Burford Capital CEO Christopher Bogart. Photo by Laura Barisonzi.
After a decade of seeking its voice, litigation finance has found it – and it’s Burford Capital, the legal finance powerhouse with a deeply thoughtful and experienced team whose mash-up of finance, corporate and platinum law firm credentials is helping lawyers worldwide become savvier about business. Burford has definitively ended any debate about the merits of financing individual cases, and turned the conversation to transforming how lawyers think about the economics of their practice.
It was just a year ago that Gerchen Keller Capital debuted in these pages as the upstart legal finance savants shaking up the “third-party funding” industry. In December 2016, they joined Burford.
Adam Gerchen walks into the same conference room where we met a year earlier, looking just a bit tired. Ten days ago, he and his wife welcomed their third child. Seven months ago, he and GKC’s other co-founders, Ashley Keller and Travis Lenkner, sold the business to Burford. In one year, Gerchen, a 2009 Harvard Law graduate who has never billed an hour, went from intriguing entrepreneur to President of a legal finance behemoth that is ten times larger than the next largest publicly traded litigation financier.
“Scale matters tremendously in this business,” says Gerchen, as we start to discuss how the match with Burford occurred – and what the acquisition means for the lawyers with whom it works.
The GKC partners had been approached by other suitors, but they found a true match in Burford – which likewise saw GKC as a perfect complement. GKC had thrived as a private law-focused investment manager, with $1.3 billion in assets under management and roughly $1 billion in total commitments across 80 investments. Burford, meanwhile, was the industry’s standard-bearer – a publicly traded company with a seven-year track record and well over a billion dollars committed to commercial litigation and arbitration.
Burford’s founders, Christopher Bogart and Jonathan Molot, were eager for growth that would yield advantages for the firm’s clients. The marriage of Burford and GKC did just that.
Put simply, the ability to draw on public and private capital gives Burford an edge in innovation and pricing that it can pass on its clients. “Our product breadth and the resources we can put into an investment now are unmatched in the industry,” says Gerchen.
The deal was also a meeting of minds: The respective companies’ founders knew and respected one another, and their respective staffs quickly came together post-merger as a unified team of ridiculously smart, change-the-world lawyer quants with impeccable credentials.
Burford’s founders began their ascent to being the premier legal finance company in the world in 2009. Christopher Bogart and Jonathan Molot saw the need for smarter and more flexible financing options for legal matters. The duo’s experience and credentials gave them unique insights into the problem and its solution.
Bogart had been general counsel of Time Warner and an attorney at Cravath, Swaine & Moore. As Time Warner’s general counsel at the age of 34, Bogart led a team of 350 lawyers and saw for himself the potential of legal finance.
While overseeing Cravath’s legal work for Time Warner when it merged with AOL, he got the illustrious firm to agree to do the deal for what was at the time the largest alternative fee arrangement in history. If the merger did not close, Cravath would not make any money. If it did, however, its partners stood to pocket a significant premium.
“The reason for doing that was all about the accounting treatment of those fees in connection with the merger transaction,” Bogart said. “It wasn’t just a way of getting a discount in fees. It was all about transcending those very basic things that I still see lots of companies doing – just negotiating hourly rates – instead of thinking about what you’re doing, what your value proposition is, and how to deal with that in a financially advantageous way.”
For his part, Molot had clerked for U.S. Supreme Court Justice Stephen Breyer, worked at Cleary Gottlieb and Kellogg Hansen, and taught at George Washington University and Georgetown University law schools.
In his scholarship, Molot was intrigued by how economics affected litigation incentives and outcomes. That led to an initially academic interest in legal finance, and then, in 2005, his own company, Litigation Risk Solutions, to provide capital to companies whose deals were being buffeted by litigation risk.
“The deal-by-deal approach I was using was really difficult,” said Molot. “You needed a dedicated pool of capital because law firms or businesses would come to you for a solution. You didn’t have the time to come up with a solution to their problem and then scramble to get the capital together.”
Around the same time, Bogart, who had left Time Warner and was running a venture capital fund, talked to an old college friend, Robert Volterra, then an arbitration partner at Latham & Watkins, whose clients were seeking financing options. Latham could not see its way past billable hours, so Bogart set up a small fund to help his friend.
“I had no intention at the time of this being a business or an industry,” said Bogart.
But when other firms heard what Bogart had done, the phone began to ring.
In 2009, Molot published his seminal piece on legal finance, “A Market in Litigation Risk,” in the University of Chicago Law Review, explaining how litigation risk can interfere with productive business activity.
The two met at a Rand conference, discovered their mutual interest, and soon thereafter raised the capital to fund Burford Capital.
After opening its doors in the early autumn of 2009 – smack in the midst of the financial crisis – Burford quickly showed the market what was possible through legal finance. It overcame caterwauling critics and dubious competitors to immediately begin posting exceptional results. On October 21, 2009, it listed on the London Stock Exchange.
In no small part, Burford built acceptance for legal finance by assembling a team that resembled the law firm clients they aimed to attract: They hired from Latham, Debevoise and other AmLaw 50 firms. “We have always been about attracting talent that is equal to the people we finance,” said Molot. “The clients recognize that we are an asset not just because of the finance we supply, but because of the assistance we can provide in how they’re managing the case. There’s no substitute for those relationships.”
Gerchen, Keller and Lenkner opened GKC’s doors in 2013 with some platinum resumes of their own. Keller and Lenkner had met as law clerks for Supreme Court Justice Anthony M. Kennedy and discovered a shared interest in litigation finance. The trio came together when Keller and Gerchen, who had worked at Goldman Sachs, met at Chicago-based investment fund Alyeska.
