Litigation Finance Ready for Post-COVID Challenges
There is little doubt that the pandemic and accompanying financial downturn will leave lasting marks on the legal industry, and on the broader economic and business ecosystem as well. Whether certain practice areas, firms, or industries will be harmed by the crisis and if so, how much depends on a variety of factors. Practice areas that are correlated with the market will be more negatively impacted. Mergers and acquisitions have slowed, and IPOs have stalled. Overall appetite for business and economic risk is undoubtedly lower. At the same time that businesses and firms are more risk-averse, litigation sometimes becomes more necessary for cash-strapped clients. Disputes that business counterparties may have worked through and considered a normal part of doing business in pre-pandemic times might now be worth going to the mat over, and at this juncture, where risk aversion and necessary litigation meet, litigation finance can step into the spotlight.
- Good for litigation finance?
Litigation finance is, by its nature, designed to help hedge the economic risk of litigation. Obtaining financing in normal times can make pursuing an expensive claim more feasible. In times of economic turmoil, litigation finance allows clients the bandwidth to bring a big claim and risk losing a risk they otherwise couldn’t afford to take. In addition, law firms that were previously willing to take cases on contingency can now turn to litigation financing to spread their risk. Simply put, because of litigation funders’ role of sharing and therefore reducing risk, there will be an increased demand for funding as a result of the downturn.
– Change to Deal Specifics?
The types of financing deals that funders are approached about will shift during this time. Funders will see more activity in certain practice areas and deal types that will increase due to the economic downturn, including bankruptcy, insurance coverage, and contract litigation.
Funders will also see more requests for claims monetization, which often comes up when a case is on appeal or awaiting enforcement of a judgment and allows the client access to cash that is otherwise inaccessible until the legal claim is resolved. Portfolio arrangements with law firms also will become more frequent, so that firms that have already invested in contingency fee cases can sell off a portion of the risk to a litigation funder in exchange for cash they need for their balance sheets on a more urgent basis.
Topics: COVID-19 | Mergers & Acquisitions | Litigation Finance | Bankruptcy
Work cited: Annie Pavia | Bloomberg Law | May 18, 2020
