The Advantages of Litigation Finance for “Middle-Market” Lawsuits
When people talk about litigation finance, they often talk about the funding provided at the extreme ends of the market. At one end are the small-scale investments in the claims of individual plaintiffs, often in personal injury cases. At the other end are large commercial cases, where corporations receive seven-figure investments in cases where the amount at stake is in the tens of millions, or more. But what about the middle? In particular, what about commercial cases where a litigant needs a an investment of about $100,000 to get a recovery of about $1 million?
That’s the question asked by Michael McDonald, a leading analyst of the economics of litigation finance. In a recent article, he notes that there is a large segment of the business litigation market that is currently unserved. In this “middle market,” there are many cases where damages range between $500,000 and a few million dollars, there are great opportunities for litigation financing.
Having heard that many funding companies think that middle market cases don’t provide good returns on investment, McDonald conducted a survey to find out if that assumption was true. He looked at 100 plaintiffs and defendants, examining the value provided by litigation funding in the middle market. He discovered that middle market cases can reliably provide a meaningful return for funding companies, even if that return is relatively modest. The key to finding those returns is in finding the right ration between the funding company’s internal costs and the external costs of the funding.
As McDonald explains:
On the whole, the middle market in litigation finance may seem challenging for funders, but the reality is that if a bank can evaluate and underwrite a business loan or home loan with a net interest margin of 3-5%, then litigation funders should surely be able to do the same thing when dealing with an analogous margin of 6-10% or more. Higher implicit interest rates may be needed in the middle market than in larger claims, but this is a market that can be lucrative, and survey results suggest there is definitely a demand and a need for the financing.
McDonald also notes that there aren’t many firms serving this market “but not many. The one I am most familiar with is TownCenter Partners.” TCP’s commitment to funding middle market cases may be unique, but it is grounded in sound economics.
Topics: litigation finance, legal reform, third-party funding, litigation costs, middle market, commercial litigation
Works Cited:
Michael McDonald, The Value of Middle Market Litigation Finance, Above the Law (May 2, 2017), available at http://abovethelaw.com/2017/05/the-value-of-middle-market-litigation-finance/