Litigation Finance: Its Past, Present, And (Very Bright) Future

If -- or rather, when -- a recession hits, litigation finance is going to thrive.

On Wednesday, I headed uptown to cover Financing, Structuring, and Investing in Litigation Finance, a very interesting conference hosted by IMN. I left the conference with a strong sense that litigation finance is thriving — and that the industry is only still in its infancy.

Back in 2015, I attended a similar (also excellent) conference on litigation finance at NYU Law. Comparing this latest conference to the earlier one underscored for me the growth in the field. The IMN conference was larger, taking place before a standing-room-only crowd filled not just with representatives from dozens of litigation-finance firms but with Biglaw partners, in-house counsel, and finance professionals. The packed ballroom at the Union League Club overflowed not just with dark suits but with buzz, energy, and a sense that the future of law and finance was unfolding right here, before our very eyes.

It’s not my imagination. In his opening keynote, William Strong of Longford Capital marshaled charts and graphs to illustrate the explosion in the number of litigation finance firms and the capital that they deploy. What’s driving this dramatic growth? Strong cited several factors, including legal and regulatory developments favorable to the industry, the robust returns being posted by litigation finance firms, and the low barriers to entering the field.

This expansion in the supply of litigation financing reflects a sharp increase in the demand for funding. To the businesses that turn to litigation-finance firms to fund lawsuits, it offers them a way to advance meritorious legal claims with little or no effect on their earnings or balance sheets, as well as a way to spread litigation risk and control cost. To the growing number of law firms that utilize litigation finance, it lets them transfer some of the risk of contingent-fee cases, obtain funding for out-of-pocket expenses, and accelerate and smooth the collection of receivables.

And there’s no sign that this trend is going to change. If anything, litigation finance is poised to witness even greater growth. It’s only a matter of time before this long economic expansion ends and we are hit with a recession — and when that happens, litigation finance will be sitting pretty.

Why? As Strong explained, traditional asset classes tend to have highly correlated returns — e.g., when the U.S. stock market tanks, the U.S. real estate market and the global stock markets tend to tank as well. In contrast, litigation finance offers uncorrelated returns — i.e., the performance of lit-finance investments is largely independent of developments taking place in other markets. During recessions, low-correlation assets will generally outperform — meaning that now is not a bad time to be engaged in litigation finance.

In the first panel of the day, an overview of the fundamentals of commercial litigation finance, moderator Andrew Langhoff of Red Bridges Advisors echoed Strong’s optimistic assessment. Noting that the field now has its own trade journal and makes appearances in influential legal and business rankings, Langhoff declared, “The litigation finance industry has arrived.”

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Fellow panelist Lee Drucker of Lake Whillans Litigation Finance, previously described in these pages as a “rock star” of the field, looked back at what things were like when he entered the industry a decade ago, while still pursuing his J.D./M.B.A. at NYU. Back in 2008, few people had heard of litigation finance, and many of the folks who had questioned its legality or legitimacy (based on antiquated concerns over concepts like champerty and maintenance). Today, as reflected in the packed ballroom he was addressing, litigation finance is now much more widely known and understood — and, increasingly, embraced.

What explains the appeal of litigation finance? Drucker offered an example. Lake Whillans was approached by a software company with a compelling breach of contract claim. The company wanted to pursue the claim, but it also needed capital to grow its business. Lake Whillans liked the case and its risk profile, so it agreed to finance the litigation — and offered the company more funding than usual, which the company was able to use to finance and expand its operations. In the end, the case settled on very favorable terms, resulting in a win-win situation for both the software company and Lake Whillans.

And it’s not just companies that are working with litigation financiers. As panelist William Weisman of Therium noted, a significant portion of his firm’s deal flow now comes from law firms hoping to monetize some portion of their cases ahead of time. They can use the funding to invest in the case being funded, to launch new cases, to pay bonuses to their lawyers, or for any number of other purposes.

For corporations or law firms that are interested in working with litigation finance firms, what do funders consider when deciding whether to underwrite a case? The panelists identified three key factors: legal merits, deal economics, and collection risk.

Legal merits are critical, as panelist David Kerstein of Bentham IMF explained. When Bentham IMF gets pitched on a case, it will do an initial, high-level review. If the case looks like one that might meet its parameters, it will ask for a non-disclosure agreement (NDA) to be signed, then conduct more detailed due diligence. This process involves experienced litigators assessing the likelihood of winning the case and the possible return.

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Of course, the case to be funded must look good not just as a legal matter but as a financial matter. The transaction terms for a litigation-finance arrangement are bespoke, as Lee Drucker of Lake Whillans explained, and will take into account such factors as the merits of the case, its likely duration, and the estimated investment-to-damages ratio (comparable to a loan-to-value ratio in other contexts).

Finally, as discussed by William Weisman of Therium, there’s the issue of collection risk. If the funded party wins in court but can’t collect on the judgment, then that’s not a win for the funder.

Right now, the typical litigation-finance arrangement involves a funder supporting a plaintiff in a single case. But other types of arrangements are gaining traction, including funding of portfolios — i.e., funding multiple cases (generally at least three) with the same company or law firm — and funding of defendants. For corporate defendants worried about the uncertainty of their exposure in a particular case, litigation finance can help quantify and limit that exposure.

Defense-side funding right now is fairly limited compared to plaintiff-side funding — but it will grow, according to Lee Drucker. The key here is educating companies about the opportunities to use litigation finance as a tool of corporate finance and risk management.

So litigation finance, despite its recent, explosive growth, will likely see even more expansion in the years ahead. As Drucker put it, “Demand for litigation finance right now is coming to the market faster than supply can keep up with it.”

Financing, Structuring, and Investing in Litigation Finance [IMN]

Earlier: 6 Virtues Of Litigation Finance


DBL square headshotDavid Lat is editor at large and founding editor of Above the Law, as well as the author of Supreme Ambitions: A Novel. He previously worked as a federal prosecutor in Newark, New Jersey; a litigation associate at Wachtell, Lipton, Rosen & Katz; and a law clerk to Judge Diarmuid F. O’Scannlain of the U.S. Court of Appeals for the Ninth Circuit. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at dlat@abovethelaw.com.