Trending Now
Community Perspectives

Insights on Portfolio Funding for Law Firms

By Peter Petyt |

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.

About the author

Peter Petyt

Peter Petyt

More LFJ Conversations

View All
Community Perspectives

Securities Litigation: A Growing Space in Scandinavia

By Mats Geijer |
The following article was contributed by Mats Geijer, Counsel Scandinavia of Deminor. In the complex world of securities trading, disputes and violations can arise, leading to legal actions that seek to hold wrongdoers accountable and provide recourse for affected parties. In recent years we have seen an increase in actions from investors towards listed companies, shareholders vs the so-called issuers in the region. Notable cases are OW Bunker, Danske bank in Denmark and more recently Ericsson in Sweden. Securities litigation serves several important purposes in the financial ecosystem, namely:
  1. Protecting Investors: Securities litigation helps investors in their fiduciary responsibility to seek financial compensation for losses resulting from securities fraud or misconduct. By holding wrongdoers accountable, it deters fraudulent activities and promotes market integrity.
  2. Enforcing Compliance: Securities litigation enforces compliance with securities laws and regulations, ensuring that companies and individuals adhere to disclosure requirements and ethical standards in their financial dealings.
  3. Promoting Transparency: Securities litigation can uncover hidden risks, misrepresentations, or conflicts of interest that may impact investors’ decisions. This transparency is essential for maintaining trust in the financial markets.
  4. Enhancing Corporate Governance: Securities litigation can target corporate governance failures, such as breaches of fiduciary duty or conflicts of interest among corporate insiders. Holding company officers and directors accountable can lead to improved governance practices.

Securities litigation in Sweden can be done in various ways, through class/group actions, derivative actions, or regulatory enforcement actions (by authorities). Case law in the sphere of private enforcement is historically scarce but will now hopefully start to emerge. A historic reason is probably that Sweden as a civil law country lacks statutory rules regulating civil liability in relation to improper securities activities.

In the Ericsson case, 37 institutions are claiming roughly $200 million from the issuer in the district court of Solna, Sweden. The claimants state they have suffered investment losses since Ericsson withheld information about potential bribes paid to the terrorist organisation ISIS in Iraq, that caused the share price to fall. The claimants are all large (non-Swedish) institutional investors, and the case is funded by a third-party funder (not Deminor). The case will be tried in the first instance court in 2025.

The legal community expects to see an increase in litigation related to securities in the coming years, to paint a picture in 2021 there where was one (1) initial public offering every second day (157 in total). In 2022-23 there were only a handful of initial public offerings each year. Sweden has a disproportionate number of listed companies compared to other EU countries and it is considered a national sport to invest in the stock market. A majority of listed shares are held by local and foreign sovereign wealth funds, they seldom engage in litigation locally but often participate in international cases in the US and elsewhere. The economy is currently in a recession which has historically always led to an increase in the number of disputes.

Deminor is the only international funder with a local presence that focuses on securities litigation. On paper there are plenty of opportunities in Scandinavia, but in practical terms cases are often too “small” meaning the quantum of the potential loss the investor has suffered is not sufficient to initiate the litigation. Or which is more often the situation, the investors that do hold a significant part of the shares (the loss) are not willing to engage in litigation for various reasons. The claimants that are willing to lead the way in terms of creating the much-needed case law is the types we see in the Ericsson case, foreign institutional investors.

We could summarize the situation with a phrase coined by the advertising industry for when there was a minute of silence before the next add was supposed to run - watch this space!

Community Perspectives
" />

Navigating the Legal Landscape: Best Practices for Implementing AI

By Anthony Johnson |

The following article was contributed by Anthony Johnson, CEO of the Johnson Firm and Stellium.

The ascent of AI in law firms has thrust the intricate web of complexities and legal issues surrounding their implementation into the spotlight. As law firms grapple with the delicate balance between innovation and ethical considerations, they are tasked with navigating the minefield of AI ethics, AI bias, and synthetic data. Nevertheless, within these formidable challenges, law firms are presented with a singular and unparalleled opportunity to shape the landscape of AI law, copyright ownership decisively, and AI human rights.

Conducting Due Diligence on AI Technologies

Law firms embarking on the integration of AI into their practices must commence with conducting comprehensive due diligence. This process entails a precise evaluation of the AI technology's origins, development process, and the integrity of the data utilized for training. Safeguarding that the AI systems adopted must be meticulously developed with legally sourced and unbiased data sets. This measure is the linchpin in averting potential ethical or legal repercussions. It is especially paramount to be acutely mindful of the perils posed by AI bias and AI hallucination, both of which have the potential to undermine the fairness and credibility of legal outcomes.

