As litigation volume spikes in the US, law firm portfolio financing may help cover staffing shortfalls

As litigation volume spikes in the US, law firm portfolio financing may help cover staffing shortfalls
Author:
John Harabedian
Investment Manager, Legal Counsel - United States

Many law firms are seeing a substantial spike in their volume of litigation work as, among other things, courts begin tackling a pandemic-driven case backlog, COVID-19-related business interruption suits continue to percolate, and corporate enforcement activity picks up under the new administration in Washington.

According to a recent report by The American Lawyer, firms that may have paused hiring efforts last year are now, in the words of one recruiter, “desperate” to cover staffing shortfalls. “Now that litigation is going gangbusters, there’s a real need for associates,” one Am Law 200 litigation practice head told the magazine.

At the same time, the cost of bringing on new lawyers continues to rise. In the last few months, several law firms have raised associate salaries, with starting pay for first-year associates now north of $200,000 at many large firms.

For law firms that are looking to hire additional litigators but are concerned about the capital outlay, litigation funding may provide a useful solution. By financing a portfolio of expected fees, firms can access future fees now, using that money to fund expansion efforts, avoid long-term debt, and reduce potential risk to their balance sheets.

A portfolio approach

Litigation funding is non-recourse, which means that the funder receives a return on its investment only in the event of a successful resolution. If a case is unsuccessful, the firm owes the funder nothing.

In a portfolio financing arrangement, a law firm with several meritorious contingent-fee or hybrid cases can receive financing for multiple cases at the same time. This portfolio approach is often attractive to funders because their risk is spread across several matters. By financing several cases at once, the funder is also able to increase the amount of capital it can provide.

For the law firm, a portfolio approach can result in substantial benefits. Legal finance may be used to fund operational expenses, expand a practice, and hire associates. Some entrepreneurial lawyers have even used litigation portfolio funding to help finance start-up and operational costs for their own boutique firms.

In addition, cases that may not have provided a return on investment for several years now generate immediate income for the firm. And after the funder recovers its investment (which may involve the resolution of just one matter in the portfolio, depending on specific matters in the portfolio), a law firm may also reap the rewards of a substantial judgment or settlement from that matter and/or from the resolution of the remaining matters in the portfolio.

The non-recourse nature of legal finance can be a boon to firms accustomed to financing their expansion efforts via lines of credit or bank loans. A traditional line of credit from a bank often comes with periodic interest payments due, other restrictive terms, and may require the law firm or its individual partners to put their personal assets on the line as collateral. And unlike non-recourse financing from a litigation funder, a bank loan must be repaid no matter the outcome of a case, and as such, it must be reflected as a debt obligation on the financial statements of the firm.

Reducing Risk

Experienced legal finance firms like Omni Bridgeway further reduce risk by working with firms to carefully select the matters to include in the portfolio. Our investment management team is comprised of lawyers who have come from some of the nation’s most prominent firms and who are experts in litigation and valuing potential recoveries. They help fund disputes around the world and possess a keen understanding of how firms manage and litigate large, complex cases.

A traditional lending institution that deploys bankers to negotiate and manage loans is unlikely to have such deep knowledge of the litigation landscape and are unlikely to offer the flexible terms that firms may need when dealing with the uncertainties of litigation.

The due diligence process can also help law firms and their clients test the strengths and weaknesses of their cases by providing them with an expert objective assessment. The vetting process can help them validate their current strategies or make necessary adjustments to their approach to help improve their prospects for success and maximize their recoveries.

An expansion tool

For firms looking to expand their litigation practices by offering alternative fee arrangements to clients, portfolio financing can assist in removing the risk associated with taking cases on a full contingency basis. The firm can offer either full or partial contingency fee arrangements to clients, while the arrangement with the funder operates in the background to hedge the firm’s risk on those engagements.

Thus, the firm can offer alternative fee arrangements to clients, enhance revenue, and fund new hiring and increased operational expenses—all while sharing risk with the funder and shielding its bottom line.

To learn more about Omni Bridgeway’s litigation funding capabilities, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us for a consultation for more information about the ways we can help you pursue meritorious claims.