Burford Barometer 2016 Litigation Finance Survey
Latest Burford Capital Research Shows Explosive Growth and Ongoing Evolution of Litigation Finance
Outside capital fuels innovation and opportunity for clients and firms
3 May 2016 – Burford Capital (“Burford”), a leading global finance firm focused on law, announced today the results of its 2016 Litigation Finance Survey, which draws on independent research conducted with law firms and in-house lawyers in the US. The 2016 Litigation Finance Survey builds on three prior surveys commissioned by Burford since 2012.
Burford’s 2016 Litigation Finance Survey shows that litigation finance continues to grow and evolve:
- 28 percent of private practice lawyers say their firms have used litigation finance directly—a four-fold increase since 2013
- 75 percent of outside counsel and 61 percent of clients predict that litigation finance will grow in the next five years
- 35 percent more private practice lawyers and 50 percent more clients predicted that litigation finance will grow in 2016 vs. 2014
- For the first time, Burford surveyed lawyers about financing portfolios of litigation, an emerging and relatively novel form of litigation finance—and about as many lawyers said they had experience with portfolio financing in 2016 (9 percent) as had experience with single case financing, the most commonly understood form of third-party funding, in 2013 (7 percent)
“Burford’s 2016 Litigation Finance Survey results affirm our experience,” said Christopher Bogart, Burford’s Chief Executive Officer. “Finance is increasingly used by ?rms and clients as an innovative and ?exible means of accessing capital that can be invested back into the business—and indeed 87 percent of the capital committed by Burford in 2015 was to litigation portfolios and other complex investments that can now be offered at a scale that helps meet this demand.”
Indeed, the research identifies access to capital as a major challenge faced by firms:
- 81 percent of private practice lawyers say lack of capital to invest back into the ?rm is a major challenge—an obstacle faced in large part due to the unique capital structure of the partnership-based law ?rm business model
- 41 percent of clients and 48 percent of private practice lawyers are con?dent that law ?rms will increasingly seek outside ?nancing to fuel growth
“What we’ve found is that the growth in corporate finance for law not only reflects the enormous need for outside capital,” said Bogart. “It also coincides with a broad array of changes in the traditional business model for law, which can help law firms thrive and provide high quality counsel in a new environment.”
As in prior surveys, this year’s findings show that litigation finance continues to provide relief what an AmLaw 100 partner interviewed in conjunction with the research referred to as “an irreducible conflict between clients and firms”: the lack of a clear alternative to hourly billing models that satisfies client needs for cost containment without putting more burden on firms than they can bear. Litigation finance addresses helps firms meet client needs while removing from the firing line. Consistent with prior surveys, 54 percent of clients say they have already moved work to a ?rm that proactively o?ered alternative fee arrangements.
Burford’s 2016 Litigation Finance Survey was overseen by the former head of the research department of a leading US legal trade publication.
From our 2009 founding, Burford has remained committed to educating clients and law firms about litigation finance and more broadly the dramatic changes and opportunities for financial innovation in the legal market.
When we started out, the economic pressures that shook the business of law in the wake of the 2008 financial crisis helped drive strong demand for third-party capital—from clients that couldn’t afford to pay hourly fees to hire their firm of choice, and from law firms that could neither take on more contingent risk nor turn clients away. In such an environment, litigation finance bridged the gap between client and law firm needs—as a tool of economic necessity.
Since then, litigation finance has continued to grow, and it remains an important mechanism to bridge enduring gaps between client and law firm needs. However, it is now increasingly used not out of economic necessity but as a matter of choice—as a smarter and more efficient means of unlocking the asset value of pending litigation and adding cash flow to businesses and to law firms. Not surprisingly, then, both private practice and in-house lawyers predict still more growth in litigation finance in the years ahead—and indeed this view rose 50 percent among private practice lawyers and 35 percent among in-house lawyers compared to 2014 data.
The growth of litigation finance and its evolution as an increasingly common form of corporate finance are among the key findings of Burford’s 2016 Litigation Finance Survey, which draws on independent research conducted with private practice and in-house lawyers in the US in late 2015 and early 2016. Building on our three prior surveys of litigation finance in the US, as well as similar studies in the UK, this year we also expanded the research to provide a broader view of the business of law.
