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Trends and Key Developments Impacting the Litigation Finance Market

By John Freund |

How are inflation and rising rates impacting the litigation funding market? How can funders attract more institutional capital in today’s economic environment? What new products are emerging to disrupt the market? IMN’s 5th Annual Financing, Structuring, and Investing in Litigation Finance event kicked off with an opening panel on “The State of the Market: Where is the Litigation Finance Market Headed?”

The panel consisted of Douglas Gruener, Partner at Levenfeld Pearlstein, Reid Zeising, CEO and Founder of Gain (formerly Cherokee Funding & Gain Servicing), William Weisman, Director of Commercial Litigation at Parabellum Capital, Charles Schmerler, Senior Managing Director and Head of Litigation Finance at Pretium Partners, and David Gallagher, Co-Head of Litigation Investing at the D.E. Shaw Group. The panel was moderated by Andrew Langhoff, Founder and Principal of Red Bridges Advisors.

There is a lot of experimentation happening in the Litigation Finance market, whether that be single-case financing, portfolio financing, secondaries investment, defense-side funding and other strategies. Regardless of one’s position in the market, it is evident that the Litigation Finance sector continues to grow, both in terms of demand for the industry’s products and in terms of adoption within the broader Legal industry.

Interestingly, David Gallagher of D.E. Shaw noted that while both funder AUM and new commitments by funders continue to rise, the rate at which AUM is rising is slowing down while the rate at which new commitments are rising is speeding up. So, there are no longer ‘too many dollars chasing too few deals,’ as was the case for the past several years. William Weisman of Parabellum corroborated that narrative by noting that his phone and the phones of many other funders continue to ring with new deals. And while the majority of cases Parabellum sees are single case funding, there is increasingly demand for portfolio funding. Weisman also noted that there is opportunity in the smaller end of the market, which larger funders can’t focus on due to opportunity cost or LTV reasons.

Doug Gruener added that average deal size has indeed trended upwards over the past few years, primarily due to a recent influx in mass tort investments. Nine-figure deals are not uncommon in today’s funding environment. Also, the cost of legal services goes up every year, especially in an inflationary environment, which of course necessitates larger and larger case investments. Charles Schmerler of Pretium noted that pricing is up, but that is relative to the previously muted pricing.  Funders are now able to underwrite in ways that are more sensible, in terms of what investors are looking for.

Moderator Andrew Langhoff then asked if demand is up, AUM is up, pricing is up, why are funders having issues raising capital? David Gallagher responded that just because a handful of market participants are having trouble, that doesn’t imply systemic risk. In fact, it underlines the sustainability of the industry, given that specific operators can have problems and the rest of the industry still grows. Charles Schmerler added that in any economy, there will be idiosyncratic distress. This will impact the market. Things shake out, and for funders to succeed, they need to understand what sophisticated investors in the market are looking for. There can be a disconnect there—funders need to understand investors’ needs and exit strategies.

The question then turned to duration risk—is this what is causing hesitation amongst LPs? Doug Gruener stated firmly that he’s found that duration risk is not the issue, rather it’s the broader state of the market that is causing some investors to sit on the sidelines, perhaps due to a ‘risk-off’ approach. Another factor that doesn’t help is the age of the industry—this is the 5th annual IMN event, after all—so that FOMO that existed in year one simply doesn’t exist anymore.

Reid Zeising of Gain did stress duration risk as an issue, however. “Lesson 101 in Finance,” he reminded, is that “asset and liability should match duration. If you extend your liability beyond your asset, that is the number one way to get in trouble.”

Other parts of the discussion centered around regulation (“The Chamber of Commerce is the shill of the Insurance Industry,” according to Reid Zeising), secondaries (“There were a large number of investments made five to seven years ago, so the opportunity is ripe both on the demand side and supply side,” says Doug Gruener), and disclosure (“In the space of disclosure, if both sides could have a reasonable discussion, it might work. But we’re not in a space where both sides can have that discussion,” claims Charles Schmerler).

Overall, the first panel at IMN covered a broad range of topics impacting the Litigation Finance sector in 2023. It was a robust and well-rounded discussion, and set the table for subsequent panels which dove deeper into the topics touched upon here.

 

*Editor’s Note: An earlier version of this article incorrectly stated that David Gallagher noted that new commitments by funders are now falling. Mr. Gallagher in fact stated they are rising. We regret the error. 

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Commercial Regulatory Issues

Legislation to ensure the enforceability of LFAs is progressing smoothly through Parliament

By John Freund |

The following is a contributed piece by Tom Webster, Chief Commercial Officer at Sentry Funding.

So far, the Litigation Funding Agreements (Enforceability) Bill has been passing through Parliament without a hitch.

The government is bringing the legislation in response to the Supreme Court’s decision last summer in PACCAR Inc & Ors v Competition Appeal Tribunal & Ors [2023] UKSC 28, which called into question the enforceability of LFAs.

The Bill was briefly introduced into the House of Lords on 19 March, and was debated at second reading on 15 April. During the debate, while some peers discussed the need for regulation of the litigation funding industry and for careful consideration of whether the retrospective nature of the legislation was justified, no peers opposed the Bill – and many welcomed it.

