As 2019 dawns, Bentham IMF is paying close attention to the trends that may be affecting litigation and the funding industry in the year ahead. Below, we’ve gathered several of the developments we think may have a major impact on claimants, litigants, and funders during the next 12 months.
A Bankruptcy Boom?
Litigation finance is already being used by companies, creditors, bankruptcy estates, trustees and their advisors to maximize the value of meritorious claims attached to an insolvent enterprise. We expect that trend to pick up speed in the year ahead, as trustees and others gain greater familiarity with funding opportunities.
Bentham has been ahead of the curve on insolvency-related funding, bringing aboard Ken Epstein, a veteran New York bankruptcy lawyer, in late 2017 to launch the company’s bankruptcy litigation funding platform. (Learn more about how trustees, insolvent estates, creditors and others benefit from a funding relationship on our previous blog posts and in this New York Law Journal article.[i])
Portfolio Financing’s Growth Curve
Portfolio financing has been growing rapidly in recent years. In 2019, we expect a continued surge, particularly as more capital is available to fund more large-scale, meritorious litigation. And in an age when the top billable rates have cracked $2,000 an hour, clients are also pressuring their outside counsel to provide greater value and to take on more risk. A portfolio arrangement allows firms to take a measured risk while providing clients with more creative solutions when it comes to the fee structures they offer.
Generally, a portfolio consists of multiple plaintiff-side cases that have been financed on a full or partial contingency basis. Bundling several cases together in a portfolio and using it as collateral for financing a law firm makes an investment less risky and more attractive for funders. Meanwhile, the law firm has the financing necessary to cover a healthy portion of its baseline expenditures during the pendency of the cases, while keeping the potential for substantial additional fees in the event of fee recoveries beyond the funder’s investment returns.
More Funding for International Arbitration
Expect more litigation financing to flow to international arbitrations in 2019. The area is relatively unexplored by U.S. funders, but large commercial arbitration cases continue to grow rapidly overseas and are often handled by top-notch U.S. legal teams. In the last few years, arbitration hot spots like Singapore and Hong Kong have opened up to funding in their arbitral forums. And arbitration opportunities may also be forming in South America, where the International Chamber of Commerce has reported double-digit annual increases in the number of Latin American parties involved in international arbitration matters.
Uptick in Corporate Financing
During the last few years, we have seen more corporate law departments engage with us directly to finance elective litigation. It’s a trend we believe will continue accelerating in the coming year, as corporations are changing the way they have traditionally viewed litigation. For both struggling and well-capitalized companies, funding provides several clear-cut benefits: it removes litigation costs from the balance sheet; transforms claims into recognizable revenue; and, through a portfolio arrangement, can help manage risk across litigation assets. A financing arrangement enables in-house teams to bring highly meritorious claims that might have been left by the wayside because of tight, defense-centric budgets. And as law departments face greater pressure from the C-suite to justify costs and drive business outcomes, a strong portfolio of cases with large potential recoveries could help a legal department to become revenue-neutral, or even transform it from a cost center to a profit center.
Watching the Midterm Fallout
The recent election meant sweeping changes not only in the House of Representatives but in several state courts as well. In Texas, for instance, Democratic judges took majorities on seven of the state’s 14 appellate courts—including the influential courts serving Austin, Dallas, and Houston. Dramatic changes in the makeup of the bench could have a significant impact on litigation in affected jurisdictions, as liberal-leaning judges are often seen as more plaintiff-friendly. We’ll be watching closely to determine how the litigation climate shifts in those locales.
Investments Being Made in the Litigation Finance Space
Outside investors are showing a great deal of interest in the litigation funding space, and even more money could flow to funding as a result of stock market turmoil. That’s because funding is an uncorrelated asset class whose high returns aren’t dependent on market performance. A number of new funders are taking advantage of the available venture capital to set up shop. This is creating more competition in the marketplace and will continue to do so in the year ahead. However, we caution investors and litigants who want to take advantage of funding opportunities to perform careful due diligence to ensure that their funder is highly reputable and has achieved a significant track record of success.
It will be interesting to watch how 2019 unfolds for the litigation finance industry. In the meantime, to learn more about our funding options, contact us for a consultation.
[i] Kenneth Epstein and Eric B. Fisher, Litigation Funding: An Essential Tool for Maximizing the Value of the Debtor’s Estate, New York Law Journal, March 15, 2018.