B U R F O R D B A R O M E T E R

2016 Litigation Finance Survey Inside: New research on how clients and firms are using litigation finance

Bridging the gap: Clients, law firms and financial innovation 1

Present and future business challenges for clients and firms 3

Innovation and legal finance 5

Explosive growth of litigation finance 7

Litigation finance as corporate finance 9

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When we started out, the economic pressures that shook the business of law in the wake of the 2008 financial crisis helped drive strong demand for third-party capital—from clients that couldn’t afford to pay hourly fees to hire their firm of choice, and from law firms that could neither take on more contingent risk nor turn clients away. In such an environment, litigation finance bridged the gap between client and law firm needs—as a tool of economic necessity.

Since then, litigation finance has continued to grow, and it remains an important mechanism to bridge enduring gaps between client and law firm needs. However, it is now increasingly used not out of economic necessity but as a matter of choice—as a smarter and more efficient means of unlocking the asset value of pending litigation and adding cash flow to businesses and to law firms. Not surprisingly, then, both private practice and in-house lawyers predict still more growth in litigation finance in the years ahead—and indeed this view rose 50 percent among private practice lawyers and 35 percent among in-house lawyers compared to 2014 data.

The growth of litigation finance and its evolution as an increasingly common form of corporate finance are among the key findings of Burford’s 2016 Litigation Finance Survey, which draws on independent research conducted with private practice and in-house lawyers in the US in late 2015 and early 2016. Building on our three prior surveys of litigation finance in the US, as well as similar studies in the

UK, this year we also expanded the research to provide a broader view of the business of law. What did we find? Economic pressures—on client legal departments to manage costs and on their law firms in turn to offer alternatives to established pricing models—have not abated, and indeed have become more acute. Law firms are forced to compete ever more aggressively. Over half (54 percent) of clients have already moved work to a firm that proactively offered alternative fee arrangements. But pricing pressure isn’t the only force at work. An equally striking force is the desire for innovation among both clients and law firms.

Almost nine out of ten in-house lawyers (88 percent) say that the need for innovation from their outside counsel is a leading challenge today, and two thirds (66 percent) expect it to remain a top challenge in the future. Looking ahead five years from now, the top business challenge identified by private practice lawyers is increased competition and the need for law firms to differentiate from their competitors—a challenge that will be overcome, arguably, when firms embrace innovation and reject the status quo.

Innovation will certainly be needed to alleviate the tension between clients and firms and add more capital and financial expertise to the mix. The research confirms that clients today are happy to share risk with their lawyers, and they actively

seek alternatives to traditional pricing models from their lawyers. Neither of these expectations is surprising. But these expectations often place a burden of capital and risk on firms greater than the current law firm business model can tolerate and support. Innovation is needed to alleviate the impasse and bridge the client-law firm gap. Other solutions—like litigation finance—are needed. Fortunately, many private practice lawyers are already relatively well informed about the more innovative options available, such as financing portfolios of litigation, and as a result they are three times as likely as clients (58 percent vs. 19 percent) to express a readiness to secure portfolio financing. If the need for innovation is among the key findings of the 2016 Litigation Finance Survey, another is that to seize today’s best opportunities firms must increasingly take it upon themselves to educate their clients about available financing options. In that spirit, in the pages that follow we offer data that may help all lawyers better understand litigation finance and opportunities for financial innovation in the legal market. Lastly, we wish to thank the leading lawyers at top firms who agreed to interviews that we conducted in parallel with the research, who are listed at the end of this white paper. Their perspectives affirmed many of its findings, and also addressed the role that litigation finance may play in resolving the pressures in the legal market. Below and throughout the pages that follow are selected quotes from those interviews.

From our 2009 founding, Burford has remained committed to educating clients and law firms about litigation finance and more broadly the dramatic changes and opportunities for financial innovation in the legal market.

9 out of 10 clients want more innovation

from their firms.

Bridging the gap: Clients, law firms and financial innovation

Reported use of litigation finance has grown significantly. Four times as many private practice lawyers say their firms have used litigation finance directly in 2016 vs. 2013

7%2013

11%2014

28%2016

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The starting point of the 2016 Litigation Finance Survey was an inquiry into the business challenges facing clients and law firms. We broadened the research from prior years to address not only today’s challenges but also emerging obstacles in the years ahead.Clients are still feeling the heat on costs—and it is getting worseThe pressure on clients’ legal budgets keeps rising. More than nine out of ten clients (94 percent) say that increased pressure on legal budgets, staffing and spending is a significant challenge today, up from 80 percent in 2014 and 73 percent in 2013. Clients don’t expect the pressure to fade anytime soon: in-house respondents put budget pressure among the top three challenges to be faced by legal departments five years from now. Nearly a third (29 percent) of clients say they have been forced to forego bringing

litigation that they believed was meritorious and would have produced recoveries for their companies because of budget and capital constraints.Clients also express concern about how ongoing legal expenses depress financial results for their companies; 87 percent identify this as a significant challenge today, and 84 percent predict it will remain a significant challenge in years to come. It’s therefore not surprising that more than one in five (23 percent) have dropped a claim they were pursuing because the company wasn’t willing to continue to have the associated legal expenses hitting its bottom line.Clearly, clients look to their firms to help them resolve the cost pressures: almost nine out of ten point to the need for innovation from outside counsel as a major concern today.