What did we find?
Economic pressures—on client legal departments to manage costs and on their law firms in turn to offer alternatives to established pricing models—have not abated, and indeed have become more acute. Law firms are forced to compete ever more aggressively. Over half (54 percent) of clients have already moved work to a firm that proactively offered alternative fee arrangements.
But pricing pressure isn’t the only force at work. An equally striking force is the desire for innovation among both clients and law firms.
Almost nine out of ten in-house lawyers (88 percent) say that the need for innovation from their outside counsel is a leading challenge today, and two thirds (66 percent) expect it to remain a top challenge in the future. Looking ahead five years from now, the top business challenge identified by private practice lawyers is increased competition and the need for law firms to differentiate from their competitors—a challenge that will be overcome, arguably, when firms embrace innovation and reject the status quo.
Innovation will certainly be needed to alleviate the tension between clients and firms and add more capital and financial expertise to the mix. The research confirms that clients today are happy to share risk with their lawyers, and they actively seek alternatives to traditional pricing models from their lawyers. Neither of these expectations is surprising. But these expectations often place a burden of capital and risk on firms greater than the current law firm business model can tolerate and support. Innovation is needed to alleviate the impasse and bridge the client-law firm gap. Other solutions—like litigation finance—are needed.
Fortunately, many private practice lawyers are already relatively well informed about the more innovative options available, such as financing portfolios of litigation, and as a result they are three times as likely as clients (58 percent vs. 19 percent) to express a readiness to secure portfolio financing.
If the need for innovation is among the key findings of the 2016 Litigation Finance Survey, another is that to seize today’s best opportunities firms must increasingly take it upon themselves to educate their clients about available financing options. In that spirit, in the pages that follow we offer data that may help all lawyers better understand litigation finance and opportunities for financial innovation in the legal market.
Lastly, we wish to thank the leading lawyers at top firms who agreed to interviews that we conducted in parallel with the research, who are listed at the end of this white paper. Their perspectives affirmed many of its findings, and also addressed the role that litigation finance may play in resolving the pressures in the legal market. Below and throughout the pages that follow are selected quotes from those interviews.
Litigation finance – Present and future business challenges for clients and firms
The starting point of the 2016 Litigation Finance Survey was an inquiry into the business challenges facing clients and law firms. We broadened the research from prior years to address not only today’s challenges but also emerging obstacles in the years ahead.
Clients are still feeling the heat on costs – and it is getting worse
- The pressure on clients’ legal budgets keeps rising. More than nine out of ten clients (94 percent) say that increased pressure on legal budgets, staffing and spending is a significant challenge today, up from 80 percent in 2014 and 73 percent in 2013.
- Clients don’t expect the pressure to fade anytime soon: in-house respondents put budget pressure among the top three challenges to be faced by legal departments five years from now.
- Nearly a third (29 percent) of clients say they have been forced to forego bringing litigation that they believed was meritorious and would have produced recoveries for their companies because of budget and capital constraints.
- Clients also express concern about how ongoing legal expenses depress financial results for their companies; 87 percent identify this as a significant challenge today, and 84 percent predict it will remain a significant challenge in years to come.
- It’s therefore not surprising that more than one in five (23 percent) have dropped a claim they were pursuing because the company wasn’t willing to continue to have the associated legal expenses hitting its bottom line.
- Clearly, clients look to their firms to help them resolve the cost pressures: almost nine out of ten point to the need for innovation from outside counsel as a major concern today.
- Firms’ biggest challenge in the multi-billion-dollar legal market is staying competitive
- One hundred percent of private practice lawyers identify pressure from clients for discounted or alternative fees as a major business challenge today. That is up significantly from 2014 and 2013 (74 percent and 77 percent, respectively).
- This concern is correctly placed: more than half (54 percent) of in-house respondents say they have shifted work to firms that proactively offered alternative fee arrangements, including litigation finance.
- The need for increased business development is another major trend-line of concern, with 97 percent of lawyers identifying it as a challenge, up from 71 percent in 2014 and 68 percent in 2013.
