September 25, 2020
We’ve previously written about the two “bread and butter” litigation finance products: single-case financing and portfolio funding. Which one is right for you? Lots of times, single-case funding is the way to go. But other times, a law firm comes to us seeking single-case funding for one client but ends up entering into a law firm portfolio deal instead. Here are four reasons why requests for single-case funding sometimes morph into portfolio deals:
1. Better pricing for law firms.
From the funder’s perspective, single-case funding is riskier than portfolio funding. A single misstep in the single case, and the funder loses her entire investment.
With portfolio funding, a funder’s investment is cross-collateralized by a basket of three or more cases. At Validity, we believe that if we’re taking less risk, we should offer better returns. Our portfolio pricing is among the most competitive in the industry, and it’s always less expensive than single-case financing. This is a big win for law firms and their clients.
2. Better economics for clients.
“But if my client needs single-case funding,” you might ask, “why should I consider portfolio funding instead?” Sometimes your client is better off if you have portfolio funding. Here’s one way how:
With single-case funding, funders typically seek “priority” return of their deployed capital (and sometimes their return) from 100% of case proceeds. Thus if a funder invests $5 million in a single case, the first $5 million in case proceeds will repay the funder for her deployed capital.
Law firm portfolio funding looks different. When Validity enters into a portfolio deal with a law firm, Validity’s return comes only from the law firm’s share of case proceeds. Validity won’t have priority over the client’s share of case proceeds.
Imagine, for example, that the law firm has a 30% contingency fee interest in case proceeds, with the firm hedging its risk through portfolio funding with Validity. In that circumstance, the client will receive 70% of case proceeds unencumbered by any claim from Validity. In our example, the client will get 70% of the first $5 million in case proceeds. This means that if the case resolves below everyone’s expectations, the client will have a greater recovery if financing comes through law firm portfolio funding rather than single-case funding.
3. The firm can de-risk across its entire portfolio.
Let’s say your firm is currently litigating, or considering litigating, a dozen cases on a contingency, investing $20 million across those cases. Single-case funding can solve your risk problem in one of those cases. But portfolio funding can help you de-risk across many cases, and indeed across your firm’s entire portfolio of contingency fee litigation.
In our example, Validity could give your firm $10 million backed by your contingent fee returns across those twelve cases. This in turn allows your firm take on additional matters. After all, in our example, once your firm gets funding it now only has $10 million instead of $20 million at risk in its contingency fee portfolio, potentially freeing up $10 million of additional risk-capital to take on more cases.
Which brings us to one final benefit of portfolio funding….
4. Turbo-charging firm growth.
Portfolios give your firm a strong competitive edge in bringing on new matters. We’ve talked about this before. While a portfolio starts out funding existing cases, Validity’s portfolios are like accordions. They can expand over time, with Validity adding more funding to back additional cases that your firm introduces to the portfolio, or that Validity refers to you.
Once your firm has a portfolio structure in place, it becomes so much easier to onboard new clients whose cases need funding. Rather than having to introduce your client to a funder, you can control the client relationship. And transaction costs are lower, because your client doesn’t need to enter into a funding agreement with Validity. Instead, you can simply offer your client a full contingency agreement, and (subject to due diligence) you can roll the case into your existing portfolio agreement with Validity. This will give you an edge in competitive situations, where the client is choosing between you and another law firm that doesn’t have portfolio funding and needs the client to enter into a funding agreement directly with a funder.
Single-case funding will frequently be the right fit for you and your client. But it’s often worth at least exploring whether portfolio funding might make better sense.