Firms’ biggest challenge in the multi-billion-dollar legal market is staying competitiveOne hundred percent of private practice lawyers identify pressure from clients for discounted or alternative fees as a major business challenge today. That is up significantly from 2014 and 2013 (74 percent and 77 percent, respectively).This concern is correctly placed: more than half (54 percent) of in-house respondents say they have shifted work to firms that proactively offered alternative fee arrangements, including litigation finance. The need for increased business development is another major trend-line of concern, with 97 percent of lawyers identifying it as a challenge, up from 71 percent in 2014 and 68 percent in 2013. Increased competition and difficulty differentiating from the competition is the challenge most private practice lawyers (83 percent) identify as a concern in the future.

Firms’ biggest business challenges

Clients’ biggest business challenges

Shareholder pressure to contain legal fees

Ongoing legal expenses depress financial results

Need for innovation from outside counsel

Cost-cutting generally

Increased pressure on legal budgets, staffing and spending

Lack of capital to invest back in firm

Reduced resources to serve clients

Increased competition or difficulty differentiating

Increased need for business development

Pressure from clients for discounted or alternative fees

78

75

84

76

66

83

85

74

84

68

85

81

87

88

88

90

88

97

94

100

Biggest business challenges facing clients now Biggest business challenges facing clients 5 years from now

Biggest business challenges facing firms now Biggest business challenges facing firms 5 years from now

Over half of clients have moved work to firms

that proactively offered alternative fee arrangements.

1/2 The clients are under enormous pressure. The legal departments are under pressure. The firms are

under pressure to be competitive… Anything that can relieve that tension is a good thing. Litigation finance relieves that tension in part because it means clients can have their difficult negotiations with the funder.

It takes the law firm out of the firing line.— Head of global disputes, AmLaw 50 firm

Present and future business challenges for clients and firms

1/2

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There’s near universal agreement among in-house and private practice lawyers that innovation is needed in the legal market—with almost nine out of ten in-house lawyers (88 percent) saying they want more innovation from their outside counsel.Firms want more access to outside capital—and see portfolio financing as an innovative solutionAmong the challenges identified by over eight in ten (81 percent) private practice lawyers both now and in the future is a lack of capital to invest back into the firm, an obstacle that is in large part due to the peculiar capital structure of the partnership-based law firm business model. Both clients (41 percent) and private practice lawyers (48 percent) are confident that law firms will increasingly seek outside financing to fuel growth. However, the research reveals skepticism that such outside capital will come through an alternative business structure approach, as is happening in the UK: nearly four in ten clients and private practice lawyers (38 percent) agree that an ABS approach is likely, but 30 percent are neutral and 32 percent disagree.Nearly one third (27 percent) agree that outside investment will happen in the next decade, but 48 percent are unsure and 26 percent disagree.

Strikingly, the research showed an advanced understanding of portfolio financing as an option available to firms. This is significant because, in Burford’s experience, it is increasingly used by firms as an innovative and flexible means of accessing capital that can be invested back into the business. Consistent with this, 87 percent of the capital committed by Burford in 2015 was to litigation portfolios and other complex investments.In interviews conducted in parallel with the research, several lawyers also emphasized portfolio finance as an innovative solution for firms. However, the data do not show clear agreement on the subject. The death of the billable hour is greatly exaggerated—and long overdueOnly eight percent of private practice lawyers and 25 percent of clients believe that the billable hour is obsolete. However, the data do not show clear agreement on this subject. While two thirds (67 percent) of private practice lawyers definitively reject the billable hour, just under half (49 percent) of clients agree—a 36-percent gap. Separate interviews with private practice lawyers affirmed that the billable hour is problematic. As one said, it represents an “irreducible conflict” between clients and firms. Yet all noted that neither firms nor clients have replaced the billable hour with a viable alternative.

