From the outset of the COVID-19 pandemic, law firms reacted quickly and aggressively to increase revenue and reduce expenses. Many law firms have sought out litigation finance providers to assist with doing so.
Several law firms have approached GLS Capital in recent months to discuss monetizing a portion of their interest in multiple ongoing contingency fee cases. This is a common transaction in litigation finance colloquially known as a “Portfolio Transaction.” Portfolio Transactions offer obvious appeal to the investor. They are typically cross-collateralized, where the investor’s return comes from all cases in the portfolio – the successful cases essentially pay for themselves, any losses, plus the investor’s return. Obvious discussion points in Portfolio Transactions include the selection of collateral (i.e. the cases in the portfolio), the purchase price, and the investment return.
Additionally – and especially in a time of increased risk – law firms should appropriately manage other, potentially less obvious risks when contemplating Portfolio Transactions. These considerations will likely affect how much the law firm ultimately recovers and when. Here are a few:
- Transaction Size: In times of economic uncertainty businesses often seek to maximize their cash position. Law firms are no exception. When considering a Portfolio Transaction, however, fully leveraging a contingency portfolio in exchange for the maximum amount of cash may not result in optimal outcomes when the portfolio matures. If recognized and managed appropriately, this structure can be effective in reducing the cost of capital for the law firm. But too large of a portfolio or too many high-risk cases within a portfolio may create a future risk to the law firm if the portfolio underperforms. If one or more of these cases are unsuccessful, then the law firm may begin to examine its resource allocation towards the remaining cases within the portfolio. Further, a large amount of capital financing a large portfolio is also likely to increase the time before the law firm participates in future proceeds because the finance provider’s capital and sometimes even a minimum return are typically paid from proceeds first.
- Transaction Structure – Single vs. Multiple Transactions: A large portfolio of cases may be financed in one cross-collateralized transaction or it may be broken into smaller transactions to be financed separately. A law firm monetizing its interests in a single, large portfolio of cases may secure a more attractive cost of capital than financing those same interests via multiple separate, smaller transactions. However, by breaking a larger portfolio into multiple, smaller transactions to be financed separately, a law firm can potentially isolate the risk of significant unexpected losses without affecting the law firm’s recovery from the other transactions. Using multiple Portfolio Transactions instead of a single transaction will also likely result in the law firm participating in proceeds earlier.
- Client & Confidentiality Considerations: Litigation finance agreements typically include confidentiality provisions that prevent both parties from disclosing the details of the transactions to any third parties. If a law firm has included its fee on a particular case as part of a Portfolio Transaction, the law firm should consider whether to inform its client about the existence of the Portfolio Transaction.
Portfolio Transactions are one of the many ways that litigation finance providers can assist law firms in managing their risk and can be especially useful in times of increased uncertainty. However, law firms should be careful in considering the present and future risks of Portfolio Transactions to ensure that any transaction properly aligns with the firm’s goals and desired risk profile. Please contact GLS Capital Managing Director David Spiegel at email@example.com if your firm is considering a Portfolio Transaction and would like to discuss these or any other related issues.