Litigation finance continues to go mainstream, according to a new report from third-party funder Burford Capital. That might be good news for law firms, especially with a potential recession on the horizon. Any disagreements? Email me here. Want this dispatch in your inbox every Thursday? Sign up here.

Restoring a Recession Hedge?

An idea popped into my head yesterday when I was talking with Burford Capital's David Perla about the growth of litigation finance.

After surveying 500 CFOs, Burford found that two out of three respondents expressed a willingness to use third-party finance in the next two years. Granted, Burford is hardly a disinterested observer. But its findings nonetheless signal growing recognition that a company's legal claims are a valuable asset to be unlocked.

Perla made the case that if the U.S. economy tips into a recession in the next two years, as many economists are predicting, this openness will spur their appetite for legal financing further. It's a way for legal departments to do more with less.

That could be surprisingly good news for law firms, I thought. While in past recessions, litigation has been a driver of business—a countercyclical practice that's helped compensate for a drop in dealmaking—that wasn't the case in the Great Recession of 2008.

“You saw a lot of defense work, but you didn't see a lot of affirmative claims,” Perla told me. “Companies were just preserving cash.”

I'd heard the same from a number of law firm leaders and other sharp-minded folks in the industry last year. Furthermore, there was little hope that firms could expect a surge in the next downturn. People expressed resignation that the days of relying on litigation as a hedge were over.

Could the emergence of the litigation finance industry change the equation?

Third-party finance, at least in the U.S., was in its infancy at the time of the last recession. The funders in the marketplace had barely moved beyond personal injury cases. The biggest players in the market today, Burford and Bentham IMF, weren't on the map when it started. (Burford was founded in 2009, Bentham came into the country in 2011.) And now a wider class of heavyweights has emerged.

There's another distinction, too. The 2008 recession was marked by a liquidity crisis, where capital markets essentially ground to a halt and companies were forced to preserve cash. In such an environment, businesses had no appetite to pursue affirmative claims.

Perla said that regardless of timing, the same dynamic is unlikely to occur in the next downturn.

At the same time, it's not unreasonable to expect that the new pool of capital sitting out there to fuel what funders see as “meritorious claims” may help keep litigators occupied, rather than twiddling their thumbs, playing minesweeper, or whatever else highly educated and heavily bored professionals will be doing at their desks in, say, 2021. Or worse—there's always the prospect of the axe.

“I think it will be a lubricant for what otherwise may be some slowing down,” Perla said.

That's also contingent on these litigators being as open as their clients' CFOs to third-party capital. But if all these pieces come together, we might have an unusual example of a “disruption” that actually helps restore some seemingly lost certainties to traditional law firms.

In the News:

➤➤ Another week, another set of announcements about firms unveiling platforms aimed at handling commoditized work. Coincidentally, now we have examples from two recent trans-Atlantic combinations: Eversheds Sutherland and Bryan Cave Leighton Paisner are getting on board, with reporting courtesy of my colleague Lizzy McLellan, my Legal Week counterpart Meganne Tillay, and myself. Even if this work doesn't make financial sense for firms' traditional structure, they don't want it going to newcomers. The solution: find a way to keep it in house and let it feed into the higher value stuff.

➤➤The Wall Street Journal visited with Nixon Peabody CEO and managing partner Andrew Glincher. He's not a fan of the billable hour, and consequently didn't push his kids into the business:

“I don't really like the business model, the hourly business model, because when you sell your time, the more successful you are, the less time you have. There's an evolution that still needs to occur in the industry.”

I wonder if he's aiming to do anything different over there?

➤➤ And, looking forward, we've talked about the California Bar's look at potential regulatory changes to expand access to legal services. After almost a year of work, they're discussing their tentative recommendations in San Francisco tomorrow. If you can't make it there, like me, tune in here.

We'll be taking a breather next week, so have a happy July 4th! But I'll still be around at [email protected]. Sign up here to receive The Law Firm Disrupted as a weekly email.