Clearly the billable hour isn’t going away–but just as clearly, clients will continue to seek alternative fee arrangements. Therefore, firms must present innovative financial structures that reduce the pressure on client budgets without putting undue pressure on firm finances (in the form of contingency overload or unrealistic pricing caps). There’s still misalignment on the best approach to risk-sharing: contingency or litigation finance? Lawyers and their clients agree that sharing risk is good—but they disagree about how to share it. Sharing the risk of a high-stakes claim is viewed as a good thing by a strong majority—71 percent of private-practice lawyers and 60 percent of in-house lawyers. But 38 percent more in-house lawyers prefer contingency to finance—and far more private-practice lawyers agree that sharing the risk with a non-recourse third party makes sense.This is a significant tension in the business of law: clients happily embrace contingency, because it shifts the risk to firms. But firms can only tolerate so much risk. This explains why firms have been quicker to embrace litigation finance. We encounter this routinely, as firms seek litigation finance as a way to hedge their risk, or to stabilize their balance sheets for the duration of contingency cases.

After 2008, I joked that when we in the law firm talk about alternative fee arrangements, we think about it in terms of

taking on greater risk and, if we’re successful, getting a premium, but when corporate clients talk about alternative fee

arrangements, they just think you’re going to give me a discount. — Ronald J. Schutz, Robins Kaplan

There was a lot of talk about the billable hour being dead and we went to a lot of effort to devise alternatives. Not one ever

succeeded, either because it was just a way to lower our rates, or the client couldn’t figure out how to implement the alternative…

Ultimately, except for contingency arrangements on the plaintiff’s side, has anything really emerged to replace [the billable hour]?

— David J. Grais, Grais & Ellsworth

Sharing the risk of high-stakes litigation is a good idea Sharing the risk of litigation with a non-recourse third party makes sense

Clients and firms agree that sharing the risk of litigation makes sense—but firms are more clearly supportive of sharing risk with a third party.

Firms

Clients

Disagree DisagreeNeutral NeutralAgree Agree

10 36

1960

71

15

2337

22

40

63

Innovation and legal finance

Almost half of lawyers are confident that law firms will

increasingly seek outside capital to fuel growth.

4

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Explosive growth of litigation finance

Clients and private practice lawyers agree: litigation finance is growing rapidly, and will continue to do so—because it fills a significant economic need. Indeed, three quarters (75 percent) of outside counsel and almost two thirds of corporates (61 percent) predict growth in the next five years, compared to under half in 2014 and 2013. Lawyers cite a significant increase in direct experience with litigation financeThree times as many private practice lawyers say their firms have used litigation finance directly (28 percent, vs. 11 percent in 2014 and 7 percent in 2013). Over half (55 percent) have talked to their clients about litigation finance, and 40 percent have been asked about it by their clients. Over one third (31 percent) feel it’s good practice to explain litigation finance to clients at the start of every case.In interviews, lawyers cited a bevy of forces propelling this growth. Cost pressures, clients’ desire to offload risk and increased competition among firms were the most commonly mentioned. “We see different drivers depending on the market,” said one litigator. “A boutique litigation or arbitration firm might see it as a way to smooth cash flow, and a firm like ours with a bigger, more diverse revenue stream sees it as a way to hedge our risk or take on different contingent models.”

Law firms are increasingly savvy about various forms of litigation finance—including portfoliosOne in five (21 percent) say they have experience with single case litigation finance, and one in four (26 percent) say they have used expense funding (where the lawyer takes a matter contingently but seeks financing for disbursements). Almost one in ten (9 percent) of private practice lawyers say they have direct experience with financing litigation portfolios. Although that number may not sound large, that is more than had used single case financing—a far more commonly understood form of litigation finance—just two years ago. Although one in ten have actually used portfolio financing, over two thirds (67 percent) say they are aware of it, and almost six in ten (58 percent) private practice lawyers say they would consider partnering with a third-party financier to fund a portfolio of litigation. Clients are, however, slower to understand the benefits of portfolio financing, with a minority of clients focused on pursuing such an arrangement–something we predict will change rapidly following news of Burford’s $45 million portfolio financing for a FTSE 20 company.

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Awareness and consideration across all types of litigation finance

Portfolio funding Expense funding Single case funding

9

26 21

46 47 44 42

69 6560 63

Have used

Would use

Aware of

Looking back five years ago, a typical major contingent case would last

from beginning to resolution maybe two years. Today it’s closer to six.

That puts an unusual strain on the law firms that used to take these cases on contingency… As a result the firms recognize that the ability to take more of these cases on contingency and get some cash flow in the interim is worth

giving up some of the upside.— J. Michael Hennigan,

McKool Smith

The globalization of disputes will make litigation finance even more significant. The funding today is now focused more

on claimants in North America and Europe, but claimants outside those geographies will begin to be a factor.— International arbitration partner,

AmLaw 50 firm

The driver for top international arbitration practices is to get standard rates or fixed fees that reflect the value

of their experience in doing highly sophisticated work, when clients

increasingly want lower budget work. There are new firms coming in, offering shockingly low rates, and the top firms simply cannot perform their top work

at those rates. Third-party funders recognize value and so help the firms

get higher rates, while also meeting the clients’ desire to get capital to fund the

case. It can be win-win.— Lucy Reed, Freshfields Bruckhaus

Deringer

Defense funding

75%75% of clients predict litigation finance will continue to grow—a 50% increase in clients predicting growth compared to 2014 data.

