Investors increasingly attracted to third-party funding, law firm’s research finds

Elliott: Funders moving into under-served parts of the market

The top 20 UK independent litigation funders now hold assets of just over £1bn, a 42% increase in just 12 months, according to research by City law firm RPC.

It attributed the rise to continued investment from private equity firms and hedge funds in “this increasingly popular alternative asset class”.

That the returns are uncorrelated to the performance of mainstream assets such as shares, helping to diversify portfolio returns, has long been seen as a selling point for third-party funding, and the RPC research indicates that this is now being appreciated.

The firm said that while assets held on balance sheets were just one measurable component of litigation funders’ finances, “they are a good indicator of the growing impact litigation funding is having on the legal sector and the investment arena”.

RPC suggested that undrawn funding lines from these sources were actually “many times” the value of assets held on balance sheets.

For example, it said that Burford Capital, the world’s biggest funder, has stated that it in addition to direct investments that it holds on its balance sheet, it has also committed $1bn towards investments in litigation funding through investment funds that it manages over the last five years.

The result of this backing was that litigation funders “are stepping up their search for potential cases to back”, the research continued, with group actions a major area of focus, along with portfolio funding across specific practice areas; last month, London firm Memery Crystal agreed a deal with Woodsford Litigation Funding for its energy and mining litigation.

Geraldine Elliott, RPC’s head of commercial litigation, said: “Litigation funders want to deliver good risk-weighted returns and a meaningful deployment of funds. That means a balancing off between the pressure to invest funds and the need to do proper due diligence on cases.

“As the more obviously strong legal cases are getting multiple finance offers, the litigation funders are spreading their search into under-served parts of the market.

“They are also seeking more innovative origination strategies, such as securing a first look at cases from individual law firms.”

The research said other trends in the market were funding for major arbitration cases, particularly involving investment treaties – with Therium Capital and Calunius Capital among those identifying arbitration as a key activity – and including asset tracing within their remit.

It said: “Litigation funders appear to be increasingly prepared to fund the costs involved in enforcing court decisions, for instance to track down and recover money from overseas. For example, Burford Capital has a global asset tracing team.”

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