Maurice MacSweeney explains how funders are evolving beyond single-case litigation
Litigation finance as a concept is not new—indeed, regulation of it first arose in medieval England. But its use as a tool to support those involved in commercial litigation and arbitration is much more recent, having entered the mainstream in many of the world’s major legal centres in the past two decades. While litigation funding has traditionally been offered to support large single cases, the market has seen an evolution into other areas, such as a portfolio of cases, more use of funding by corporates, and realising immediate value from litigation or arbitration which may still have some time to run.
However, the most recent development is perhaps the most revolutionary—litigation financiers becoming funders to law firms or other legal businesses, and for purposes not necessarily linked to litigation. With litigation funders’ knowledge of the legal market and a higher appetite for risk, this new form of funding could be a gamechanger for firms seeking growth, or where they cannot source working capital from traditional lenders. So, what are the range of options now open to law firms seeking investment from litigation funders, either for their clients or indeed their own purposes? The traditional form of litigation funding sees the funder pay the costs associated with pursuing a claim in litigation or arbitration. In exchange, the funder receives a pre-agreed share of recoveries made, usually a multiple of the amount invested or a percentage of the settlement. Crucially, the funder will only receive their investment back, plus any return, if the case settles or succeeds at trial and money is recovered from the losing party.
As a result, the risk posed to the litigation funders is high, and the outcome is binary— you either win, or you lose. Even when a case wins at trial or settles, there is no guarantee an award will exceed the costs of bringing the claim. Consequently, pricing of the investment reflects that high risk, as well as the fact a funder’s capital is tied up for the usually inordinate amount of time a case takes to conclude. That means individual claims generally need to be for substantial amounts for the economics to work for all parties.
Portfolio funding
Funding for single cases has expanded into portfolio funding, which allows a whole group of cases to be progressed. This could be a group of specific cases or a more open-ended commitment, where some cases already exist but a law firm wants to pursue other cases of a similar nature. It can be for a large group of low-quantum cases, or a smaller group of high-quantum cases. Structures are flexible.
In a portfolio, it is the performance of the group of cases rather than the individual cases that is important, so both claims and defences could be included. Claims can be cross-collateralised, meaning the financial loss arising from an unsuccessful case is mitigated by success in the other cases. Reducing risk in this way can also reduce the price.
Laying off the risk
While more common in the US, even the more traditionally risk averse UK legal market is now seeing risk being laid off to legal funders. Legal financiers pay firms a share of their work in progress, which the firms keep regardless of the outcome of the case, but they can still participate in a successful outcome and share a success or contingency fee with their funding partner.
Monetising ongoing litigation
Litigation is costly, and budget increases as a case progresses are far from uncommon. Now legal funders are providing products to monetise ongoing litigation—buying a share of future money recovered for a cash sum now, or indeed buying in its entirety an award made, perhaps at a discount to the face value, but leaving any delay in payment for a funder to manage.
Funding legal businesses
A sea change is afoot in the legal funding market. Litigation funders are now looking to fund the business of law, even when no litigation is involved. With high interest rates here for the foreseeable future, obtaining finance for growth may be more difficult. But legal financiers—often majority staffed by lawyers—offer a deep understanding of the requirements of law firms.
We are beginning to see lawyers turn to litigation funders for credit facilities—or indeed equity stakes—to monetise work in progress, to recruit teams and/or make other lateral hires, for financing succession planning or de-equitising outgoing partners and founders, and to open new offices or to merge with or acquire other firms.
Law firms are approaching legal financiers to invest in products they are developing for their clients, like managed legal services and legal tech to streamline routine work. Lawyers spinning out of big law firms and setting up their own firm often can’t find competitively priced funding for start-up costs and working capital because of their limited track record. However, legal financiers have a higher risk appetite arising from a deep understanding of the work those law firms and lawyers will be undertaking.
Litigation funders can be more creative and flexible than banks because of their knowledge of the market. For forward-thinking lawyers, this new form of funding could be the key to unlocking serious growth.
The article was first published in New Law Journal
