Hello, and welcome back to the Big Law Business column on the changing legal marketplace, written by me, Roy Strom. This is only the second edition of the column, but I’ve already gotten some terrific feedback and heard thoughts from readers across the legal industry. So please, keep it coming!
Last week, I wrote that litigation finance firms have been able to make money because they are taking risks that traditional law firms are not.
I still think that’s true. And I still think, over time, more law firms will become more comfortable with litigation that puts their partners’ money at risk, a la Quinn Emanuel or, more recently, Kirkland & Ellis.
But it’s unlikely a more risk tolerant Big Law would pose an existential threat to litigation funders. For one, not all firms are going to want to put their money on the table. And even the ones that do might still want to share some of the risk with a friendly financier—like plenty of businesses outside the legal sector do to finance big purchases.
Litigation funders and the risk-taking firms of Big Law will probably co-exist in the longer term. But it’s worth examining what sort of an edge the funders might have over their law firm rivals when it comes to making money on litigation.
That starts with a question: How do you make money on contingency-fee litigation?
Let’s start by saying you want really good lawyers to actually handle the cases. That seems important whether you are a law firm or a litigation funder. But not every firm has really good lawyers for every type of case. That may give funders an opportunity to act as a brokerage, bringing cases to the best lawyers. But, those lawyers are themselves able to look for good cases and market themselves. So the brokerage model would likely include competition from law firms and funders.
Next you have to pick winning cases. Considering the all-or-nothing nature of lawsuit investing, this is an important part of the game. It has always surprised me that litigation funders and law firms do it in broadly the same way: They ask lawyers who know the area of law for opinions about the case.
I asked Scott Mozarsky, head of litigation funder Vannin Capital’s North American business (and former Bloomberg Law president, in full disclosure), if consulting experts in the field is still the best way to analyze the odds of winning a case.
“I would say the answer is, ‘Absolutely yes,’” Mozarsky said.
I asked him if there is some guru out there who all the litigation funders turn to for the best case-picking advice. I could see the headline already: This Big Law Partner Is Making Millions for Litigation Funders.
Sadly, Mozarsky said that person is not out there. (Still, tell me if you are that person!) The funders, he said, “all have our favorites.” Whom they ask to vet cases, he said, is often based on relationships they have in the industry, like former partners or classmates. He also said there are “at least 50 highly credible firms” who can form opinions on cases in any particular area of the law.
So, seems like a wash? Not so fast!
Chris Bogart, CEO of Burford Capital, said picking winners requires more than just an analysis of legal liability. He said Burford turns down most cases not because of a disagreement with the law firm over liability. Instead, Bogart said there is a level of financial analysis his firm conducts at the start of a case that law firms don’t do.
“We look at credit risk, enforcement risk, asset recovery risk,” Bogart said. “And then we spend quite a lot of time working on damages and settlement value. And we do that in advance of when law firms often do that work. And those are not things that law firms have in their DNA.”
Law firms could build up their expertise in those areas. But it would be another cost in an already expensive transformation to invest in lawsuits. So, the edge probably goes to litigation funders.
One last requirement for making tons of money on contingency cases is having the ability to pay for a lot of them. And this is really where law firms, of course, just don’t stack up.
Finance firms have capital buffers to suffer losses that they anticipate. It’s part of the business model. Law firms don’t. Start losing contingency cases, and watch the partners walk out the door. Most law firms also do more than litigation. So even if all of a firm’s litigators want to take more risk, it’s unlikely the corporate partners would push their income into the gambling pile.
And that is the main reason why Burford’s Bogart said he would be “delighted if every law firm would do what Kirkland has now done.”
“The big difference between somebody like Kirkland and Burford is Burford’s balance sheet is vastly larger,” Bogart said. “We have the capacity to accept risk and to manage it on a diversified basis in a much more efficient way than a single law firm does.”
In the end, the biggest difference might not be the risk appetite or the case-picking, but the capital available to pursue it.
Worth Your Time
On Burford: The litigation funding giant last week again announced record profit and levels of new investment commitments. But the markets weren’t all that kind to the publicly traded Burford, sending shares down as much as 9 percent in intraday trading on Thursday. Bogart blamed the dip on “profit-taking.”
On M&A Competition: Kirkland & Ellis hired an up-and-coming M&A partner from Paul Weiss last week in David Klein. The move comes just a couple weeks after Paul Weiss’ hire of Kirkland private equity partner Sarah Stasny. Kirkland over the years has made a habit of hiring younger partners from rival firms.
On Law Firm ‘Death Spirals': LeClairRyan was in the news last week for all the wrong reasons. First, Richmond Biz Sense reported unidentified former partners were owed up to $9 million from the firm. The publication quoted an anonymous former partner referencing a “death spiral.” Then AmLaw reported the firm’s co-founder Gary LeClair had left, and news broke of the firm and its joint venture partner UnitedLex being sued over alleged gender pay discrimination.
That’s all I’ve got until next time! Reach me here to share your views on law firms, litigation funders, and whatever else is happening in the world of Big Law Business.