As the stock markets show some early signs of weakness after ten consecutive years of growth, investors are looking harder for counter-cyclical assets – those in which performance is not correlated to other market cycles. Investments in third-party litigation funding companies fit this bill because they offer the prospect of high yields that are independent of market cycles.
Third-party litigation funding has been growing because litigation is becoming increasingly complex, time-consuming and expensive. It can be difficult for parties, even successful commercial enterprises, to pay attorneys’ fees and other costs throughout the pendency of a long case. A third-party funder can step in and allow a party to continue to pursue its case.
In the early days of litigation finance, the funders were mainly global banks. Now, the primary sources of funding are alternative asset managers such as hedge funds and special situation investors. Asset managers will typically fund commercial litigation, but are increasingly providing funding to litigate so-called “mass torts,” which are class actions that usually arise from injuries caused by consumer products or medical devices
Today, it is estimated that approximately $10 billion has been invested in litigation in the U.S. alone. The field is becoming increasingly crowded with new entities, as approximately thirty new third-party funding firms have emerged in the last couple of years to invest in litigation. These new firms have raised over $2 billion to invest.
Investors are ready to supply this kind of capital to third-party funders for two principal reasons. First, the prospects for investments in litigation are not correlated to market cycles because litigation is not directly influenced by changes in monetary policy or the financial markets. Indeed, litigation may actually increase when the economy struggles as businesses place more time and money in pursuing their legal claims as a means of replacing lost revenue from their operations. Second, investment in litigation often provides double-digit returns, and it can carry relatively low risk because funders tend to make investments in cases with a very high probability of a favorable settlement or recovery.
Keywords: litigation finance, third-party litigation funding, alternative investments, counter-cyclical investing
Work Cited: Thomas T. Janover, Litigation Funding: An Increasingly Popular Investment Vehicle, Lexology (Nov. 1, 2018) available at https://www.lexology.com/library/detail.aspx?g=3d4474b1-6ce6-4f3e-a853-45b21d47182d