Litigation financing is one of the most important recent developments in the global claims arena. There is a very simple reason why it has become an increasingly important phenomenon, and that is because it is so highly remunerative. An August 27, 2018 Bloomberg article entitled “For the World’s Super Rich, Litigation Funding is the New Black” (here) takes an interesting look at the recent growth in litigation funding, as well as the reasons for and consequences of the growth. According to the article, for many institutional investors and other sources of investment capital, litigation funding is now viewed as just another asset class, albeit one with superior returns (for now, at least). The question is whether all of the current litigation financing fund raising is shrinking the opportunities and possible future returns.
Litigation Funding as an Asset Class
The Bloomberg article notes that “a flood of money” has been moving into litigation financing, as endowment funds, family offices and “other savvy investors” allocate cash to lawsuits, “attracted by juicy payouts” and returns that “aren’t necessarily correlated to movements in equity and bond markets.”
One commentator quoted in the article notes that “Litigation funding is rapidly emerging as an alternative asset class.” A second commentator noted that “returns across a portfolio are similar to private equity but are expected to be generated within a shorter time frame.” A graphic accompanying the article shows that litigation funding outperformed a number of other types of investments – including private equity, real estate, credit and hedge fund investments — as measured as a multiple of invested capital.
Litigation Financing Fund-Raising
The article cites as a specific example the recent fund-raising efforts of IMF Bentham, Ltd., the Australia based litigation funding firm whose shares are listed on the London Stock Exchange. In the past 16 months, the firm has raised a total of about $198 million for three external funds. The article quotes the firm’s CEO as saying that the interest in the funds was so strong that the firm now views its future as “more of a fund manager” (by contrast to the past in which the company financed lawsuits using its own funds).
Among other things, the new funds are helping IMF to expand overseas. According to the article, the firm is now exploring opportunities in the U.S., Singapore, Hong Kong, continental Europe and Canada as it focuses more on “corporate litigation, whistle-blower suits and U.S. law firm portfolio funding.” This global shift has affected the company’s lawsuit portfolio; whereas three years ago, Australian shareholder class action represented 50% of the firm’s portfolio, it now represents only 13%.
IMF Bentham is of course not the only firm raising funds for litigation financing. In a Wall Street Journal article last fall, Sara Randazzo noted that “Competing litigation-finance firms have raised and deployed hundreds of millions of dollars more in recent months. The industry has accelerated as investors–including pension funds, family offices and wealthy individuals–are drawn to a new asset that isn’t tied to the broader markets.”
Difficulties from the Sheer Magnitude of the Fund-Raising
One problem for the funding firms with all of this fund-raising is that the best opportunities may be oversubscribed. Indeed, the Bloomberg article notes that the Australian shareholder class action arena – which has been the source of so many lucrative litigation financing opportunities – is showing “signs of saturation.” While the overall number of Australian class actions in general has been relatively stable, “the number of investor and shareholder cases – the ones that tend to attract outside financing – have risen sharply. Over the past five years, 100 percent of shareholder class actions have been funded as opposed to only about 30 percent for consumer protection litigation.
The abundant availability of financing is having an impact. The article quotes one commentator as saying that “Past settlements have attracted more funders and the numbers have grown in recent years,” as a result of which there is now something of a “squeeze,” with commission rates falling. With these kinds of pressures, the funding firms may have difficulty delivering “the stellar returns that attracted limited partnerships and other investors in the first place.”
The “real issue” for litigation financing, one author quoted in the article notes, and the issue that “no one talks about” is “whether there is too much capital chasing this asset class and how does the litigation fund manager find quality of case inventory in a crowded global market.” In other words, the commentator notes, “are there enough good litigation cases to go around?”
I have long been concerned as the litigation funding industry has grown that the out-sized returns that the early movers have realized would attract additional funding seeking lawsuit opportunities, with the result of diluting the quality of cases funded. Some of the comments quoted in the article echo my concern that as the funding chases new opportunities, less meritorious cases could result, and lawsuits that in the past might not even have been filed could go forward because of the removal of the financial risk through litigation funding.
It may be that the problems in the industry could be self-correcting. If as the article suggests that commissions that that the funding firms can command shrink and if the ability to fill a portfolio of quality lawsuits becomes more difficult, returns on investment could shrink and the flow of capital will diminish as a result.
For the moment, however, opportunities in the litigation financing arena continue to look good. To cite just one example, in its most recent annual report, Burford Capital, the world’s largest litigation funder, reported that from 2009 to the end of 2017 the firm invested almost $443 million in 61 completed cases, recovering $772.7 million at an internal rate of return of 31 per cent.
In addition, new opportunities may be available. Several jurisdictions that in the past have not permitted litigation financing have now opened the door, even if just slightly. For example, in January 2017, the Singapore Parliament passed a bill authorizing litigation financing. In June 2017, the Legislative Council of Hong Kong passed an ordinance allowing litigation financing in international arbitration and mediation. In India, in March 2018 the Supreme Court of India confirmed in the Bar Council of India case that there is no restriction on third-parties funding litigation. The moves by IMF Bentham noted above to develop a more international portfolio reflects the availability of potential new opportunities in new jurisdictions.
On an interesting related note, it turns out (perhaps as a result of the litigation funding firm’s ability to raise capital) that the litigation funding firms are having little difficulty attracting legal talent. In a July 5, 2018 Wall Street Journal article (here), Sara Randazzo notes that litigation funding firms have been on a “hiring spree” and are attracting lawyers from the elite law firms. Working in litigation financing, according to the article, is “the hot new law job.”
With ample fund-raising, impressive current returns, new opportunities, and a talented work force, it is hard to say that the litigation funding industry is somehow in trouble, at least right now. To be sure, like any other industry, the litigation funding industry faces challenges. As I have noted before on this site, there have been litigation funding firms that have failed and there have been litigation funding investments that have fallen through. But for now at least it seems that the litigation funding industry is in the ascendancy. It remains to be seen whether the current level of fund-raising in the industry will in the longer term undermine the industry’s returns or shrink the pool of promising litigation opportunities.