diligence step is to confirm the litigation investment firm’s process
of choosing suits for direct investment or to include in portfolios.
Another way is to invest at arm’s length in one of the few publicly
held companies that specialize in this category.
Gerchen says that he realized early on that the usual investment
analysis didn’t apply to these cases. As he built his namesake firm,
he concentrated on the back-office operation because deep analysis
of the law, trends, and legal logic was the only way to identify likely
payoffs. “It’s different from investment analytics,” he says. “Process
and portfolio construction is how you overcome the unique risk of
That deep knowledge of the cases and their likely trajectory is
how firms identify the right moments for maximum return.
“Each step of litigation is an inflection point where we can bring
in investments or capital for the first time,” says Gerchen. Over the
typical 18 months to four years that a case is active, opportunities
emerge in the earliest stage in deals that resemble equity, he explains.
Later, if the law firm wants to finance the case mid-stage to free up
capital for new cases, and the case looks strong, “we can accelerate
the receipt of those funds for a lower return,” he says.
Settlements are good news for litigation investors because they
signal money on the table but even settlements offer a moment to
invest if the payment is delayed by legal appeal or other complica-
tions. Such deals resemble old-fashioned factoring. “We’ll buy the
settlement at a discount and ultimately receive the payments when
they flow,” says Gerchen.
Bentham tends to invest in either single cases, putting in a set
amount of money that clients can use to cover legal fees or as working
capital, or in portfolios of cases handled by law firms, construct portfolio funds for categories of cases, explains Chock. Bentham also
provides early-stage funding for new law firms.
The downside of litigation investing is that timing is erratic and
unpredictable. Managing results over portfolios of cases help ease
the ‘lumpiness’ of returns to investors, says Chock.
Because the industry is still emerging in the United States, there
is no industry association or index, and no benchmark or norms for
returns. Burford, the largest publicly held litigation finance company,
produces regular reports that are cited even by its competitors as the
best source of industry trends.
A survey released in 2016 by Burford of large law firms and
in-house counsel at major companies found that firms are intrigued
by the prospect of litigation finance and inclined to give it a try – an
indicator of significant growth. The Burford survey asked about the
three main types of litigation investment and found that 9% have
tapped outside assets to fund portfolios of work, and 47% would
consider doing so; 26% have used expense funding and 44% would
consider it; and 21% have used outside funds to fund a single case,
while 42% would consider it.
“No matter what’s happening in the market,” says Bentham’s
Chock, “These assets have a life of their own.” CIO
84% 81% 75%
Law Firms’ Biggest Business Challenges
Capital and cash flow are ongoing headaches for law firms, according to the 2016 Burford Barometer Litigation Finance Survey.
Burford is the largest publicly held litigation finance company and its reports are widely cited as the best and broadest industry
indicators. Results are based on surveys completed in early 2016 by the largest law firms and in-house counsel in the U.S.
n Now n Predicted Challenges for 2021
Increased need for
Increased pressure on legal
budgets, staffing and spending
Pressure from clients for
discounted or alternative fees
Lack of capital to
invest back in firm
Source: Burford Barometer 2016 Litigation Finance Survey