The litigation funding space continues to evolve in ways that affect attorneys and the larger litigation ecosystem.
There is the growth of new funding firms — whether specialized firms or multistrategy hedge funds choosing to engage in litigation funding for single investments. There have also been certain firms pulling back.
The outlook for 2024 continues this trajectory. Here are five trends we expect to continue to shape the development of litigation finance.
1. Growth of the Insurance Market Alongside Litigation Funding
The insurance market for litigation and contingent risk has grown dramatically over the last few years. It’s always existed for adverse costs, but insurers have developed newer products, such as judgment preservation insurance — where insurance companies charge a premium at closing to take on the risk that a successful verdict will be disrupted on appeal.
Insurance companies have large balance sheets and increasingly mature systems in place to syndicate risk. While insurance companies have, at times, been adversarial to the growing litigation funding industry, these new products place them in the same general industry as funders.
From the perspective of litigants and lawyers, these insurance products create more options and arguably better economics to address risk. If a litigant has internal resources to pay for an insurance premium and its main goal is to limit the downside risk of appeal, then a judgment preservation insurance policy could be the best choice.
On the other hand, if that same litigant is liquidity-constrained and has current business opportunities, then direct cash payments from a litigation funder could be more attractive.
Indeed, there is an increasing overlap between contingent risk offerings and litigation funders. For example, judgment preservation insurance has become an option for litigation funders who have an investment that succeeded at trial but is still subject to appellate risk.
Looking ahead to this year, litigants should expect more risk-mitigating options, whether from insurance companies, funders or a combination. With this proliferation, there will naturally be a need for lawyers to assist their clients in understanding the more nuanced landscape.
2. An Uptick in Bankruptcies and Distressed Situations
There was a significant increase in the number of business bankruptcy filings in 2023 across the U.S. Litigation funders are seeing a consistent increase in the number of opportunities that fall into this space.
Each party in a distressed scenario has different needs and priorities. Debtors are usually looking for immediate liquidity to maximize the guaranteed return to stakeholders. It is common for debtors to sell litigation assets rather than seek ongoing funding.
Trustees, on the other hand, are often looking for financial optionality, where they want to confidently know that they can bring claims to trial even if the goal is a settlement or quicker resolution.
Compared to traditional litigation funding, parties in a distressed situation or formal bankruptcy often prize the speed and certainty of closing a transaction even at the expense of other funding terms, such as total amount of funding, priority, return structure and cost of capital.
Companies, creditors, trustees and receivers are increasingly looking to be more creative and seek additional options to make the best decisions, find the best sources of capital, and maximize their leverage and options in what are often very difficult situations.
This may put pressure on bankruptcy attorneys to watch their budgets or offer alternative fee arrangements in light of the litigation funding options.
3. Continuing Discussion Over Regulation and Transparency
Discussions related to litigation funding and disclosure in the U.S. seem to be always new, but also always the same.
2023 was no different from prior years in this regard. Academics, legislators, judges and practitioners continue to discuss the pros and cons of disclosure of litigation funding, but the actual changes have been relatively small.
For the most part, states have been reluctant to intervene in sophisticated, commercial, arm’s-length agreements between a funder and a company.
Regardless, this area remains important to watch over the coming year.
There have been a couple of notable recent developments concerning disclosure.
First, in 2023, the Montana Gov. Greg Gianforte signed into law S.B. 269, which aims to regulate the litigation finance market in the state, especially with respect to increased disclosure of for-profit funders.
In addition, Chief U.S. District Chief Judge Colm Connolly of the U.S. District Court for the District of Delaware has made headlines by imposing standing orders regarding both disclosure of third-party litigation funding and patent ownership.
So far, however, none of the other judges in the U.S. District Court for the District of Delaware have followed Judge Connolly’s lead.
And there continues to be a steady stream of opinions where judges find litigation funding relationships irrelevant or otherwise reject the standing order disclosure adopted by Judge Connolly.
Over the next year in the U.S., we expect to see a continuation of the trend toward no disclosure, or limited disclosure when appropriate, of litigation funding.
These trends lead to an expectation that the status quo for disclosure in litigation funding in 2024 is not likely to change. This stability can be helpful to attorneys who are working with and alongside litigation funders.
4. Rising Interest Rates Leading to Adjustments by the Industry
Everyone knows that the Federal Reserve has been raising interest rates and that those increases have profoundly affected the entire economy. The litigation funding industry is not immune to those effects.
We have seen that in certain aspects of litigation funding, especially those that are lower-risk credit deals or large deals in the mass tort space, rising interest rates can affect whether deals can get done and the pricing those deals command.
Generally, those deals have seen an increase in the cost of capital or at least provisions that protect funders from future changes in rates.
Conversely, in single-case investments or higher-risk litigation funding portfolios, rising interest rates seem to have had less of an impact on how those deals are structured and priced. That’s because, in a single case investment, the primary risk is the litigation itself, which tends to overshadow any interest rate risks associated with it.
Looking ahead to this year, it’s hard to predict what interest rate changes will look like and how they may affect the overall economy. Regardless, the uncertainty will restrict the availability of capital and litigation funding.
This will be compounded by an increased demand from newly distressed litigants. We expect to see the cost of litigation funding increase, in particular for large deals like those for law firm portfolios or large mass torts.
5. A Growing Secondary Market for Litigation Finance Claims
The final trend we are seeing is the continued emergence of a secondary market for litigation finance. This secondary market, or a single secondary transaction, is when a litigation funder sells some of its existing portfolio of deals, usually after a period of holding the investments.
Funders use secondary transactions to free up liquidity or because the lingering deals have extended beyond the length expected by the funder and their investors.
This trend is emerging because there are now litigation funding deals that have been outstanding for an extended period. Consequently, we’re now seeing a growing secondary market that is in proportion with the maturing market.
From the litigant and attorney perspective, one benefit of this secondary market is that it provides an influx of liquidity to the litigation finance market at different stages. This should cause more competition — from better-capitalized funders — and better pricing for litigants.
On the other hand, litigants may be wary that a funder that they know and trust could sell a portion of their case.
As this trend continues, litigants may look for reasonable protections in their agreements, such as increased notice or limitations on assignment, in light of the growing secondary market.
In 2024, the secondary market is expected to continue to grow. With more deals originating now than there were 10 years ago, the secondary market will likely follow that trend over the years.
This article was originally published by Law360.