London-based litigation funder Burford Capital says a growing part of its business revolves around the financing of international arbitration cases handled by U.S. law firms—work that previously went to Magic Circle firms.

Burford managing director Craig Arnott told Law.com International that companies are increasingly using arbitration in place of litigation, despite it turning out to be "vastly more expensive" than litigation, and Burford is capitalizing on this global trend.

"We're talking extraordinary expense. So even the big oil majors, gas majors, big construction companies don't have budgets for this," Arnott, who previously was a barrister in Sydney, said in an interview at Burford's office in Sydney. "But what has happened, as arbitration has really gone through the roof, is that they have too many of these things and they don't have in-house legal budgets that can deal with it."

Burford's arbitration funding focuses on energy, extractive industries, oil and gas, big mining disputes and big international treaty investment disputes where an expropriation has taken place, such as when a national government breaches a treaty and takes a mining asset from a miner.

In such cases, the firm funds the corporations' expenses, which can run anywhere between $20 million and $50 million for a single matter.

U.S. firms also get financing

But Burford is also providing financing for U.S. law firms to run these cases on a contingency fee basis. This puts the U.S. firms at an advantage as they compete with the Magic Circle firms on their home turf in London because the U.K. firms generally charge hourly fees, Arnott said.

With the funding, U.S. firms are in a position to go to potential clients with an appealing offer. They can tell potential arbitration clients that instead of paying hourly rates, "we'll do it all on a contingency, so you're not going to pay anything upfront and we'll take our contingency only from the back end if you win."

"The U.S. firms are taking work from under the [Magic Circle firms'] noses," he added.

Arnott said law firms also seek funding to meet their ongoing costs and pay annual partner drawdowns.

Arnott has become familiar with the inner workings of global law firms in part because he worked at several. From 2004 to 2009, before becoming a barrister in Sydney, he was a partner and head of competition/antitrust law in London at Fried, Frank, Harris, Shriver & Jacobson, according to his company bio. He also spent four years at Ashurst in London and three years at Gilbert + Tobin in Sydney. And earlier in his career, he was an associate at Cravath, Swaine & Moore in New York.

Most of Burford's litigation funding agreements with corporations and law firms are not disclosed. But it's evident that some are quite large. Burford's interim 2019 results reveal that it has signed a $130 million portfolio litigation funding agreement with "a major global business," and Arnott said other agreements are "substantially bigger."

"The biggest ones are with U.S. firms and it's powering their growth," he said.

Portfolio funding

While litigation funders will continue to fund lawsuits and arbitration disputes for corporations and law firms, the new growth industry for litigation funders will come from the funding of corporate litigation portfolios, Arnott said.

In such arrangements, litigation funders provide funds to companies to cover a range of ongoing and potential litigation matters. The arrangements help fill shortfalls in corporate legal budgets and fund litigation that companies might not otherwise have been able to afford, as well as take the costs off the companies' balance sheets.

Burford is aiming to expand corporate portfolio funding in Australia.

"Australia has not even been cracked yet," Arnott said. "We see the uptake of this in the United States and in England, in particular. And that's largely because often, that's where the big corporates are headquartered."

There are some major public companies in Australia, however, and Burford has been in talks with players in construction and infrastructure and in the extractive industries.

Arnott said the firm seeks to form close relationships with lawyers so the firms can offer its funding as part of a solution to clients. The relationship also helps Burford better understand the risk involved in each matter.

"If we are constantly working with the lawyer, they don't bring you rubbish because they want to work with you again," he said. "It also puts the pressure on us to do the diligence and kick the tires of a matter."

About half of Burford Capital's business is in the U.S. and half is elsewhere in the world, with the non-U.S. portion growing rapidly.

The business done from the London office—which is Arnott's responsibility and includes the U.K., some of Continental Europe, Singapore, Hong Kong and Australia—has grown fivefold in the three and a half years Arnott has been with Burford Capital.

In 2018, Burford reported revenues of $420 million—up 23% from the year before. After-tax profit was up 24% to $328 million. In 2014, the firm's profit was a mere $54 million.

Muddy Waters

The rise has been reflected in the share price—despite the fact that it dropped precipitously in August after a report by U.S. research and investment house Muddy Waters labeled Burford "a poor business masquerading as a great one," concluding the company is "arguably already insolvent."

Burford CEO Christopher Bogart said at the time that Muddy Waters' tactics behind the report were "deeply disgusting," and following an analysis of its share trading, Burford alleged the shares had been the subject of illegal market manipulation.

"Short selling—it can be very destructive," said Arnott of the investment strategy that seeks to make a profit from share price falls. "All the short-seller has to do is raise queries. And we were sitting ducks because our share price had appreciated so much."

The Burford Capital share price has improved only slightly since the report came out but Arnott said it is still double the price it was at when he started at the firm three years ago.