Portfolio Funding: A Creative Approach to Managing Risk

Portfolio Funding: A Creative Approach to Managing Risk

Litigation funding, in the minds of many, is designed to give a client or a law firm the resources it needs to pursue a single big case. But Bentham IMF also works with law firms to create litigation portfolios that allow firms to finance several clients’ cases at once. As a rule, a portfolio contains three or more cases that are strong in terms of the merits, damages, and collectability. All types of commercial litigation can be included in the portfolio. Bentham’s minimum portfolio funding size is $2,000,000. (You can read more about the basics of portfolio funding here). For those receiving funding, a portfolio can open opportunities to manage litigation risk in creative and lucrative ways.

To learn more about portfolio funding and its potential advantages for firms, we spoke with David Gallagher, a Bentham investment manager and legal counsel. Here’s what he had to say.

How does a litigation portfolio spread out risk for the law firm and the funder?

Gallagher: A portfolio contains multiple contingency or partial contingency matters. Three is the minimum number of cases required, but some portfolios have forty or so cases. Having multiple cases in a portfolio allows a firm to cross-collateralize their litigation assets, upon which we receive our return from those that are successful.

What are the advantages for the law firm in creating a portfolio?

Gallagher: The main advantage compared to obtaining a line of credit from a bank is that litigation finance is non-recourse funding. The partners in the firm are not required to personally guarantee anything and only have to repay the funding received if the cases are successful. Although our percentage returns are higher than with a line of credit, partners aren’t going to have to sell their houses if the cases are unsuccessful.

Also, a firm can use the money for anything the firm might need, such as taking on more contingency cases or hiring laterals. By using portfolio funding, a law firm can also convert a full contingency case to a hybrid contingency, which allows a firm’s client to continue to reap the benefit of a contingency while allowing the firm to take a more measured risk.

How can portfolio funding be used in creative ways by a firm?

Gallagher: Portfolio funding can allow a firm to increase risk and potential return in a manageable way. For example, a big firm could make a targeted approach to some of its clients and convert cases from hourly billing to contingency. By using a portfolio with rigorously selected cases, it guarantees firms a portion of the revenue today with a chance to see significantly more if the cases perform well. It’s more risk, but it’s smart risk. Every Am Law 100 firm could do this in a month if they put their minds to it.

Also, tapping into portfolio funding can help lawyers start their own firm. An elite group of partners who believe they can start their own firm, but either don’t want to take on the risk of obtaining a traditional loan or don’t have the means for a substantial outlay that would get a new firm off the ground, can use portfolio funding to launch their firm provided their cases meet our criteria.

A real-world example can be found in Ray Boucher’s experience, where he used Bentham’s portfolio funding to launch a new, nine-person firm in Los Angeles. For more about Boucher’s experience, click here.

Can you use the money to fund defense-side cases?

Gallagher: Yes, portfolio funding can be used for any purpose. For example, it can support giving discounts to clients on defense side-cases and in return, the firm can ask clients to use their services to bring plaintiffs-side contingency cases.

What makes a case a good fit for a portfolio?

Gallagher: We look for plaintiffs-side contingency cases that are compelling on the merits, strong on damages, and have no issues with collectability. For law firms, the ideal case is one where the contingency fee is likely to greatly exceed the amount of billable time necessary to achieve a successful result.

What issues do some firms face in putting together a litigation portfolio?

Gallagher: One concern is the ethical rule against sharing fees with non-attorneys. A law firm can borrow money from a bank, and can then use its fee revenue to repay that money, with interest, without violating the rule. Similarly, a law firm can take litigation funding, and can use its fee revenue to repay that funding, plus an additional investment return for the funder, without violating the rule. It is important that the portfolio include several cases or more, so that the fee revenue being paid to the funder is not necessarily tied to any one case. It is also important that the funding agreement provide that the funder has no control whatsoever over litigation strategy or settlement, so as not to interfere with the attorneys’ independent exercise of professional judgment. (For more on this issue, check out the State Bar of California’s Big News for Solo and Small Firms. Click here to read his article.)

Does the funder have any say or control about the litigation strategy in the cases after they have been included in a portfolio?

Gallagher: As mentioned above, the cases are the law firm’s to manage. However, our team here at Bentham is made up of former litigators, so we can certainly make suggestions if asked, and are always available to kick around ideas.

To learn how portfolio funding can make a difference for your law firm, contact us for a consultation.