Litigation Finance and its Origin
Litigation Finance and its Origin
Litigation finance is a developed asset class providing investors with strong returns, uncorrelated to wider economic trends.
It is rapidly gaining popularity with investors including Private Equity Firms, Hedge funds, High Net Worth Individuals and Family Offices as it provides diversification to investor portfolios with no additional exposure to capital markets.
Litigation finance is where a third-party provides capital on a non-recourse basis to a litigating party in return for a portion of any financial recovery from any ensuing legal action. Litigation finance provides claimants, who might not have been able to afford legal action, the means to do so. It also allows companies, who pursue litigation, to remove legal fees and costs from their balance sheets.
The litigation funder may also agree to pay other costs associated with the claim, including putting up security for costs or taking out “after-the-event” (ATE) insurance to cover an opponent’s legal costs should the case lose.
Under most litigation finance arrangements, funds are advanced by litigation funding firms on a non-recourse basis and thus are not classified as a loan. If there is no recovery of proceeds through settlement, the claimant owes nothing to the funder.
A fast-growing area of legal finance is portfolio-based finance, where multiple matters are combined in a single cross-collateralized financing agreement. This in itself enables regular event-based payments, a clearly defined exit strategy and an above average rate of return on capital.
While litigation finance is rapidly gaining prominence in the 21st century, the practice of using a third party to fund legal cases dates back centuries, however it was outlawed until the passing of the Criminal Law Act 1967 in the United Kingdom.
This paved the way for subsequent legal rulings around the world which legitimised litigation finance, and a host of companies and investors began to realise the opportunities this presented. Early investors in lawsuits were mostly opportunistic hedge funds and wealthy individuals whose involvement was private and confidential. It was a good deal for litigants, who no longer had to worry about spiralling legal costs; for lawyers, who got paid no matter the outcome of their cases; and for the funders, who could get back multiple times what they paid for a share of the suit when it succeeded.
The value of Litigation Finance
Litigation finance is an attractive asset class with inherently strong returns potential. At its best, winning on a litigation claim can pay out multiple times what the initially invested stake was. Providers of litigation finance opportunities also offer a variety of portfolios and deal structures to investors, which can give lower rates of return if the investor were to invest directly in the success of only one case.
Aside from the high potential yields of litigation finance, the main value of the asset class is its low correlation to the stock market. Investors looking for a way to diversify their portfolios, without adding additional exposure to the stock market, have found litigation funding as an increasingly viable option to generate the large returns they expect from the stock market without the frustrating ups and downs. This has contributed to the continued rise of litigation funding in the USA, UK, and Australia since the 1990s. Emerging specialist litigation finance providers such as Omni Bridgeway, Burford Capital, and Lake Whillans thrived in the field by allowing investors to access lawsuit funding and law firm funding with the potential for huge returns.
The litigation finance market itself is growing rapidly; it was estimated to be worth around USD $10.9 billion in 2018, according to a report by absolute market insights. In this report they forecast an annual growth rate of 8.3% to take the market to USD $22.3 billion by 2027. This indicates that litigation finance continues to have huge potential upside, and it continues to provide a growing wealth of investment opportunities.
8.3% Annual Growth Rate
Who uses Litigation Finance and why?
Everyone can use, and benefit from, litigation finance. From individuals, class action and tort claimants, as well as fortune-500 companies and businesses of all sizes.
It makes strategic corporate sense, as companies will lose the capital from the balance sheets while litigation is pending, and therefore outsourcing it makes perfect sense. It also gives groups or individuals, who have justified claims that they might have been unable or unwilling to pursue otherwise, the financial means to do so.
