A cost-benefit analysis of litigation finance
Litigation finance allows law firms and companies access to a source of capital that can be far more flexible than other financing options—with stronger results for the bottom line.
Bentham IMF invests a minimum of $1 million in meritorious commercial cases that are likely to recover $10 million or more (exclusive of punitive damages). We also fund portfolios of plaintiffs-side litigation (for both companies and law firms), offering a minimum of $2 million for a bundle of three or more matters.
How much of the recovery do funders receive? It depends on a multitude of factors, which include an assessment of various risks, the stage of the litigation, as well as the anticipated time to resolution. In general, we seek a return based upon a percentage of the recovery or a multiple of the initial investment. For instance, a $1 million investment may see a return of 2.5 times the initial investment, or $2.5 million.
Financial details for each funded matter are negotiated at the beginning of the financing process, with an agreement on the initial financial terms for the transaction via a non-binding term sheet. After Bentham conducts due diligence and evaluates whether to move forward, the final terms are set in a written litigation funding agreement.
An alternative to loans
Often, the capital obtained from a litigation funder is more attractive than taking out a bank’s line of credit to fund a case. An interest-bearing loan must be repaid no matter what happens in the case. If, for example, the case is lost at trial, the borrower is still obligated to pay back the loan, with interest.
That is not the case with litigation finance. Because funding is non-recourse, we collect a return on investment only if the case is successful. Claimants who use funding are thus relieved of the burden of ongoing principal and interest payments. And Bentham’s investment is collateralized by the litigation itself, which means in instances of law firm funding, partner or corporate assets are not on the line to return Bentham’s investment should a recovery fail to materialize.
As we’ve previously noted, litigation finance is also immune from rising interest rates. Traditional debt is typically tied to the Federal Reserve’s benchmark interest rates and the cost of borrowing money could rise at any time. By comparison, the terms of a litigation finance deal are set by the strength of the case being funded.
In addition to reducing risk, funding delivers immediate accounting benefits to companies and law firms. Loans add to operating expenses—and, thus, reduce profits. Funding can be treated as revenue, immediately boosting the financial picture for a company or law firm. Litigation costs are also removed from the balance sheet (the funder is covering them) releasing capital for other priorities and improving the enterprise’s margins.
Many claimants are looking for a more sophisticated arrangement that allows them to take advantage of one of the key benefits of funding: its flexibility. Because of its non-recourse nature, funding can be used for litigation or for any other purpose the funded party deems necessary. Funding can, for instance, be deployed to defray operational expenses during a long, bet-the-company case or to fund other contingency litigation that would be too costly to pursue without outside financing.
Our funding deals allow lawyers, claimants, and companies the flexibility to withstand low-ball settlement offers on meritorious claims, thus ensuring a case be fairly adjudicated on the strength of its claims rather than the depths of one’s pockets to see a case through trial.
Consider this example: A company is seeking $2 million to cover legal fees and $300,000 for costs in a case with a potential return of $20 million. A law firm agrees to take on the matter but is uncomfortable assuming the risk of handling the case on a full-contingency. After evaluating the case, Bentham agrees to provide $1 million in funding at a 2.5x return, the law firm will take half of its fees on a contingency, and the company will cover costs.
Both the law firm and the company have substantially lowered their risk upfront by partnering with a funder: The company is able to pursue affirmative litigation without spending its legal budget on representation and the law firm immediately guarantees half of its fees.
Is it always the case that a funder will expect a law firm to take on half of the risk in a financing arrangement or for a company to take the full costs in a case? Though the percentage of participation is not fixed, Bentham does like the firms and companies it funds to have skin in the game. When funding a case, Bentham assumes significant risk, and we remain responsible for maintaining returns for our investors, shareholders, and insurers. Having firms and companies participate financially ensures that the interests of all the parties in a funding arrangement are aligned toward maximizing a settlement or judgment.
No matter the arrangement, the hallmarks of Bentham’s deals with clients are simplicity, fairness, and transparency. Our terms are easy to understand, they seek to provide a significant return to claimants, and as a publicly-traded company, Bentham’s financials and case history are publicly available. However, litigation is inherently risky and unpredictable and as such, we cannot accurately predict the outcome of every case nor guarantee any result.
We strongly encourage claimants, firms, and companies to conduct their own due diligence about a potential financing partner—making sure that they are adequately capitalized and that they have a consistent track record of success.
To partner with Bentham IMF for an individual case or a portfolio of cases, contact us for a consultation.