The Evolution and Expansion of Litigation Finance

The concept of Litigation Finance is a simple one. A plaintiff with a valid claim can seek third-party financing to take that claim to court. If the claim is successful, the funder gets an agreed-upon percentage of the award, or a multiple of the investment, or some combination thereof. If the claim isn’t successful, the funder walks away with nothing. That simple model has grown by leaps and bounds in recent years, and is now even more powerful given the pandemic and subsequent lockdown.

Above the Law explains that Litigation Finance is growing in many directions. These days, firms and businesses turn to litigation funding to manage risk, adjust balance sheets, or free up capital for other uses.

Three areas, in particular, are growing rapidly.

Corporate entities are typically able to fund their own litigation. But they’re taking advantage of the opportunities that litigation funding can offer. Even strong lawsuits are unpredictable, and company shareholders might not be in favor of pursuing litigation. Funding is accounted for differently on balance sheets than, say, a traditional loan. So some large businesses use litigation funding as a way to improve valuation.

Portfolio funding refers to a circumstance when a third-party funder arranges to bankroll a portfolio of cases, rather than provide funds for a single claim. Returns on this type of funding can be sporadic and unpredictable. But they can also be highly lucrative, over time. Portfolio funding is particularly valuable for firms that take on contingency cases—since it provides reliable cash flow.

Claim selling is another way people use Litigation Finance to improve cashflow. A funder might agree to purchase the interest in a claim. This can be incredibly helpful for those who can’t wait years for the court process and collection to happen.

As the practice of Litigation Finance grows and develops, we can expect legal professionals to find new ways to make use of it.