How Portfolio Financing Gives Law Firms a Competitive Edge

March 3, 2020

We’ve previously written about how law firms can use portfolio financing to manage risk for their existing contingency fee cases. But there’s another significant advantage to portfolio funding: it gives firms an edge when competing for new clients and cases.

Lawyers are increasingly familiar with standard portfolio funding, which provides financing backed by three or more of a firm’s existing contingency fee cases. But Validity can also create an open-ended portfolio, committing to rapidly deploy capital for new cases that may present themselves to the law firm.

These portfolios create a powerful vehicle for firms to expand their practice and recruit new clients. Here’s how it works.

Portfolios don’t just fund existing cases

When a restaurant, a rocket manufacturer, or any other business raises capital, it usually doesn’t only secure the capital it needs for projects that are already under way. The business typically tries to secure financing to meet future opportunities that may arise, whether it’s a chance to open a new location, build a new prototype, or expand in some other way.

Law firms should approach their business the same way. They shouldn’t just focus on securing financing for the cases they are currently litigating. Instead, they should also secure financing that allows them to bring on new clients and expand into new practice areas as attractive opportunities present themselves.

That’s where Validity can help. In addition to funding a portfolio of the firm’s existing contingency fee cases, Validity can commit capital for the firm to use in future cases as they arise.

Giving law firms a competitive edge

Open-ended portfolio financing is especially important today. Clients increasingly expect law firms to offer the full suite of case-financing options: not just hourly billing, but also contingency fee arrangement or “partial contingency fees” supplemented by litigation finance.

When law firms secure open-ended portfolio funding with Validity, they can confidently tell clients that they already have access to capital to support the full range of fee arrangements.

We have seen first-hand how this sort of funding gives law firms a leg up when they pitch and recruit new clients.

Here’s a typical fact pattern: A client approaches a law firm with a great case, but the client can’t pay the firm’s hourly rates. The client asks if the firm can litigate the case on a contingency fee, but the firm isn’t willing or able to commit to a “full contingency” arrangement where the firm gets paid nothing until the case resolves.

Litigation finance bridges the gap, allowing a funder like Validity to share the financial risk of litigating the case. Of course, if a law firm doesn’t already have open-ended portfolio financing, it can always seek one-off single-case financing. But portfolio financing has at least three key advantages over single-case financing:

First, portfolio funding allows firms to rapidly secure funding and win the engagement.

Clients aren’t always eager to wait around while a law firm secures single-case funding for the new case. Sometimes a statute of limitations clock means the client has to move quickly. Nowadays, the client frequently has the opportunity to go with another law firm that already has portfolio funding. Other times, the client is simply eager to get on with the litigation.

That’s where having portfolio financing can be the difference between winning or losing the engagement. The firm can let the client know that it already has access to third-party funding. The firm can then bring the case to Validity, and together we can evaluate the case’s fit for the portfolio. If the case merits an investment, the firm can simply roll the case into the existing portfolio, meeting the client’s needs and taking on the new matter.

Second, portfolio financing reduces transaction costs.

Single-case funding agreements are typically between the funder and claimholder (not the law firm). This means that if a law firm is trying to recruit a new client and needs single-case funding to take on the engagement, the client will need to meet and contract with two separate counterparties: the law firm, and the funder.

Portfolio financing makes the transaction much smoother because there’s no need for a whole new litigation investment agreement between client and funder. Instead, the law firm will simply roll the new case into its pre-existing agreement with the funder, minimizing transaction costs, and allowing for as rapid and smooth a funding decision as possible. That’s something clients will appreciate.

Third, Validity’s portfolio financing allows firms to offer better terms to their clients.

When a funder invests in a diverse portfolio of cases rather than a single case, the funder is taking less risk: While there may be a decent chance that any one case will lose, it should be pretty unlikely that all of the cases in the portfolio will lose.

If there’s lower risk, there should be lower reward for the funder. Yet many, if not most, funders ask for comparable returns from portfolio funding as they seek from single-case financing. Not Validity. We believe that when portfolios offer less risk than the binary risk of a single case investment, the funder should receive a lower and capped return.

This obviously means a better deal for the law firm. But it also means a huge competitive advantage for the firm that is competing for new clients. That’s because the firm can offer the client better pricing than another law firm that is offering the client either single-case financing or portfolio financing through another funder.