Why CFOs need to adapt their financing – and why they need to do it now

By Ellora Macpherson, Chief Investment Officer at Harbour

The current business landscape is a uniquely volatile one. In March 2020, almost all business leaders and their CFOs would have been asking themselves hard questions about their balance sheets. How robust are we? Will we need to let people go? Can we balance the books?

Do we adapt and innovate? Do we try to maintain business as usual?

It soon became clear that businesses would have to make tough decisions. UK redundancies have hit a record high with official data showing the largest annual fall in employment for a decade. By November 2020 there were 819,000 fewer workers on UK company payrolls than at the start of the pandemic.

The Office for National Statistics has also reported a steady climb of insolvencies and voluntary liquidations. According to the report, some two thirds of businesses are at risk of collapse, with 14% of all UK businesses having already suspended trading due to lockdown restrictions. This is despite recent optimism seen in the markets following the development of several promising vaccines.

Whilst many businesses will sadly become insolvent in 2021, others will see opportunities to act differently to manage the struggles ahead.

Within those businesses, CFOs have an immediate and urgent need to find new ways to adapt their financing through lateral thinking and alternative solutions.

That means CFOs are looking for assets already in their businesses that can be capitalised upon. One such asset is unrealised litigation. Whether arising out of fraudulent activity, unpaid debts, breaches of contract, viable claims can take many forms and can be found in many places.

The last decade has witnessed something of a mindset shift; whereas litigation was previously seen as a drain on resources, claimant side litigation is increasingly viewed as an asset – one which in the right circumstances can be hugely profitable. In calmer times businesses may have been prepared to leave such claims untouched, however the current economic reality means that businesses can now seldom afford to overlook such lucrative assets.

Yet at a time when UK businesses are facing sizeable losses and sustained uncertainty, the likelihood is that few will have neither the funding nor the internal resources to litigate. Add in the financial risk of losing the claim, they may be left with very little inclination to proceed at all.

The litigation finance market is becoming an essential tool for forward thinking CFOs intending to unlock claims in their businesses. The macroeconomic lifecycle has no bearing on the outcome of disputes and litigation as an asset class itself it has little correlation to the wider market. This means that litigation funders have the capital to pursue meritorious claims at difficult times even when the businesses with the claims do not.

By providing funding for all of the costs incurred in bringing the claim (in addition to covering the adverse costs risk should the claim not succeed) litigation funding provides a working solution to these barriers at no cost to the litigant. If the case is won, the funder receives a pre-agreed share of the proceeds; if however the claim is lost, the funder’s investment in the case is written off with no recourse to the unsuccessful claimant. A successful claim can not only improve the financial position of the company, but also that of creditors and investors.

So, if CFOs can proceed with a potentially profitable claim without any impact or risk to their balance sheet, what’s the downside? Given the litigation funder’s return is tied to the success of the case, it’s obvious that not every claim will be suitable for funding.

Experienced funders will not support meritless claims, but the truth is this makes their decision-making process a valuable yardstick to gauge whether or not a claim should be pursued. The monetization of litigation also takes expertise; claims do not behave like shares, bonds or receivables. It requires a different skillset – a blend of both legal and financial acumen.

Given that commercial disputes are often worth tens or even hundreds of millions of pounds, it is clear that CFOs must adapt their mindset to view court claims as valuable assets rather than liabilities. It is now no longer a question of whether CFOs can afford to advance these claims, but whether they can afford to ignore these assets on their books any longer.