Ten years of commercial legal finance

Craig Arnott of Burford Capital looks back at legal finance’s first decade, and shares his thoughts on what lies ahead for the industry

In October 2019, Burford Capital will celebrate its tenth anniversary. We’re understandably proud of this milestone, but we also welcome it as an opportunity to reflect on the progress that the legal finance industry has made in the last decade.

The most profound change is this: in its early days, the conversation about legal finance (also known as litigation finance or litigation funding) revolved around permissibility and ethics, and it was assumed to be a niche topic, but the conversation is now about the industry’s rapid evolution and professionalisation, and it is celebrated as a tool with broad business relevance and impact.

Burford has helped lead this evolution and is an exemplar of legal finance’s growth and impact. Since its launch on the London Stock Exchange in 2009, Burford has worked with 90% of the leading 100 global law firms.

I examine below industry milestones in its first decade and its continued evolution in the years ahead.

What are Burford’s origins?

Burford’s founders – chief executive officer Christopher Bogart and chief investment officer Jonathan Molot – met at a RAND conference in 2009 and discovered a shared interest in developing ways for corporate legal departments and law firms to manage the cost and risk of high-stakes commercial disputes. As a former Fortune 50 GC and a scholar of legal economics – and both veterans of some of the world’s largest law firms – they were thoroughly aware of the challenges facing in-house legal teams and the inherent capital constraints of law firms, owing to the traditional law firm cash partnership model.

In response to mounting demand for capital in law, especially given the pressures placed on legal spend by the recession, they launched Burford Capital on the London Stock Exchange in October 2009, with a modest $130m IPO. Neither would have guessed that the company they launched with a skeletal team, at the height of the global economic crisis, would grow so much or so quickly.

How have Burford and the legal finance industry grown in the last decade?

Burford is not the only provider of commercial legal finance – nor were we the first – but we are, without question, the largest.

Since listing, our team has grown exponentially, from five people at the end of 2009 to more than 120 people today, in offices across London, New York, Chicago, Washington, Sydney and Singapore, including some 60 lawyers. Over the last ten years, annual inquiries from law firms and in-house lawyers have increased over 1,000%.

Burford’s growth has not occurred in isolation: the entire legal finance industry has expanded, as greater awareness of legal finance begets more use. To better understand this growth, Burford has sponsored annual independent research since 2012. The 2018 Litigation Finance Survey demonstrated that reported use of litigation finance grew to at least 32% in 2018 from just under 10% in 2012 – a 237% increase.

What has driven the growth of commercial legal finance?

Simply put: commercial legal finance helps law firms and their clients solve the daunting challenge of managing legal cost and risk.

In-house legal teams are all too aware of the uncertainty and cost involved in pursuing valuable recoveries through litigation or arbitration, and often walk away from meritorious claims because of the potential impact of doing so on the bottom line. Legal finance offloads cost and risk to a passive third party, thereby solving this problem. Further, in recent years, companies have embraced the potential for legal finance to help them manage the cost and risk not only of claims but also of matters in which they are respondents.

Simultaneously, since the 2008 recession, law firms have faced intense client pressure for efficiency, alternative fee models and cost effectiveness. Due to their capital structure, firms aren’t always able to meet client demands for innovation and cost-sharing. Because they operate as cash-based partnerships, they are severely limited in their ability to make long-term client risk-sharing arrangements or investments in business growth. Commercial legal finance addresses this structural problem and reshapes law firms’ ability to serve clients and invest in growth.

What should lawyers and litigants look for in potential legal finance providers?

Given the critical business challenges that legal finance solves for companies and their law firms, it is no surprise that in the legal finance industry’s first decade, the number of companies providing commercial legal finance grew significantly. While it is difficult to be precise, given that many of these capital providers are private and release little information about their business operations, we have encountered many opportunistic players and tiny enterprises founded by former law firm partners – often litigators who used commercial legal finance in their practices.

While we applaud entrepreneurialism born of business need and the drive to solve it, commercial legal finance requires a lot more than a few lawyers getting together to try to pick some cases – it requires significant scale, capital and professionalism. This is partly why Burford has had such success: We view the legal industry through the lens of a large financial institution, not a law firm. What differentiates Burford and has enabled our growth is that we run our business as a finance institution that happens to be focused on law – not as a law business.

