The business of making money out of lawsuits, enforcing court awards and other legal activity is large, yet relatively underdeveloped, a firm that reported results has said.

A regular feature of investment is the quest for uncorrelated returns – or in simpler language, assets that don’t rise and fall in unison. True diversification, however, is nice to have in theory but as market surges and plunges demonstrate, tough to deliver when it matters. 

One type of business that does offer some promise through different forms of financial weather, so to speak, is the law. Lawsuits are filed in recessions and booms, and often as not, when the economic cracks open up, people reach for their lawyers. (Readers are no doubt familiar with how lawyers are permanent features of life, along with death and taxes.) This means that the proceeds of litigation and funding of law firms can be a valuable source of return, particularly in legal regimes, such as the Common Law systems of much of the English-speaking world. 

The area of litigation finance is not totally obscure but it is still a relative niche area. It hasn’t been easy to tap into the revenue-generating powers of law firms, given that they don’t typically issue shares that investors can put into a portfolio. 

One firm aiming to change the market is Burford Capital, a commercial finance provider issuing public equity and private debt, so an investor can tap into the legal/litigation world by purchasing its shares or bonds. It is quoted on London’s Alternative Investment Market and legally domiciled in Guernsey, with main offices in New York and London.

Yesterday, Burford Capital announced a 48 per cent increase in income for the half year to $40.6 million from the same six-month period to end-June a year ago, driven by a 64 per cent increase in income from the litigation investment portfolio to $30.7 million.

Investment returns were strong, it said. Since inception, 38 investments have generated $299 million in gross investment recoveries and $124 million net of invested capital, producing a 71 per cent net return on invested capital. A year ago, Burford Capital Plc, which is a wholly-owned UK subsidiary of Burford Capital Limited, launched a 6.5 per cent sterling bond maturing on 19 August 2022. The bonds have a minimum initial subscription amount of £2,000 ($3,397). (To see that story, click here.)

Against such results and activity, CEO Chris Bogart is confident of further progress, and points out that the litigation market is still in its relative infancy, especially in the UK. If the largest UK law firms could be listed businesses, at least six of them would be included in the FTSE 100 Index of blue-chip UK stocks, he told this publication. “In that world, there are really no investment opportunities…these [firms] are partnerships…this is a huge space,” he said.

With litigation finance, the provider typically funds a case in return for a share of the winnings and a specific fee (the exact level of fee and winnings percentage will vary, depending on the risk of a case, its complexity, and other factors). 
 
“We do attract not just case financing but financing that is based on the idea of a legal claim on an asset,” Bogart said, likening this to receivables finance, which he called a common feature of business. “A legal claim is nothing more than potentially a risky receivable,” he said.

“If you do this work on a portfolio basis you find a range of outcomes but that that consistently provides positive net cash-flow. Ultimately, all returns are driven by the operation of the litigation system. It’s like starting a conveyor belt and it moves forward at its own speed and own rules. At the end of the process it delivers a result entirely independent of the economic system,” he said.

The legal process provides an automatic exit – ie litigation moves through the system and eventually concludes, unlike private equity where investments can be held for an indeterminate amount of time, he said. He added that the business model works where the English-model Common Law system, based on legal contests in front of a judge, exists, so there are large markets in the US, UK, Canada, Australia, New Zealand, Hong Kong, Singapore and certain other jurisdictions. 

Judgment enforcement
Among developments at Burford this year has been its entry into the international judgment enforcement business. One of its indirect subsidiaries acquired Focus Intelligence, a firm specialising in asset tracing and judgment enforcement worldwide. That business has a team of eight legal and investigative specialists. As a result of the acquisition, Burford can if it wishes buy uncollected judgments and awards outright and then collect them at its own cost and risk; it can also make its global judgment enforcement services available on a contingent basis.

The evolution of organisations such as Burford is part of a broader trend of lawyers seeking new ways to finance activities when fees are under pressure, Bogart said. Many law firms don’t have a proper balance sheet and their financial arrangements are relatively basic, he said.

Asked about the risks of such finance – there are no free lunches in economics – Bogart replied: “The largest risk is that we do a bad job in picking investments.”

“One reason there is excitement around our business is that there has been consistent performance,” he said, noting that it makes sense to judge a track record over the medium term rather than over a period of a few months.

Bogart has worked at a large law firm as a trial lawyer and worked as a general counsel at Time Warner. He has also worked in the venture capital space; he decided to come back into the legal world because he was asked to do so by those looking at financing legal cases, he says.