Litigation Finance: Where to go from now?
Litigation Finance: How did it start?
The low yield environment in the past decade has driven investors further out into uncharted territory. During this period, an area that has benefited from increasing popularity is litigation finance, as hedge funds, private equity funds and other institutional investors committed billions of dollars to this new source of yield. Litigation finance is characterized by contingent fees, where clients pay lawyers only if a case is won. Around a decade ago, when after the great recession law firms couldn’t get capital from banks anymore, a group of lawyers started accepting money from third parties to fund cases in exchange for some of the winnings. Spurred by stellar returns and massive capital inflows, litigation finance has since taken off. After the race into the asset class from accredited investors, crowdfunding platforms are now attempting to democratize the asset class and make it accessible also to private investors (1). On top of the expected sky high returns, litigation makes for an interesting investment case, being uncorrelated to the broader stock market, the interest rate market, and the economy as a whole.
This democratization has benefited all involved stakeholders, providing litigants with more funding resources and law firms with means to enhance their profits. However, the upcoming of litigation finance has also raised concerns, most notably from the U.S. Chamber of Commerce, as focus is shifting towards profits and speculation and away from helping clients get their cases decided on the merits. Critics say this will lead to more lawsuits in an already litigious society and reduce the payouts victims receive. “Third-party financing leads to more lawsuits, undercuts plaintiffs’ control of a case, and unnecessarily prolongs litigation,” Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, wrote in a June op-ed published in the Des Moines Register (2).
Further growth and innovation ahead
According to the 2018 Litigation Finance Survey conducted by Burford, the largest player in the space, interviewees were confident that litigation finance will impact the market for legal services in positive ways. The biggest impact was predicted in fee arrangements and the way in which litigators will charge for their services: “Anything that makes the legal fee structure more creative and further away from the billable hour is good in my judgment.” (3).
The market seems to be poised for further growth as 70% of the respondents indicated that their organization had chosen to forgo claims in the past, due to the impact of associated legal expenses. Furthermore, with market penetration still on the lower end and innovation being among the major challenges, we see litigation finance growing to a key tool to spur competitivity and gain market share among law firms.
1. Financial Times, Litigation finance industry opens up to private investors
2. In low-yield environment, litigation finance booms
3. Burford 2018 Litigation Finance Survey