Guidelines must decisively address the responsible use of AI, encompassing critical issues related to AI ethics, AI law, and copyright ownership. Furthermore, defining the scope of AI's decision-making power within legal cases is essential to avert any over-reliance on automated processes. By setting these boundaries, law firms demonstrate compliance with existing legal standards and actively shape the development of new norms in the rapidly evolving realm of legal AI.

Training and Awareness Programs for Lawyers

Implementing AI tech in law firms isn't just a technical challenge; it's also a cultural shift. Regular training and awareness programs must be conducted to ensure responsible and effective use. These programs should focus on legal tech training, providing lawyers and legal staff with a deep understanding of AI capabilities and limitations. Addressing ethical AI use and the implications of AI on human rights in daily legal tasks is also required. Empowering legal teams with knowledge and tools will enhance their technological competence and drive positive change.

Risks and Ethical Considerations of Using AI in Legal Practices

Confidentiality and Data Privacy Concerns

The integration of AI within legal practices presents substantial risks concerning confidentiality and data privacy. Law firms entrusted with handling sensitive information must confront the stark reality that the deployment of AI technologies directly threatens client confidentiality if mishandled. AI systems' insatiable appetite for large datasets during training lays bare the potential for exposing personal client data to unauthorized access or breaches. Without question, unwaveringly robust data protection measures must be enacted to safeguard trust and uphold the legal standards of confidentiality.

Intellectual Property and Copyright Issues

The pivotal role of AI in content generation has ignited intricate debates surrounding intellectual property rights and copyright ownership. As AI systems craft documents and materials, determining rightful ownership—be it the AI, the developer, or the law firm—emerges as a fiercely contested matter. This not only presents legal hurdles but also engenders profound ethical deliberations concerning the attribution and commercialization of AI-generated content within the legal domain.

Bias and Discrimination in AI Outputs

The critical risk looms large: the potential for AI to perpetuate or even exacerbate biases. AI systems, mere reflections of the data they are trained on, stand as monuments to the skewed training materials that breed discriminatory outcomes. This concern is especially poignant in legal practices, where the mandate for fair and impartial decisions reigns supreme. Addressing AI bias is not just important; it is imperative to prevent the unjust treatment of individuals based on flawed or biased AI assessments, thereby upholding the irrefutable principles of justice and equality in legal proceedings.

Worst Case Scenarios: The Legal Risks and Pitfalls of Misusing AI

Violations of Client Confidentiality

The most egregious risk lies in the potential violation of client confidentiality. Law firms that dare to integrate AI tools must guarantee that these systems are absolutely impervious to breaches that could compromise sensitive information. Without the most stringent security measures, AI dares to inadvertently leak client data, resulting in severe legal repercussions and the irrevocable loss of client trust. This scenario emphatically underscores the necessity for robust data protection protocols in all AI deployments.

Intellectual Property Issues

The misuse of AI inevitably leads to intricate intellectual property disputes. As AI systems possess the capability to generate legal documents and other intellectual outputs, the question of copyright ownership—whether it pertains to the AI, the law firm, or the original data providers—becomes a source of contention. Mismanagement in this domain can precipitate costly litigation, thrusting law firms into the task of navigating a labyrinth of AI law and copyright ownership issues. It is important that firms assertively delineate ownership rights in their AI deployment strategies to circumvent these potential pitfalls preemptively.

Ethical Breaches and Professional Misconduct

The reckless application of AI in legal practices invites ethical breaches and professional misconduct. Unmonitored AI systems presume to make decisions, potentially flouting the ethical standards decreed by legal authorities. The specter of AI bias looms large, capable of distorting decision-making in an unjust and discriminatory manner. Law firms must enforce stringent guidelines and conduct routine audits of their AI tools to uphold ethical compliance, thereby averting any semblance of professional misconduct that could mar their esteemed reputation and credibility.