More recently, during scrutiny at grand committee on 29 April, the relatively small number of peers who attended the session broadly supported the Bill, and several spoke in favour of the need for its provisions to be retrospective.

In terms of the Bill’s drafting, the government proposed some small changes at committee stage, which were waved through by peers. The most significant was to address a potential problem with the original drafting where the LFA relates to the payment of costs rather than funding the provision of advocacy or litigation services.

The problem was that, in the original wording, it could be argued that the Bill only applied to the funding of costs that relate to court proceedings, but not those relating to arbitration, or settlements. This has now been resolved by new wording to make clear that an LFA may relate to the payment of costs following court, tribunal or arbitration proceedings, or as part of a settlement. An LFA may also relate to the provision of advocacy or litigation services.

Meanwhile another government amendment was aimed at avoiding problems for litigants-in-person, by ensuring that the definition of LFAs in the Bill includes agreements to fund the expenses of LiPs, for example where they need to pay for an expert’s report.

During grand committee, peers also expressed their approval of the broad terms of reference that have now been published by the Civil Justice Council for its review of litigation funding, which will include an examination of whether the sector should be regulated; and if so, how. Peers commended the speedy timescale that the CJC has set itself, aiming to produce an interim report by the summer, and a full report by summer 2025.

As the Litigation Funding Agreements (Enforceability) Bill continues its journey through Parliament and the CJC begins work on its review, there are clearly significant changes on the way for the litigation funding sector in the UK.

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Commercial Regulatory Issues

Rowles-Davies: Retrospective Provision in Litigation Funding Bill is ‘Fundamentally Flawed’

By John Freund |

In an article shared on LinkedIn, Nick Rowles-Davies, founder and CEO of Lexolent, makes the case against the retrospective aspect of the UK government’s Litigation Funding Agreements (Enforceability) Bill. Whilst acknowledging that many within the industry disagree with his position, Rowles-Davies argues that ‘the Bill should be prospective only and that the retrospective element is fundamentally flawed.’

Rowles-Davies summarizes his extensive article into the following key points:

  1. ‘The starting point for any consideration of the Bill must be firstly to correct the various inaccurate Supporting Documents (to the Bill) such that the law as it stands, and has always stood, is properly reflected. 
  2. The Government has put forward no credible justification to support the retrospective provision in the Bill.
  3. When considered under the true set of facts, this legislation appears to be incompatible with the ECHR. 
  4. The justification for the Bill’s prospective elements and its (arguably unprecedented) retrospective aspect must be considered separately. The Supporting Documents grossly misrepresent the position. Save for pure value transfers from previously funded parties to existing funders, what the Bill properly seeks to achieve can be accomplished through prospective only legislation. 
  5. If retrospectivity survives, it is likely that the matter will come before the courts quickly thereafter in relation to the ECHR.’

Rowles-Davies argues in the article that ‘the Supporting Documents to the LFA Bill provide absolutely no evidence of legal precedent to support the retrospective aspect of the Bill.” He goes on to say that not only is this bill ‘unprecedented’, but it also fails to provide ‘credible “public interest” justification for the retrospective aspect.’ 

In the conclusion of the article, Rowles-Davies calls on both chambers of Parliament to ‘take proper time to explore the foundation upon which the Bill rests and then test its contents after it has been repaired.’ Furthermore, he argues that ‘the positioning of the Bill is disrespectful to a busy Parliament tasked with addressing far more pressing global, social, and public interest matters.’

Commercial Regulatory Issues

Bills Targeting Litigation Finance Disclosure and Foreign Funders Make Progress in Louisiana

By John Freund |

Reporting by Bloomberg Law covers the campaign to introduce new rules governing litigation funding in the state of Louisiana, with proponents of the legislation sensing an opportunity to make progress since the state elected a new governor, Jeff Landry. The two bills making their way through the Legislature are: HB336, which would create a Litigation Financing Disclosure Act, and SB355, which would enact ‘transparency and limitations on foreign third-party litigation funding’. 

In an interview with Bloomberg, Representative Emily Chenevert ,who brought HB336, explained that the turnover in elected representatives provided a fresh opportunity, saying: “The appetite was there already within the legislature and so now it’s like, let’s attempt this and let’s see with a new House and some new senators what could happen.” Dai Wai Chin Feman, managing director at funder Parabellum Capital, spoke out in opposition to Chenevert’s bill but said that SB355 was “acceptable to our industry.”

HB336 would require any party in a civil action to disclose the existence of a litigation financing agreement, whilst redacting the financial details of the agreement, and would make all financing arrangements ‘permissible subjects of discovery’. The bill also prohibits funders from controlling or making any decisions in the proceedings, stating that ‘The right to make these decisions remains solely with the plaintiff and the plaintiff's attorney in the civil proceeding.’

SB355 requires any foreign litigation funder involved in a civil action in Louisiana to disclose its details to the state’s attorney general (AG), and to provide the AG with a copy of the funding agreement. Similarly to HB336, this bill would prohibit the foreign funder from controlling the legal action in any way and also prohibits the funder from being ‘assigned rights in a civil action for which the litigation funder has provided funding’.

HB336 has been approved by the state House and was referred to the Senate Judiciary Committee, whilst SB355 has cleared the majority of procedural hurdles and now awaits a vote by the House.