When I first started writing about the litigation funding sector more than a decade ago, the talk was always about whether the financing of litigation had ‘entered the mainstream’.
I’d say that threshold was crossed some years ago now, and most litigators have a decent understanding of what litigation funding is all about, and how their clients might benefit.
The next step for the industry – the hallmark of a well-established financial asset class – will be the development of a ‘secondary market’ for litigation funding investments. This is common in other areas of finance such as private equity. The secondary market would essentially be a place where investors can acquire an investment from the original, ‘primary’ investor.
A mature secondary market for litigation funding would be hugely beneficial for funders, lawyers and clients. Primary investors would have an exit route that meant their cash would not necessarily be tied up until the case concludes, because they would have the option of offering the investment asset on the secondary market. That improves liquidity in the funding market and allows primary funders to free up cash and invest in new cases.
Meanwhile a mature secondary market would also open up the litigation funding sector to a whole new category of investors; perhaps those who lack the manpower or expertise to find and analyse cases that have not yet started, but who are comfortable in investing for a shorter duration in cases that are already established, and where there are fewer unknowns. The secondary market is likely to attract investors such as hedge funds, some of which are already active in the litigation funding sector.
At the International Litigation Finance Association’s (ILFA) inaugural European conference last month, funders discussed how we are starting to see encouraging signs towards the beginnings of a secondary market, with all the benefits that will bring – though we’re not quite there yet. There was a word of warning from Burford Capital’s chief executive officer Christopher Bogart, however. He cautioned that while the development of a secondary market for litigation finance would be a positive development, funders should be very careful to ensure that legal privilege is protected as that market develops and information is distributed to investors or buyers. If the courts were to find that privilege had been lost as a result of the actions of litigation funders who have distributed privileged information too broadly, this would be a ‘very bad day’ for the industry, he remarked.
It has always been the case that litigation funders have transferred investments to others on an occasional, bespoke basis. But if and when we do see the development of a more formalised market in secondary claims, this could prove a real gamechanger for the availability of litigation funding and the industry’s ability to help clients bring meritorious legal claims.
July 10, 2023
Insights
