Hannah Hooper (pictured) and Tim Bignell in the commercial litigation team at law firm Howard Kennedy delve into the opportunities presented by litigation funding
LITIGATION FUNDERS are doing a roaring trade. No longer considered a last resort for the cash strapped, litigants are increasingly turning to funders to bankroll their bust-ups. The model has gone from strength to strength in recent years, and the emerging trends in the market indicate that this growth is set to continue.
- The advantages of funding
Litigants are outsourcing the funding of their disputes like never before, recognising that if they win, their funder gets a cut, but safe in the knowledge that should they lose, their funder will pick up the tab.
Funders are increasingly offering an array of packages to fit a litigant’s particular requirements. In addition to funding on a case-by-case basis, funders are negotiating portfolio deals and financing payments post-judgment, where the case is going to appeal.
For many businesses involved in disputes, litigation funding makes financial sense. It enables them to maintain cash flow and keep the on-going expense of litigation off their balance sheets. It also means that they can mitigate the financial risk inherent in any legal tussle.
- Litigation as an asset class
Litigation is regarded by funders as a lower-risk asset class as it has no correlation or exposure to capital markets and interest rates. Hedge funds and banks are pouring money into the sector, attracted by the potential for big returns.
Manolete Partners PLC, which focuses on insolvency-related claims, entered the Aim market in late 2018. Its initial public offering was heavily oversubscribed and its share price has performed well since then, which chief executive Steven Cooklin said reflects “the tremendous level of investor interest in the litigation funding sector”.
It is not only the established commercial funders that are expanding their portfolios: private investors are also getting in on the action. Savvy funders have identified a gap in the market for smaller claims, and crowdfunding, an established model in the US, is fast becoming a hot trend in the UK. Online platforms now offer private investors the opportunity to back lower-value claims, with the potential for fruitful returns.
- The future of funding
The perennial challenge in the sector is identifying those cases which are suitable for funding. The model only works if it is fuelled by a steady pipeline of cases which carry an acceptable risk and have the potential to generate damages or settlement sums sufficient to provide worthwhile returns for both litigants and investors.
Funders are increasingly seeking to harness new technologies in their quest to find suitable cases to fund. Artificial Intelligence is moving fast and funders are using algorithms and big data as a means of identifying cases that fit the bill. It is often said that these tools are only as clever as their human creators, but if data analytics can be effectively utilised, the market in litigation funding will only continue to grow.