Peter Petyt of 4 Rivers undertakes critical research into portfolio funding

We spoke to Peter Petyt, CEO of 4 Rivers Services, a third-party funding advisory and legal project management firm.

Peter is undertaking part-time doctoral research at the University of Westminster in London to explore how law firms can ensure that they are suitable for portfolio funding and how funders can best evaluate which law firms to support. In his thesis, he will examine the different ethical and regulatory challenges in various jurisdictions and analyze the characteristics of legal case types which make them suitable or unsuitable for inclusion in a funded portfolio. The research will complement the existing 4 Rivers know-how which has been developed to help law firms and claimants secure third-party funding.

Why did you decide to conduct this research?

Since third-party funding is becoming more and more significant, I was very eager to produce some thought leadership outlining the requirements and ways in which law firms might profit from portfolio finance. For many law firms, this type of financing has the potential to be truly transformative.

What benefits do clients get from law firms which have this sort of funding behind them?

Due to the high costs and fees associated with running disputes, clients frequently demand success-based fee arrangements from the legal practice. However, law firms must make sure they have enough working capital to exist, and they are understandably wary of risking their own time and third-party costs if payment for these hinges on an uncertain outcome.

What is portfolio funding?

Portfolio funding is finance secured by a bundle of cross-collateralized cases. In contrast to single-case financing, cross-collateralization allows the funder to lower its overall cost of capital by diversifying and lowering its risk.

Portfolio finance provides a law firm with working capital while cases are in progress and is used to cover case expenses (such as experts' fees, court and arbitration costs, and electronic disclosure), and can even be used to finance other projects such as hiring more staff, expanding marketing reach, or investing in IT. Portfolio financing is correlated with the successes and failures of individual cases, in contrast to bank financing or shareholder ownership.

Which conventional forms of funding are available to legal firms?

Frequently, law firms merely rely on bank financing and other forms of debt financing, which can be costly and may not be available to plaintiff law firms at all. Unrealized contingency fees are not accepted by banks as collateral for loans; instead, they want more traditional security, such as assets and individual guarantees from the firm’s partners, to offset any financial or economic risks.

Is there another option, such as a public listing?

UK law firms have been allowed to list and raise money on a public stock exchange since 2012. A public listing offers financial resources that can allow a law firm to back its own decisions when accepting contingent or partially contingent matters.

Nevertheless, no law firm has floated on the UK market since 2019, and the market seems to be less accepting at present. Taking a company to market is also a difficult process, and partners receive less guaranteed annual remuneration. They do, however, have stock ownership in a publicly traded company, which can be more easily monetized than a share in a conventional partnership and have significant capital value over time.

What about external equity investment in law firms?

This is allowed in the US states of Arizona and Utah as well as the UK, so it could very well become the norm in the future. The independence of a law firm may be impacted, nevertheless, if a funder decides to invest in the firm’s equity. Burford's acquisition of a minority 32% ownership in PCB Litigation and its provision of funding for a case portfolio served as an example of this crucial issue.

The question of whether a firm in a highly regulated sector, such as legal services, should be permitted to accept investment from a party that directly influences the financing process is raised by the fact that equity involvement confers some control and influence over operations and strategy.

What are “pacts” or “best friends” relationships?

Here, the law firm partners with a particular funder to pay for the fees and costs associated with taking on a single case.

A case in point was the 2021 cooperation between Willkie Farr & Gallagher and Longford Capital, in which a US$50 million "facility" was made available. In addition, there was the "strategic alliance" between Litigation Capital, DLA Piper, and Aldersgate Funding, which gave DLA customers access to £150 million for funding extensive litigation and arbitration, as well as Harbour's agreement with Mishcon de Reya, which was billed as a "strategic partnership".

Since the funding is being supplied for the client's account rather than the law firm's account, the "pact" structure is not a true portfolio structure. The clear advantages of diversification are lost since there is no cross-collateralization of claims. Furthermore, there is no proof that these agreements provide clients with a better financial deal than they would if they conducted a competitive process themselves or through a broker or advisor. In fact, the rejection of a case by a best friend funder or pact funder may make the case less appealing to other funders. Additionally, there is no proof to back up the claim that the agreement structure benefits from speed of execution.

Please give some examples of portfolio funding deals which have been announced in the market.

UK litigation law firm, Provenio, has a £50 million fund in partnership with Therium to finance high value business litigation and arbitration claims. Provenio had been launched in 2019 by a team of senior litigation lawyers from DLA Piper to advise exclusively on high-value, national and international commercial disputes.

Then, in March 2021, international firm PGMBM announced a £45 million “funding partnership” with North Wall Capital to support the funding of cases related to diesel emissions scandals, breaches of personal data and risks associated with drugs and medical devices, as well as environmental litigation.  This was followed in 2022 by a further investment of £100 million by North Wall, targeted at litigation arising from ESG issues, which is “in the form of a loan secured against the revenues from winning or settling cases brought by PGMBM”. This structure - a cross-collateralised loan which is repaid from the proceeds of cases - is typical of a law firm portfolio funding facility.

Harbour provided financing for an acquisition of a division of a law firm in July 2023 in the UK, where Rothley Law acquired the private client team and business book of Shoosmiths; and Harbour was also the financier behind the acquisition of the UK law firm Hawkins Hutton by Bamboo Law in August 2023, as well as providing Slater and Gordon (S&G) with a £33m facility in one of the largest deals publicly announced during that year. The S&G facility is for expansion into high-value PI work as the UK fixed cost regime reduces profit margins on lower value claims, with the firm focusing instead on severe and life-changing injury cases, including catastrophic loss work, as well as consumer law developments.

How does portfolio funding differ from single-case funding?

Since the risk associated with a single dispute is binary, a high rate of return is necessary for TPF in single cases. On the other hand, portfolio funding is given for a group of cases in order for the funder to provide a non-recourse credit-like solution that increases liquidity and leverages a legal firm's time investment.

A basket of current and upcoming cases—such as a large collection of low-stakes cases or a smaller number of high-stakes cases—may be included in a portfolio. Funders differ in the size of their portfolios, but generally speaking, three cases or more and a $3 million minimum commitment are required. Other specific uses include helping a new law firm launch, monetizing unpaid WIP, acquiring a new line of business, mergers and acquisitions, and geographic expansion. The funding can be used to increase revenues by opening new business locations and divisions in strategic markets, as well as hiring new individuals or groups of fee earners with client followings. Additionally, the capital might be used for remuneration to existing staff to secure their continued employment.

It also seems likely that the funder will offer added value services to law firms to which they are providing portfolio financing, including mock trials, moot courts, and strategic advice.

My research is showing that portfolio funding enables the law firm to secure funding more quickly, on pre-arranged terms, and, depending on the structure, the ability to benefit from the overall success of the portfolio.

How does 4 Rivers use the knowledge that this research is producing to help law firms?

This know-how is essential in enabling us to advise our law firm clients on how to structure a portfolio so that it is investment ready and to maximize the chances of securing funding. I have spent many years helping corporations secure capital from venture capitalists, private equity houses, family offices, and banks and consequently I have developed a bespoke approach to third-party funding.