Q&A: Litigation Funding Offers CFOs New Options

Justin Brass is a managing director at Burford Capital, which specializes in litigation finance. He visited Global Finance to discuss funding innovation and the bottom-line value of litigation.

Global Finance: What are the market’s needs in your area?

Justin Brass: Most traditional global banks won’t lend nonrecourse (without an option to claim against the company itself) against legal cases to fund working capital. Companies like Burford Capital fill this market gap. It can be financing the costs of a large single commercial litigation case or providing capital against a portfolio of legal claims, which allows pricing flexibility. A rising segment is multinational corporates using financing against their litigation spending. Bigger and public companies are using us more.

Defendants can also get funding, but those investments require the financier and the client to define success. A small tech company defending itself in a patent-infringement case might need funding support, and in those cases, the investment may include an equity component. Regardless, these types of legal cases often take years to resolve, and having our own judgment enforcement and asset recovery team really helps us mitigate risk. Our JE team takes cases on risk or for a fee to help clients recover judgments.

GF: How do you choose clients and what’s the process?

Brass: We take up a small fraction of the opportunities presented to us—low single-digit percentages. Because we do not control the litigation, we engage in extensive due diligence to determine the value of and prospects for the litigation—including the attorneys’ capabilities. Few of the total screened cases actually get funded but the due diligence process is helpful to the potential client. We typically fund companies in litigation, not individuals, as the decision-making process tends to be less emotional. We can fund the company, or fund its lawyers directly, using an agreed-upon budget. Funding is typically provided in phases, and, at least with us, payments do not depend on specific developments in the litigation.

GF: What new legal-related financial services are you and your competitors looking into?

Brass: We’ve expanded into other areas, including restructuring and financing companies in the bankruptcy zone and going through substantial litigation. We also help private equity fund acquisitions and portfolio exits by monetizing legal assets. We recently acquired Gerchen Keller Capital, a management company of several legal-risks funds, allowing us also to expand our work in intellectual property and get into post judgment claims with lower expected rates of return.

GF: Who invests in your industry, and how do you finance your own operations?

Brass: Burford Capital is a public company, raising capital based on performance. Our investor base includes renowned institutional investors such as Fidelity. Our recent acquisition of a fund structure also allows fundraising from limited partners to litigation financing funds. Transparency is key for our investors, and investing in a public company in this space allows investors to look at the company’s cash flow and financials and understand the legal risks better. We also issue debt in London’s bond market. The company recently raised 6.125% £100 million ($123.6 million) bond.

GF: Are you or others able to resell legal claims that you fund?

Brass: I don’t believe in securitization of these assets, but creating a secondary market is one of Burford’s current initiatives and important for growth of the industry. In December 2016, Burford sold several million dollars in participation interests in its possible future proceeds related to Petersen claims regarding Argentine expropriation in 2012 of a majority stake in YPF, an energy company.