What is Litigation Financing?

What is litigation funding?

In the simplest terms, litigation funding is lending money to law firms or individuals who do not have enough cash to fund their legal cases. Should the claim be successful, the litigation funder takes a pre-agreed share of the proceeds. However, if the claim is unsuccessful, the litigation funder will bear the loss. Litigation funding provides a more equal playing field for legal disputes, gone are the days where the party with the deepest pockets is more likely to win.

How does litigation funding work?

Typically, litigation funding companies will raise capital through private equity funds or private debt instruments. They have a team of lawyers who will assess legal claims against their lending criteria. There are various ways that litigation funding companies make a return on their capital such as:

• Claim and award acquisition: where a claimant wishes to monetise a claim, at any stage in the claim, purchasing claims and judgments. This can include an up-front payment or partially deferred payments, pending success in the proceedings.
• Portfolio funding: Where multiple claims require funding, there are two options
  • Law firm portfolio – where a law firm is running multiple cases on conditional or contingency fee agreements and wishes to hedge the attendant risk of such agreements,
  • Claimant portfolio – where a claimant intends to bring multiple claims arising from different causes of actions.
• Working capital facilities: loan facilities to law firms to fund working capital, enabling firms to invest in their businesses. Repayments can be made based on pre-agreed rates or tied to successful outcomes of cases being run on a contingency fee basis.
• Single case funding: funding for claimants’ legal fees and disbursements incurred in pursuing single claims, whether brought against one defendant or several. Providing claimants with indemnities to protect against adverse costs.
• Insuring litigation costs: All litigation entails risk. Whether in conjunction with funding or not, offering adverse costs insurance, own-side disbursement insurance, own-side solicitor’s fees insurance and damages capping products. Together, these products offer a comprehensive litigation risk solution.

Litigation Funding as an Asset Class

Litigation funding is one of the best non-correlated asset classes, given that the outcome of legal disputes is in no way linked to wider macroeconomic factors.

Another reason why this asset class is growing in popularity is the potential for high returns. Given the share of the proceeds in the cases that they’re funding, litigation financing companies often measure their returns in multiple on invested capital (MOIC) rather than the traditional percentage points as we see in other investment classes.

However, unlike other asset classes, such as real estate, it is almost impossible for investors to access litigation funding investments directly. Unless you are a lawyer and can assess the risk of legal cases it will be necessary to invest with an experienced litigation funder. Therefore, the asset manager selection is key.

Latest from the sector

Personal Contract Purchase (PCP) claims have been a very hot topic in the UK litigation funding sector in 2024, with many law firms and funders investing into claims in this sector. On 30^th July 2024 the FCA announced that their review into PCP claims had been extended. As a result of this any claims would likely not be paid to consumers (and the law firms / funders) until early in 2026. This may present cash flow issues to those exposed to PCP claims.

ATE Insurance is a buzz-phrase that is banded around in the market. Investors often associate the “insurance” with capital insurance on their investment, but this is not the case. In many instances, ATE insurance is downside protection for the law firm that is litigating the case. Simply put, if they lose the case, the ATE insurance just ensures that the law firm don’t have the pay the winning parties’ legal costs. While this is beneficial, in most cases this doesn’t protect the original investment into the losing case.

Conclusion

Litigation funding can be a fantastic asset class to balance risk-adjusted returns and truly diversify away from market correlated investments. The key to success is choosing a reliable asset manager with a proven track record in the market, which can be difficult to achieve if investors have limited knowledge of the sector.

All investments come with risk. Investors in any type of investment must first familiarise, and then ensure they are comfortable, with these risks.