Case Studies: Success and Cautionary Tales in AI Implementation

Successful AI Integrations in Law Firms

The legal industry has witnessed numerous triumphant AI integrations that have set the gold standard for technology adoption, unequivocally elevating efficiency and accuracy. Take, for example, a prominent U.S. law firm that fearlessly harnessed AI to automate document analysis for litigation cases, substantially reducing lawyers' document review time while magnifying the precision of findings. Not only did this optimization revolutionize the workflow, but it also empowered attorneys to concentrate on more strategic tasks, thereby enhancing client service and firm profitability. In another case, an international law firm adopted AI-driven predictive analytics to forecast litigation outcomes. This tool provided unprecedented precision in advising clients on the feasibility of pursuing or settling cases, strengthening client trust and firm reputation. These examples highlight the transformative potential of AI when integrated into legal frameworks.

Conclusion

Integrating AI within the legal sector is an urgent reality that law firms cannot ignore. While the ascent of AI presents complex challenges, it also offers an unparalleled opportunity to shape AI law, copyright ownership, and AI human rights. To successfully implement AI in legal practices, due diligence on AI technologies, training programs for lawyers, and establishing clear guidelines and ethical standards are crucial. However, risks and moral considerations must be carefully addressed, such as confidentiality and data privacy concerns, intellectual property and copyright issues, and bias and discrimination in AI outputs. Failure to do so can lead to violations of client confidentiality and costly intellectual property disputes. By navigating these risks and pitfalls, law firms can harness the transformative power of AI while upholding legal standards and ensuring a fair and just legal system.

Community Perspectives
" />

Bank Lending Vs. Alternative Litigation Finance: A Mass Tort Attorney’s Strategic Opportunity

