Fortress Law Firm Investment Signals Shift in Legal Industry (1)

Investment managers and litigation funders are eyeing a bigger piece of the legal services market through deals with law firms.

Fortress Investment Group has a 20% economic interest in a Phoenix personal injury law firm, documents obtained by Bloomberg Law show. The stake was made public for the first time less than two weeks after litigation funder Burford Capital said it’s looking to invest more directly in firms, including possibly through Arizona’s alternative business structures program.

“It’s not a surprise to me at all that the big investors would find ABS’ to be a field they would want to put some money in,” said Lucian Pera, a partner at Adams & Reese who consults with businesses forming alternative business structures and management service organizations. “What I’m hearing from investors is that there is a growing interest in the legal space and they are exploring all kinds of ways to put their funds at work.”

The moves by Fortress and Burford signal some big names are looking at different ways to invest in law firms, which traditionally have been off limits for outside investors. Some are targeting Arizona and other states that have loosened restrictions on non-lawyers owning firms. Others are seeking workarounds through management service organizations, which split the legal side of firms from the back offices to allow outside investment.

“Capital helps firms grow and that is good for lawyers, firms, and their customers as well as tax payers and the general economy,” said Crispin Passmore, who also consults on these types of structures.

Still, the flow of outside money into law firms has raised concerns for litigation finance opponents about whether lawyers will put their investors over their clients.

“It’s really important for us to collect data and see examples of this in the world and understand if that can work better,” said Trisha Rich, a partner at Holland & Knight who advises on alternative business structures. “There’s a lot of people that will have a look at this and have a knee jerk reaction and say, ‘This is not great,’ but what they don’t have are actual instances of clients or the public being harmed because of structures like this, and we’re entitled to see how these structures pan out.”

Imagination Expansion

Fortress’ foray into personal injury law appears to be a change for the asset management giant, which has invested billions of dollars into intellectual property and mass tort litigation.

Litigation funders that back injury cases tend to put their money into mass tort suits against the makers of allegedly harmful products. Esquire Law, the Arizona firm in which a Fortress affiliate owns an economic stake, focuses on representing individual clients injured in car accidents.

Litigation finance typically involves funding individual lawsuits or a portfolio of lawsuits in exchange for a portion of an award. Some funders offer firms loans against their entire caseloads.

The ABS and managed services organization routes give investors more skin in the game and a direct piece of the profits. Investors in Arizona may help a law firm in the state acquire cases across the country and then refer the matters to lawyers in other jurisdictions and split the fees, Pera said.

For firms, pass through businesses that start each year with a balance sheet of zero,cash injections can help them invest in technology and growth, Passmore said.

“The whole range of the legal space of lawyers and people who work in the legal space has had this expansion of its imagination about what’s possible because of a number of developments slowly, gradually as a result over the last several years because of the ABS program,” said Pera.