Institutional investors continue to pour money into the litigation finance sector. The prospect of attractive returns, uncorrelated to broader equity/bond markets, which may actually increase post-recession given the influx of legal claims likely to arise explains why institutional capital is flowing steadily into the space. But what concerns do institutional investors have about litigation funding, and what questions are they asking?
An LFJ Conversation with Jonathan Stroud
Institutional investors continue to pour money into the litigation finance sector. The prospect of attractive returns, uncorrelated to broader equity/bond markets, which may actually increase post-recession given the influx of legal claims likely to arise explains why institutional capital is flowing steadily into the space. But what concerns do institutional investors have about litigation funding, and what questions are they asking?
As reported in Above the Law, a panel at IMN’s recent litigation funding conference covered exactly this topic. Namely, the key concerns that arise when institutional investors approach the space.
Firstly, there is the issue of competition. Most funders currently offer healthy, double-digit IRR. Yet, one question many institutional investors have, is can those returns remain steady as more competition enters the space?
Drew Kelly of Delta Capital Partners noted that he has been in the space for several years, and hasn’t seen a measurable difference in competition for claims, suggesting that demand is keeping up with – or perhaps even outpacing – supply. Additionally, as Lee Drucker of Lake Whillans pointed out, the litigation funding market remains highly inefficient – as do all nascent industries – which means there is plenty of opportunity for funders to differentiate remain competitive.
There is also the issue of conflict of interest. The panel mentioned a recent example where an educational endowment decided not to invest in a funder because they were concerned they might end up funding a lawsuit against the school. The panel agreed this concern is legitimate, yet many institutions are coming to terms with it and deciding to invest anyway, given the attractive returns available.
Brian Roth of EJF Capital commented that as the industry grows more mainstream, those institutions that do have such disqualifying concerns will eschew funding altogether, meaning funders should encounter less and less of these issues going forward.