It is critically important that lawyers and litigants carefully diligence potential legal finance providers. Among the factors to consider are the following:

  • Permanent capital. There are inherent advantages to working with a publicly-listed legal finance partner. First, its financials are subject to auditing, and there is a level of transparency that is simply not required of private firms. Given Burford’s listing on the London Stock Exchange, our clients have the security of knowing our sources and availability of capital. Second, publicly-listed companies have their own permanent capital, which will be available for the duration of funded matters. As the largest provider of legal finance many times over, with our own independent capital reserves, Burford can provide capital as and when needed even if a matter becomes exceptionally protracted.
  • In-house diligence. A key factor in Burford’s success is our team, whose breadth and depth mean we can conduct all of our diligence in-house and provide clients a faster and more robust response to their needs. Clients cite the quality of Burford’s people – and its 60 lawyers recruited from the world’s top law firms and blue-chip companies and financial institutions – as a reason to work with us, and as a value-add beyond the capital we provide.
  • Innovative products like portfolio and defence financing. Burford has the expertise and scale to offer innovative and needed client solutions – for example as the pioneer of portfolio finance structures that gather multiple litigation or arbitration matters in a single funding vehicle. Capital can be used to fund legal costs associated with the underlying matters or for operating capital for the firm or company. The matters within the portfolio can be unrelated and can combine claimant and defence matters. Burford also offers in-house asset recovery services for matters facing enforcement issues, for which we can also provide financing.

What does the commercial finance industry look like in 2019?

Demand for commercial legal finance and related products continues to rise as more and more law firms learn about and avail themselves of the benefits of partnering with a finance provider in increasingly diverse ways.

Our own numbers demonstrate this. Last year marked Burford’s ninth year of consecutive growth across the business, and in 2018 we committed $1.3bn to fund legal fees and expenses with corporations and law firms. During the last two years, we did $2.6bn in new business, making us one of the largest purchasers of legal services in the world.

We are also seeing greater diversification in the range of economic structures in which we make investments. Alongside growth in conventional commercial legal finance, we are also experiencing increased demand for our asset recovery and enforcement services, post-settlement monetisation and complex strategies. As the legal industry develops and our clients’ needs evolve, legal financiers must adapt to meet growing demand for innovative capital solutions.

The past couple of years have also seen a geographic expansion in the uptake of legal finance. In 2017 Singapore recognised third party funding as a staple of major arbitration centres around the world and took the landmark step of allowing legal finance for arbitration. Burford was the first company to fund a Singaporean arbitration and subsequently established an office in Singapore. This was closely followed in early 2019 by Hong Kong passing the Code of Practice for Third Party Funding of Arbitration.

We are also seeing increased opportunities from the UAE, Korea and China. As Korea becomes an increasingly serious infrastructure and finance partner globally, we are seeing a rise in the numbers of large, cross-border arbitration disputes arising from that exposure. Inevitably we will also see activity arising from China’s Belt and Road initiative – the immensely ambitious undertaking of high-value construction and infrastructure projects set to span over 60 countries, covering an area of the globe which contains more than half the world’s population.

Legal finance has in the last ten years become a widely-accepted necessity for the business of law in jurisdictions around the world and we only expect uptake to continue to rise in the next decade.

What can we expect in the next ten years of legal finance?

As noted above, the use of legal finance has grown dramatically over the past decade. Many outside the legal finance industry mistakenly assume that the result of that growth will be commoditisation, with price driving lawyers’ and litigants’ choice of funding partners. At Burford, we believe the reverse is true: as legal finance matures, we expect lawyers to become more sophisticated users of legal finance, and more discerning about the finance providers with whom they work.

Some of this shift will originate from law firm and in-house clients with the elevated expectations that are a natural outgrowth of experience in working with commercial legal finance companies. We have noted that while those without experience may at first seek simply the least expensive provider of legal capital, more seasoned users of commercial legal finance know better. Naturally, they still seek competitively priced capital, but they also know to seek commercial legal finance providers who offer something more: The ability to structure novel financing deals, expertise in financial modelling for specific types of commercial disputes, the capacity to conduct diligence and case management in-house, freedom from exclusivity arrangements, and the insights and proprietary data that only a seasoned commercial legal finance provider can bring to the investment and case management processes.

Thus, in the next decade we expect continued maturation and professionalisation of the legal finance industry. We anticipate that in the years to come, commercial legal finance providers will increasingly behave more like investment banks for law, following our example – and to the benefit of the industry at large. The shift to an investment bank for law model also reflects Burford’s natural evolution alongside our clients as well as the business of law.

As Burford and the commercial legal finance industry enter their second decade, we are committed not only to continuing the successes of the last ten years, but also to expanding our efforts to educate the legal community, the business community and the larger communities in which we operate about what we do, for whom we do it and why it can help businesses of all sizes and types to do better.