28 Apr 2021

Litigation funding: maturity and mergers

By Ian Madej

CEO Ian Madej examines the future of third party funding and where the litigation funding market is heading in the coming years.

A version of Ian’s article has been published in The Legal Diary, 4 June 2021, and can be found here. Ian’s article was also published in The Law Society Gazette, 5 July 2021 and Legal Futures, 13 July 2021. These can be found here and here respectively.

Litigation funding has grown exponentially over the past decade, transforming the disputes landscape and enabling multiple parties to bring legal actions that might not otherwise have been possible. Although it has reached a level of maturity, becoming more sophisticated and specialised, the market remains dynamic.

For example, in response to the quashing of the criminal convictions of 39 sub-postmasters and the parallel civil litigation, the FT headline ran: Post Office scandal shows value of litigation funds. In the civil case, the sub-postmasters were compensated as part of the settlement. The FT commented that this shows that ‘when it comes to challenging appalling behaviour by a deep-pocketed establishment entity, some private firepower is essential.’

Now an integral part of the international legal landscape, funders regularly work with law firms in financing individual claims as well as group and class actions. The long-running dieselgate scandal – involving Mercedes, Audi, VW and others – is a case in point. Litigation funding has been pivotal in a swath of actions against the German auto giants – in Germany, the UK and elsewhere.

A much-valued mechanism for claimants and law firms alike, litigation funding is also an increasingly attractive option for firms who would like to generate revenue early on, rather than wait for an award to be given at the end of the dispute resolution process.

Where next?

Trying to predict the future with certainty is generally unwise. But a general consensus exists in the industry that multiple new entrants will continue to enter the litigation funding market, attracted by what they perceive as the potential gains. Informed observers fear that some of them may try to achieve what appear to be uncorrelated and outstripped returns.

In doing so, they will be endeavouring to navigate an increasingly difficult investment space, perhaps believing that they can rely solely on external counsel for investment advice, and make decisions based exclusively on information provided from acting advisers. The reality is that external advice is often the ladder near the top of the board, but to successfully complete funding there has to be a navigation of tens of other obstacles prior to that.

Should this occur, these new entrants may find that the harsh realities of market economics will work against them. In practical terms, this means that the market will wash out any businesses that are over leveraged or inefficient – or worse still, that do not have a clear investment strategy from the outset. Such opportunistic funders are unlikely to survive.

Consolidation and specialisation

And what of the existing players in the market? You only have to look at banking, or indeed law, for pointers as to what might happen next. The US and UK have both experienced successive waves of bank mergers over the past 50 years, while among Europe’s lenders, led by Italy and Spain, long-awaited consolidation is finally underway. It was a similar story in the legal business. Domestic law firms became de rigueur for big players in the 1980s and 1990s, followed by another wave of US-UK tie ups a decade later.

The same pattern is likely to occur among litigation funders. An early indicator of what we might expect came with the 2019 merger between Omni Bridgeway and IMF Bentham, which they described as ‘a strategic combination.’ Economies of scale, increased access to funds and an enhanced geographic footprint were just some of the obvious advantages.

Beyond consolidation at the top end, there will be other developments at different levels of the market. It is equally probable that niche funders will appear to focus on specific sectors such as construction and shipping. Such a sectoral offering will be a consequence of increased sophistication, maturity and knowledge.

Perhaps prematurely, some market players have been pioneers: they looked at the applicability of litigation funding across a number of jurisdictions and practice areas and tried to industrialise it. Although the market was not yet ready to accommodate the move, such initiatives show how it is destined to develop much further.

As it forms and reforms in a process of dynamic evolution, the number, size and scale of the key market participants will change over time. Some new entrants will undoubtedly become dominant players of the future.

This natural cycle works to the benefit of lawyers and lay clients, providing them with greater choice and wider access to specialist funders who can fulfil their needs. Now that litigation funding is (almost) completely mainstream, it will also enable funding to be made available as part of a more normalised offering.