Do litigation funding facilities work?

Posted by Tets Ishikawa, director at Acasta Europe and senior advisor to Sparkle Capital, both Litigation Futures Associates

Ishikawa: Law firms are trying to innovate and evolve

Law firm litigation funding facilities are back! They first hit the press in the early days of Augusta in 2014 when it announced funding partnerships with a dozen or so law firms. But since then, apart from the solitary “public” news that Burford did a portfolio facility with Shepherd & Wedderburn, it’s been rather quiet… until last year.

Augusta got the ball rolling with two facilities to law firms – both £25m – to HFW and Pinsent Masons. Before the year end, two further facilities made the (litigation funding) headlines – the £10m facility given to Acuity Law (by Augusta again) and the £10m facility given to Royds Withy King (by Affiniti). Few doubt that more will be announced this year.

It’s also widely known that many market players question whether these facilities really work in practice. So do they?

For a start, it’s a fact that deployment of litigation funding capital is difficult. In any market where supply outstrips demand, the supply gets desperate for demand. That explains why it’s now par for the course that funders sniff around every major “disaster” (think Patisserie Valerie or Brazilian dams) in case there is an opportunity to book build a group litigation.

Law firm facilities certainly provide a great headline of successful deployment, but is it deployment into cases, or commitment to fund cases if they arise?

More bluntly, if there are cases there to fund already, then why haven’t they been snapped up, given the aggression with which funders are chasing opportunities? Or is it really the case that there are lots of meritorious cases that simply haven’t found its way to the market?

Of course, those in favour of litigation funding facilities will argue that these allow law firms to become more commercial because they make litigation funding more accessible to those clients who have meritorious claims, which in turn aids access to justice (and their profit line).

This is possible because economies of scale mean a cheaper funding product that comes with quick turnaround times (not a strength of most litigation funders) and the definition of “quick” by the industry is probably best thought of in relative terms.

But those against such facilities argue that this simply doesn’t stack up. Law firms have an obligation to make their clients aware of all the options in the market and to act in their best interests. Surely that means exploring the market, not favouring a partnership which suits them?

A partnership may mean cheaper pricing and (relatively) quicker processing but this does not automatically make it the best option for their clients, especially as there is more to it than just pricing and speed, such as structural flexibility.

In any case, the struggle for most claims is not picking from a multitude of funding offers but procuring a funding offer in the first place. This means that most law firms – even those with facilities – will most likely need to look elsewhere on any particular case anyway, including those with facilities.

In fact, some will point out that it is not uncommon for a solicitor to have a totally different go-to list of funders than a colleague who sits less than a few feet away, regardless of what partnerships law firms may have in place. As a case in point, Sparkle has seen a funding application from one of the named law firms above since their facility announcement.

So, on balance, the argument would go against facilities. However, we live in an age where things are often defined by the negative than the positive, and perhaps it’s worth considering that these facilities should not be rubbished.

Ultimately, they may or may not work – only the width of a facility funder’s smile will ever truly show how successful they have been – but that’s the funder’s concern. What it does show for the broader market is that law firms are trying to innovate and evolve to take advantage of the supply of funding and that can only be lauded.

In fact, litigation finance facilities to law firms is part of the broader trend towards portfolio financing trades across the market. Burford’s 2016 $45m financing of a portfolio of litigation and subsequent £9m financing of Grant Thornton for insolvency cases is one part of Burford’s overall investment strategy. Acasta has developed a CFA portfolio insurance product for law firms and is looking at combining this with a portfolio disbursement funding product through Sparkle.

What’s clear is the market still has some way to go until it is able to crack a truly valuable and viable litigation funding facility. Many might believe these facilities may be not much more than great marketing exercises. However, these are all small steps in the right direction of growth and evolution for the litigation funding market.


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