- Increased competition and difficulty differentiating from the competition is the challenge most private practice lawyers (83 percent) identify as a concern in the future.
The clients are under enormous pressure. The legal departments are under pressure. The firms are under pressure to be competitive… Anything that can relieve that tension is a good thing. Litigation finance relieves that tension in part because it means clients can have their difficult negotiations with the funder. It takes the law firm out of the firing line. — Head of global disputes, AmLaw 50 firm
Innovation and legal finance
There’s near universal agreement among in-house and private practice lawyers that innovation is needed in the legal market—with almost nine out of ten in-house lawyers (88 percent) saying they want more innovation from their outside counsel.
Firms want more access to outside capital—and see portfolio financing as an innovative solution
- Among the challenges identified by over eight in ten (81 percent) private practice lawyers both now and in the future is a lack of capital to invest back into the firm, an obstacle that is in large part due to the peculiar capital structure of the partnership-based law firm business model.
- Both clients (41 percent) and private practice lawyers (48 percent) are confident that law firms will increasingly seek outside financing to fuel growth.
- However, the research reveals skepticism that such outside capital will come through an alternative business structure approach, as is happening in the UK: nearly four in ten clients and private practice lawyers (38 percent) agree that an ABS approach is likely, but 30 percent are neutral and 32 percent disagree.
- Nearly one third (27 percent) agree that outside investment will happen in the next decade, but 48 percent are unsure and 26 percent disagree.
- Strikingly, the research showed an advanced understanding of portfolio financing as an option available to firms. This is significant because, in Burford’s experience, it is increasingly used by firms as an innovative and flexible means of accessing capital that can be invested back into the business. Consistent with this, 87 percent of the capital committed by Burford in 2015 was to litigation portfolios and other complex investments.
- In interviews conducted in parallel with the research, several lawyers also emphasized portfolio finance as an innovative solution for firms. However, the data do not show clear agreement on the subject.
The death of the billable hour is greatly exaggerated – and long overdue
- Only eight percent of private practice lawyers and 25 percent of clients believe that the billable hour is obsolete.
- However, the data do not show clear agreement on this subject. While two thirds (67 percent) of private practice lawyers definitively reject the billable hour, just under half (49 percent) of clients agree—a 36-percent gap.
- Separate interviews with private practice lawyers affirmed that the billable hour is problematic. As one said, it represents an “irreducible conflict” between clients and firms. Yet all noted that neither firms nor clients have replaced the billable hour with a viable alternative.
- Clearly the billable hour isn’t going away–but just as clearly, clients will continue to seek alternative fee arrangements. Therefore, firms must present innovative financial structures that reduce the pressure on client budgets without putting undue pressure on firm finances (in the form of contingency overload or unrealistic pricing caps).
There’s still misalignment on the best approach to risk-sharing: contingency or litigation finance?
- Lawyers and their clients agree that sharing risk is good—but they disagree about how to share it. Sharing the risk of a high-stakes claim is viewed as a good thing by a strong majority—71 percent of private-practice lawyers and 60 percent of in-house lawyers.
- But 38 percent more in-house lawyers prefer contingency to finance—and far more private-practice lawyers agree that sharing the risk with a non-recourse third party makes sense.
- This is a significant tension in the business of law: clients happily embrace contingency, because it shifts the risk to firms. But firms can only tolerate so much risk. This explains why firms have been quicker to embrace litigation finance. We encounter this routinely, as firms seek litigation finance as a way to hedge their risk, or to stabilize their balance sheets for the duration of contingency cases.
After 2008, I joked that when we in the law firm talk about alternative fee arrangements, we think about it in terms of taking on greater risk and, if we’re successful, getting a premium, but when corporate clients talk about alternative fee arrangements, they just think you’re going to give me a discount. — Ronald J. Schutz, Robins Kaplan
There was a lot of talk about the billable hour being dead and we went to a lot of effort to devise alternatives. Not one ever succeeded, either because it was just a way to lower our rates, or the client couldn’t figure out how to implement the alternative… Ultimately, except for contingency arrangements on the plaintiff’s side, has anything really emerged to replace [the billable hour]? — David J. Grais, Grais & Ellsworth
See full survey below.