Portfolio Financing for Law Firms
Third-party legal funding is becoming a more powerful force in the market for legal services, as more and more litigants realize that they can improve their chances in litigation by obtaining non-recourse financing. But there is more to third-party financing than the most common transaction in which a funding company makes an agreement directly with a litigant. There are an increasing number of variations on third-party funding transactions that can facilitate the litigation of meritorious claims. One such variation involves portfolio financing.
Portfolio financing is common in many different investment arenas. The term “portfolio” refers to any combination of financial risk such as stocks, bonds and cash. As a general rule, a portfolio is designed with respect to the investor’s tolerance of risk, time frame for earning a return, and other investment objectives.
Law firms and even some clients can use portfolio financing to cover litigation costs or to monetize litigation asset value. A client with several pending litigation matters or a firm with several pending cases can bundle their interest in those cases for investment by third-parties. The bundle of litigation matters can include plaintiff and defense cases, pre- and post-settlement cases, and others.
Such financing provides all of the ordinary benefits of third-party financing – that is, it frees up capital that can be used for other purposes besides covering litigation costs. In addition, when a third-party funder invests in a bundled set of cases in a portfolio, the cost of financing can be reduced because the risk is diversified. When a portfolio includes numerous cases with different risk levels, the total risk presented by all of the cases can be managed more effectively.
When law firms engage in portfolio financing, they can reduce their own business risk and can take on additional cases without increasing their total exposure. Clients can gain similar benefits, especially business enterprises. For them, portfolio financing is an aspect of sound risk management.
Topics: litigation finance, legal reform, third-party funding, litigation costs, non-recourse financing, alternative litigation funding, financial management, leveraged investment, law firm financing, portfolio financing
Works Cited:
Nora Freeman Engstrom, Re-Re-Financing Civil Litigation: How Lawyer Lending Might Remake the American Litigation Landscape, Again, 61 UCLA L. Rev. Disc. 110 (2013).
