The Future of Litigation Finance
It is always interesting to hear the perspective and prognostications of people that are monitoring the litigation finance market. I recently read a synopsis of Ashby Jones, chief of the Wall Street Journal’s law bureau, comments on questions concerning the future of the market, taken from a keynote speech he delivered at a litigation finance conference last year. I wanted to respond with an insider’s take on two of these questions: (1) Will the market continue to grow? and (2) Can litigation funders innovate off the initial model?
Will the industry continue to grow?
Jones admits he was taken by surprise by the growth of litigation finance, but nevertheless, he predicts its continued growth. There has been some question about whether the market is saturated with over 50 firms and increasing amounts of capital pouring into the space. While it is certainly true that the market has attracted many new entrants, there does not seem to a slowing of demand.
As a few commentators have pointed out, even with an estimated $800-$900 million in 2016 annual global litigation funding (according to research by Vannin Capital) this amounts to just 4 percent of global annual spend on litigation. This suggests that there remains significant growth potential in the space.
However, with ever more funding options available for meritorious claims, funders may start to lose leverage with individual relationships and will need to work on improving the user-friendliness of the funding process and reducing cost of capital in order to grow pipelines. Funders may also need to examine their underwriting criteria and explore ways of broadening the scope of potential funding opportunities. Is the market overly saturated? No, but it’s definitely getting more competitive.
Can litigation funders innovate off of the initial model?
Jones points out correctly that traditionally the industry has focused on commercial, single-case, plaintiff-side funding arrangements and he mentions the increased focus on arrangements that fund a portfolio of cases. From there Jones mentions the emerging and growing secondary market for litigation finance, where funders buy and sell interest in existing funding transactions.
While secondary markets may be of interest to funders and a sign of a maturing market, it doesn’t represent real innovation for the client. At our firm, we see a big opportunity to offer complementary financing products such as Litigation Insurance. This type of arrangement can be a great fit for clients looking to mitigate risk but not willing to part with a huge portion of a potential recovery. It can also be used in conjunction with traditional non-recourse loan funding to present a mix of risk and return to the client. True innovation benefits the entire ecosystem and I see the increased adoption of Litigation Insurance combined with traditional funding as a way to broaden the appeal and widen the application of litigation finance.