Since the two firms joined forces in December 2016, Burford’s success has skyrocketed. It now has $3.6 billion invested and available to invest in law worldwide, with its public balance sheet business overseen by CEO Bogart, its private funds business overseen by Gerchen, and Molot serving as Chief Investment Officer.
The evolution they are leading will likely change how law is practiced forever.
Never has the market been so ripe for legal finance. Law firms have suffered a particularly nasty undertow in recent years – compressed by clients, and facing surging compensation demands from lawyers and a perceived need to be global. The planet’s wealthiest firms are getting richer, and the revenue per lawyer elsewhere is sinking fast. Without a fundamental change in the structure of their finances, it’s a game firms can’t win.
“The challenge that the law firms have is that they don’t have capital resources,” says Bogart. “They don’t run balance sheets. And so, the only way for a law firm to defer payment and take on risk is by cutting partner cash compensation.”
Molot explains how this hinders law firm growth by pointing to tech companies like Google. Imagine if Google could only invest in R&D by asking every employee to take a ten percent pay cut. “You know that Google would underinvest because it comes from their own pockets,” he says.
Law firms look at it just that way. “You’re saying to them, ‘Let’s take a pay cut this year to give this good client an alternative billing arrangement because five years from now we might end up making money,” he explains. “And you’ve got a partner sitting there three years from retirement who’s never going to see a payoff.”
Molot acknowledges lawyers have faced a steep learning curve to “get used to the idea that litigation is a financeable asset. And that just like any other receivable a company might have on its balance sheet, a lawsuit is something that can be financed,” explains Molot. “That initial instinct took some time for people to get used to.”
Many factors accounted for that early skepticism. Like any new industry, the array of participants ranged in quality. Some law firms had what could be called institutional resistance to engage with litigation finance based on understandable but unfounded concerns about control and attorney-client privilege. But as litigation finance was written about in the trades and lawyers could read about more and more firms becoming involved – name-brand, Am Law 200 firms – the comfort level increased. Partners began to see litigation finance as a tool to be more entrepreneurial, and to meet clients’ needs.
As Burford and others grew and showed consistent institutional-level credibility, interest increased rapidly. Clients were continuing to pressure firms on fees, and law firms felt the pain. It was a perfect storm for the legal quants. Since 2013, there has been a 414 percent growth in the use of litigation finance by U.S. law firms. Today, 36 percent of U.S. lawyers say their firms have used litigation finance. Among corporates, 26 percent of global general counsel say their companies have used it, and a further 36 percent say they expect to in the next two years.
“It caught on even faster than I would have expected,” said Molot. “Law firms are fairly quickly realizing that taking finance from Burford could help them offer true alternative billing arrangements to clients. They get that being able to offer this proactively is very attractive to clients and helps the lawyers expand their practices while at the same time ensuring that lawyers can pay their bills and continue to earn the level of income that they’re earning.”
Burford’s leaders are ambitious in envisioning all the ways outside financing can help lawyers transform the economics of law. They have helped a FTSE 20 company (identified in the press as BT Group) finance a portfolio of high-value cases with $45 million in funding – transforming the litigation department from cost center to profit center. They provided $35 million in financing to help global plaintiffs’ firm Hausfeld expand into Germany and meet increased client demand for competition claims. And they provided two additional AmLaw 20 firms with portfolios of $50 million and $100 million to expand their practices and invest in firm growth. The growth in Burford’s portfolio finance business is staggering: In 2014, Burford made 63 percent of its new litigation finance investments in portfolio-based and complex arrangements, a percentage that grew to 88 percent in 2016.
Burford remains committed to the single-case model that most lawyers recognize as “litigation finance” – in which the asset value of a pending high-value claim serves as the basis for a non-recourse investment – and it is still the case that most of its new clients come in the door looking to fund a specific matter. But lawyers quickly get excited about the possibilities of portfolio finance after that initial experience.
And that is just the beginning of a paradigm shift that could transform every law practice worldwide.
Gerchen saw firsthand the power of Burford’s combined platform when he raised a $500 million fund after the merger. A key attraction is the larger growth a fund can achieve from aggregating individual cases: “If we look at ten cases to invest in and we would have done all ten of those investments had they come to us over the course of a year, represented by that same law firm, then why on earth would we not do it in one large portfolio transaction that we can cross-collateralize?”
For firms intrigued by the possibility of transforming their portfolios from cost centers to assets, Bogart advises looking at your “real-world balance sheet. What is it that you have sitting out there and would it really work on a risk-adjusted basis? “
Gerchen hopes law firms will turn to Burford to “make the shift that’s already affecting the game demanded from their clients to much larger fee-arrangement portfolios and running risk-based balance sheets, which is what contingency arrangements are.” Some of the most successful law firms have made out-sized returns running risk-based balance sheets. By becoming a financial partner in the transaction, Burford can “accelerate the percentage that your ultimate revenues are going to be generated from contingency cases by partially using our balance sheet as a risk-management tool,” he says.
No matter how pervasive legal finance becomes, Burford’s leaders remember that every claim that gets rolled up into a portfolio is someone’s most important concern.
“At the end of the day, however financial you are about law, law’s fundamentally about clients and their claims,” says Bogart. The underlying driver of the legal industry is getting a resolution in a civil way for clients. “It’s fine to aggregate lawsuits, but every single individual lawsuit is important to somebody, and I think that needs to be remembered when you’re thinking about what the core of the business is.”