State of the Litigation Finance Industry: Innovations & Outlook

We had the privilege of sponsoring and attending the 4th annual LF Dealmakers Forum in New York in late September. It was wonderful to be back meeting and networking in person, and the panel discussions provided great insights into key industry trends and topics.

For the benefit of those who were not able to attend, we are summarising some of the key discussions, starting with the opening day’s panel discussion on the State of the Litigation Finance Industry.

Participating in the panel were:

• Brandon Baer, Founder & CIO, Contingency Capital;

• Fred Fabricant, Managing Partner, Fabricant LLP;

• Michael Nicolas, Co-Founder & Managing Director, Longford Capital;

• Andrew Woltman, Principal & Co-Founder, Statera Capital; and

• Annie Pavia, Senior Legal Analyst, Bloomberg Law (moderator)

Each of the panellists confirmed that the last 12 months were very busy and very profitable, with demand for funding rising across all subject matters. The quality of opportunities also appears to be rising, which is likely due to law firms and corporates becoming more comfortable and experienced with the concept of litigation funding.

Key topics addressed by the panel:

Impact of COVID

• Funders saw an early influx of business interruption claims, which have had mixed results to date. There have also been a lot of indirect claim types, such as business fallouts, contract disputes and efficient breaches.

• Law firms and their clients have come to litigation funders looking for operating capital, which has led to creative new solutions being offered by funders.

• Collectability and duration of potential investments has taken a heightened focus.

  • Collectability is no longer a given for certain defendants as it might have been 18 months ago.

  • The initial assumption was that cases were going to take longer to get resolved, but in most situations, cases appear to be moving along relatively smoothly, aside from trial dates being set back.

Key trends being seen in the market

• Funding pacts between litigation funders and law firms, headlined by the $50 million funding pact between Longford Capital and Willkie Farr. The panel predicts that there will be other relationships like this that will become more public as part of a broader, wider adoption of litigation finance by BigLaw.

• Funders providing upfront capital for claimholders, either to help with operational cash flow or simply to give them a monetisation event.

• An increased demand from the insurance market to participate in litigation finance. Insurance companies are showing a strong appetite to insure single cases and even a portion of a funder’s entire portfolio, and we may soon see funders and insurers combining to provide clients with a complete solution.

• Credit-based offerings. The lower cost of capital for credit-based products arrangements is appealing to many claimants, especially for those with a portfolio of cases to finance.

• Defense-side funding. There is tremendous demand from the market and several funders have launched initiatives, but it is still very early and the challenge is figuring out the right structure and finding the right types of cases. The involvement of insurance could be very significant on the defense-side.

Competition and new entrants

• Competition is not something the panellists see as a major challenge right now, primarily because the market is still relatively new and is growing so quickly.

• Deals are still coming about primarily based on relationships, and funders are still not running into their competitors that often on deals that they look at.

• All the panellists agree that the demand for funding is still outstripping the supply.

• The new funders that are emerging are tending to specialise in specific subject matters or are targeting a different investment size from the more established funders, all of which is to be expected as the market matures.

Institutionalisation and other future developments

• The panellists all agreed that the industry is heading towards institutionalisation, though it is still in the early innings.

• Pension funds and other allocators in the capital markets are starting to understand the asset class much more broadly and are starting to ask where they can fit litigation finance into their allocation basket.

• The evolution and growth of different funding solutions is also going to attract more capital into the space, as allocators can find a section of the asset class that suits their risk appetite and mandate.

• The development of a robust secondary market is also further evidence of institutionalisation. More and more hedge funds and other financing companies are expressing their interest in participating in litigation finance, but they don’t have the ability or mandate to invest as an LP in traditional litigation finance funds. They can, however, participate in secondary market transactions and are starting to do so with more frequency.

• Direct investment in US law firms by funders is also a development that the panel sees on the horizon, though all agree that it is still many years away. It still remains to be seen whether the concept is gaining traction in the states where it is being tested (Utah and Arizona). Overall, Big Law is coming off a strong year and the coming year will likely be strong for firms again, giving these firms little impetus to seek outside capital. If and when the concept does gain traction, funders are going to be very interested in participating.