advisor/broker, and indeed the negative impact of a pact/best friend funder declining to fund a case could have a negative impact on that case being attractive to other funders. Furthermore, whilst speed of execution is cited as a benefit of the pact structure, there is no evidence to support this.
What portfolio funding deals have been announced in the market? UK litigation law firm, Provenio, has a £50 million fund in partnership with Therium to finance high value business litigation and arbitration claims. Provenio had been launched in 2019 by a team of senior litigation lawyers from DLA Piper to advise exclusively on high-value, national and international commercial disputes. Then, in March 2021, international firm PGMBM announced a £45 million “funding partnership” with North Wall Capital to support the funding of cases related to diesel emissions scandals, breaches of personal data and risks associated with drugs and medical devices, as well as environmental litigation. This was followed in 2022 by a further investment of £100 million by North Wall, targeted at litigation arising from ESG issues, which is “in the form of a loan secured against the revenues from winning or settling cases brought by PGMBM”. This structure- a cross-collateralized loan which is repaid from the proceeds of cases- is typical of a law firm portfolio funding facility. Harbour provided financing for an acquisition of a division of a law firm in July 2023 in the UK, where Rothley Law acquired the private client team and business book of Shoosmiths; and Harbour was also the financier behind the acquisition of the UK law firm Hawkins Hutton by Bamboo Law in August 2023, as well as providing Slater and Gordon (S&G) with a £33m facility in one of the largest deals publicly announced during that year
. The S & G facility is for expansion into high-value PI work as the UK fixed cost regime reduces profit margins on lower value claims, with the firm focusing instead on severe and life-changing injury cases, including catastrophic loss work, as well as consumer law developments.
How does portfolio funding differ from single-case funding? A single dispute carries a risk which is binary, which is why TPF for single cases requires a high rate of return. Portfolio funding, however, is provided for a bundle of cases, so that the funder can offer a non-recourse credit-like solution which creates liquidity and leverages a law firm’s investment of its own time. The bundle can involve a group of specific cases, or it can include existing and future cases, including a large group of low-stakes cases, or a smaller group of high-stakes cases. Sizes of portfolios vary among funders but in general a minimum of three cases and a minimum investment size of $3 million are standard. Other specific uses include helping a new law firm launch, monetizing unpaid WIP, acquiring a new line of business, mergers and acquisitions, and geographic expansion. The funding can be used to increase revenues by opening new business locations and divisions in strategic markets, as well as hiring new individuals or groups of fee earners with client followings. Additionally, the capital might be used for remuneration to existing staff to secure their continued employment. It also seems likely that the funder will offer added value services to law firms to which they are providing portfolio financing, including mock trials, moot courts, and strategic advice. The research is showing that portfolio funding enables the law firm to secure funding more quickly, on pre-arranged terms, and, depending on the structure, the ability to benefit from the overall success of the portfolio.
How does 4 Rivers use the know-how which is being created by this research to benefit its law firm clients? This know-how, combined with my own many years of experience in assisting corporations with securing capital from venture capitalists, private equity houses, family offices and banks, is vital in allowing us to advise our law firm clients on how to structure a portfolio so that it is investment ready and to optimise the chances of securing funding. In effect, a unique methodology has been developed.