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Litigation finance as corporate finance

Conclusion

Acknowledgements

About Burford Capital

About the research

As the research affirms, lawyers and clients increasingly regard litigation finance as a tool of choice, not just necessity. That perspective is built on a foundational understanding among lawyers that litigation is a financeable asset. However, the research also reveals that private practice lawyers demonstrate consistently greater understanding and openness to litigation finance—suggesting that they should invest in educating their clients on innovative approaches to financing law. Litigation finance is a useful tool that offers accounting and liquidity benefitsTwo thirds (66 percent) of private practice lawyers and almost half of clients (46 percent) have no difficulty thinking of a lawsuit as a financeable asset just like any other intangible.

The research generated almost identical responses concerning litigation as a financeable asset: 63 percent of private practice lawyers and 45 percent of clients agree, and 19 and 16 percent disagree, respectively. Clients are twice as likely to be neutral (39 versus 19 percent).Over half (53 percent) of private practice lawyers agree that litigation finance is just another form of corporate finance. Almost six out of ten (58 percent) of private practice lawyers believe that clients that can afford to pay their lawyers still benefit from litigation financing because of positive impact on accounting outcomes or to reserve capital for other business needs. Once again, clients are significantly more likely (46 percent) to remain undecided—

revealing a neutrality that arguably suggests a need for education by outside counsel.Only about one in ten (12 percent) of clients and lawyers disagree that litigation finance is a useful tool. But while almost two thirds of outside counsel agree that it is a useful tool, about one half of clients (52 percent) are still undecided.

Litigation is a financeable asset

Clients that can afford to pay still benefit from litigation finance given its positive accounting impact or to reserve cash for the business

Litigation is just another form of corporate finance

5358

63

41 3945

Some of our more traditional clients are still trying to find their way and understand how

litigation finance will impact them.— Head of global disputes, AmLaw 50 firm

Clients are becoming ever savvier and they are now thinking creatively about ways of financing

cases. Sometimes the decision by clients to seek financing is driven more by accounting

considerations than by cash flow. — J. Ross Wallin, Grais & Ellsworth

Many of our clients are resistant to third party funding at first, and then some use it routinely.

They don’t get it at first... They have to be educated.— Lucy Reed, Freshfields Bruckhaus Deringer 

One of the most telling findings from the research is this: according to private practice lawyers, the top two barriers to litigation finance today are 1) lack of awareness and understanding and 2) ignorance of available financing options.

Taken as a whole, this year’s research depicts the business of law at an historic inflection point. The conditions are ripe for private-practice lawyers to embrace litigation finance. Those who do will demonstrate their ingenuity by helping their clients restrain costs (without discounting fees) and spread risk. But firms must take it upon themselves to educate their clients, who lack sufficient understanding of alternative financing methods. The survey shows that clients are willing to consider litigation finance, that they want to share risk and that above all they expect and want innovation from their outside counsel. For law firms, this presents an extraordinary opportunity to use litigation finance not only to win business in a highly competitive market but to do so in ways that are extremely beneficial to their own businesses.

Several individuals were kind enough to share their time and perspective in interviews conducted in conjunction with Burford’s research. We wish to thank:David J. Grais, Partner, Grais & EllsworthJ. Michael Hennigan, Principal, McKool SmithLucy Reed, Partner, Global Co-Head, International Arbitration and Public International Law, Freshfields Bruckhaus DeringerRonald J. Schutz, Chair, National IP and Technology Litigation Group, Managing Partner, New York, Robins KaplanJ. Ross Wallin, Partner, Grais & EllsworthHead of global disputes, AmLaw 50 firmInternational arbitration partner, AmLaw 50 firm

Burford Capital is a leading global finance firm focused on law. Burford’s businesses include litigation finance, insurance and risk transfer, law firm lending, corporate intelligence and judgment enforcement, and a wide range of investment activities. Burford’s equity and debt securities are publicly traded on the London Stock Exchange. We work with lawyers and clients around the world from our principal offices in New York and London.

During the fourth quarter of 2015 and first quarter of 2016, online surveys were distributed to corporate in-house counsel and financial officers at the largest law firms and companies across the US. The results were tabulated, analyzed, and released in March 2016. For law firms, respondents identified themselves as Managing Partner (29 percent), Partner (57 percent), Administrative Executive (10 percent) and Associate (3 percent). Corporate respondents identified themselves as C-level (19 percent) legal and financial executives (GCs, Chief Legal Officers, CFO), Deputy/Assistant GCs and In-House Counsel (79 percent) and finance staff (3 percent).

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Inside: New research on how clients and firms are using litigation finance