By Jeff Manley |
The following post was contributed by Jeff Manley, Chief Operating Officer of Armadillo Litigation Funding.  Mass tort litigation is a high-stakes world, one where the pursuit of justice is inextricably linked with financial resources and risk management. In this complex ecosystem, two financial pillars stand out: bank lending and alternative litigation finance. For attorneys and their financial partners in mass torts, choosing the right financial strategy can mean the difference between success and stagnation. The Evolving Financial Landscape for Mass Tort Attorneys Gone are the days when a powerful legal argument alone could secure the means to wage a war against industrial giants. Today, financial acumen is as critical to a law firm's success as legal prowess. For mass tort attorneys, funding large-scale litigations is akin to orchestrating a multifaceted campaign with the potential for astronomical payouts, but also the very real costs that come with such undertakings. Under the lens of the courtroom, the financing of mass tort cases presents a unique set of challenges. These cases often require substantial upfront capital and can extend over years, if not decades. In such an environment, agility, sustainability, and risk management emerge as strategic imperatives. Navigating these waters demands a deep understanding of two pivotal financing models: traditional bank lending and the more contemporary paradigm of third-party litigation finance. The Need for Specialized Financial Solutions in Mass Tort Litigation The financial demands of mass tort litigation are unique. They necessitate solutions that are as flexible as they are formidable, capable of weathering the uncertainty of litigation outcomes. Portfolio risk management, a concept well-established in the investment world, has found its parallel in the legal arena, where it plays a pivotal role in driving growth and longevity for law firms. The overarching goal for mass tort practices is to structure their financial arrangements in such a way that enables not just the funding of current cases but the foresight to invest in future opportunities. In this context, the question of bank lending versus alternative asset class litigation finance is more than transactional—it's transformational. Understanding Bank Lending Banks have long been the bedrock of corporate financing, offering stability and a familiar process. While bank lending presents several advantages, such as the potential for lower interest rates in favorable economic environments, it also comes with significant caveats. The traditional model often involves stringent loan structures, personal guarantees, and an inflexibility that can constrain the scalability of funding when litigation timelines shift or case resolutions become protracted. For attorneys seeking immediate capital, interest-only lines of credit can be appealing, providing a temporary reprieve on principal payments. However, the long-term financial impact and personal liability underpinning these loans cannot be overlooked. Exploring Third-Party Litigation Finance On the flip side, third-party litigation finance has emerged as a beacon of adaptability within the legal financing landscape. By eschewing traditional collateral requirements and personal guarantees, this model reduces the personal financial risk for attorneys. More significantly, it does so while tailoring financing terms to individual cases and firm needs, thus improving the alignment between funding structures and litigation timelines. Litigation financiers also bring a wealth of experience and industry-specific knowledge to the table. They are partners in the truest sense, offering strategic foresight, risk management tools, and a shared goal in the litigation's success. Interest Rates and Financial Terms The choice between bank lending and third-party litigation finance often hinges on the amount of attainable capital, interest rates, and the terms, conditions, and covenants of the loans. These differences can significantly influence the overall cost of financing and the strategic financial planning for mass tort litigation. Bank Lending: Traditional bank loans typically offer lower initial interest rates, which can be attractive for short-term financing needs. However, these rates are almost always variable and linked to broader economic indicators, such as the prime rate. Banks are very conservative in every aspect of underwriting and the commitments they offer. Third-Party Litigation Finance: In contrast, third-party litigation lenders often require a multiple payback, such as 2x or 3x the original amount borrowed. Some third-party lenders also offer floating rate loans tied to SOFR, but the interest costs are meaningfully higher than those of banks. The trade-off is greater access to capital. Third-party lenders, deeply entrenched in industry nuances, are generally willing to lend substantially larger amounts of capital. For attorneys managing long-duration cases, this variability introduces a layer of financial uncertainty. If a loan has a floating rate and the duration of the underlying torts is materially extended, the actual borrowing cost can skyrocket, negatively impacting the overall returns of a final settlement. This is an incredibly important factor to understand both at the outset of a transaction and during the initial stages of capital deployment. Similarly, the maturity, terms, and conditions can differ drastically between bank-sourced loans and those from third-party lenders, with no standard list of boilerplate terms for comparison—making a knowledgeable financial partner key to facilitating the best fit for the law firm. Two standard features of a bank credit facility are that the entire portfolio of all law firm assets is usually required to secure the loan, regardless of size, and an unbreakable personal guarantee further secures the entire credit facility. Both of these points are potentially negotiable with a third-party lender. Bank loans are almost always one-year facilities with the bank having an explicit right to reassess their interest in maintaining a credit facility with the law firm every 12 months. In contrast, third-party lenders typically enter into a credit facility with a commitment for 4-5 years, with terms becoming bespoke beyond these basics. Loan Structures Under Scrutiny The rigidity of bank loan structures, particularly notice provisions and speed of access, contrasts with the fluidity of third-party financiers' offerings. The ability to negotiate terms based on case outcomes, as afforded by the alternative financing model, represents a paradigm shift in financial planning that has redefined the playbook for mass tort investors. Risk at Its Core The linchpin of this comparison is risk management. Banks often require a traditional, property-based collateral, which serves as a blunt instrument for risk reduction in the context of litigation. Third-party financiers, conversely, indulge in sophisticated evaluations and often adopt models of shared risk, where their fortunes are inversely tied to those of the litigants. Support Beyond Capital A crucial divergence between bank loans and alternative finance is the depth of support provided. The former confines its assistance to financial matters, while the latter, through its specialized knowledge, contributes significantly to strategic case management, risk assessment, and valuation, essentially elevating itself to the level of a silent partner in the legal endeavor. Furthermore, litigation funders (unlike banks), are often prepared to extend multiple installments of capital, reflecting a level of risk tolerance and industry insight that banks typically do not offer. Case Studies and Success Stories The case for alternative litigation finance is perhaps best illustrated through the experiences of attorneys who have successfully navigated the inextricable link between finance and litigation. The Litigation Finance Survey Report highlights the resounding recommendation from attorneys who have used third-party financing, with nearly all expressing a willingness to repeat the process and recommend it to peers. This empirical evidence underscores the viability and efficacy of alternative financing models, showcasing how they can bolster the financial position of a firm and, consequently, its ability to take on new cases and grow its portfolio. The Role of Litigation Finance Partners When considering third-party litigation finance, the choice of partner is just as important as the decision to explore this path. Seasoned financiers offer more than just capital; they become an extension of the firm's strategic muscle, sharing in risks and rewards to galvanize a litigation (and practice) forward. Cultivating these partnerships is an investment in expertise and a recognition of the unique challenges presented by mass tort litigation. It is an integral part of modernizing the approach to case management, one that ultimately leads to a sustainable and robust financial framework. For mass tort attorneys, the strategic use of finance can unlock the latent potential in their caseloads, transforming high-risk ventures into opportunities for growth and success. By carefully weighing the merits of traditional bank lending against the agility of third-party litigation financing, attorneys can carve out a strategic path that not only secures the necessary capital but also empowers them to manage risks and drive profitability. One truth remains immutable: those who recognize the need for financial innovation and risk management will be the torchbearers for the future of mass tort litigators, where the scales of justice are balanced by a firm and strategic hand anchored in the principles of modern finance.