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.

Litigation Finance

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

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