Lawyers and litigants who wish to tap into legal finance should understand how the process works, what to consider when assessing funders and how to “get to yes”—especially since legal financiers earn their returns only from recoveries connected to financed cases, and thus stand to lose their entire investment if the financed case or set of cases is unsuccessful.
What Are Some Typical Investment Criteria?
Given the high degree of risk faced by legal financiers, they look for specific attributes in matters in which to invest. The best candidates for litigation finance meet the following criteria:
- Type of matter: Commercial litigation financiers (not to be confused with consumer litigation funders) invest in complex commercial litigation, including antitrust, securities, fraud, contract, patent and intellectual property, trade secret and other business tort matters, as well as international arbitration.
- Strong merits: Legal financiers receive returns only when cases succeed, so they carefully assess the facts and legal merits of claims, starting with an operative complaint or written summary.
- Counsel: Legal financiers value cases led by experienced litigation counsel with successful track records and a strategic approach. During the review process, the financier confirms that counsel has been retained and has performed an analysis of the factual background and legal issues of the case.
- Jurisdiction: Legal financiers invest in matters filed or expected to be filed in domestic courts in a common law jurisdiction or in an internationally recognized arbitration center.
- Capital requirement: Seasoned legal financiers look to make investments of at least $2 million, but this number is sometimes lower for smaller financiers. Most of Burford’s investments, for instance, are between $4 and $10 million, and some are significantly larger.
- Damages: Damages must be supported by solid evidence of loss and should be large enough to support the financier’s investment and returns with the client keeping most of the litigation proceeds if the case goes well. Although the ratio of investment to expected recovery varies depending on the case, for an investment of $2 million, the expected compensatory damages should be around $20 million.
What Do I Need to Do to Secure Financing?
Lawyers and litigants seeking financing can aid the process in four important ways:
- Prepare a realistic budget: Matters in which financiers invest must have sufficient funding to get to the finish line. That requires a realistic, conservative budget through trial. The most frequent reason cases are rejected is that the ratio of necessary investment to expected return is too narrow. Counterparties should provide budgets that do not presuppose early settlement.
- Organize documents: Active diligence requires review of the key documents underlying the dispute as well as financial information about the businesses involved. Financiers can work more efficiently when counter-parties provide documentation quickly.
- Be responsive: The single most important way that clients and lawyers can aid the process is to respond quickly to questions and document requests.
- Understand the risk profile of the case: Financiers are in the business of taking risk, but they invest in cases that have strong risk profiles. Some of the characteristics legal financiers look for include:
- The case does not turn on a “he-said-she-said” credibility determination
- There is more than one viable legal theory that could lead to a recovery
- The legal theory is tested and has good support in statutory or case-law
- The case theory makes sense in the commercial context of the transaction or course of dealing
- The damages theory can be reasonably extrapolated from past performance of the damaged company or there is an established contract, statutory or royalty rate
- The economics of the investment do not depend on the case settling early or on obtaining treble damages
What Should I Look For in a Funder?
In transactions when some capital is to be paid in the future, law firms and their clients must be confident that capital will be available to them at the point when it is needed. They should ask the following questions when performing due diligence on financiers:
- Does the financier have its own capital, or does it need to get that capital from somewhere else?
- If the capital must be called, are the capital sources firmly bound to provide it, or are there any “outs” in their investment arrangements?
- Are the capital sources institutional, and are they “good for it”?
Even when capital availability is not an issue—such as when the client is receiving all the capital up front—clients need to focus on the size and structure of their financial providers to assess their stability and incentives, and the materiality of the investment to them. This is important because if your transaction is material to the financier, there are inevitably contractual provisions in your arrangement that will—if it comes under pressure—permit the financier to act in a manner that may be inconsistent with your interests.
It is also a bad idea to sign up early in your examination of litigation finance exclusively with one provider until you have been able to explore all these issues and also achieve confidence that the indicative terms you are seeing will translate into a real deal—which is all too often not the case.