Small law firms have mostly been the ones driving the boom in commercial litigation finance, according to a new report on the industry from broker Westfleet Advisors.

In collecting data on several dozen commercial litigation funders active in the U.S. market, Westfleet found that 70% of the capital committed by litigation funders over a 12-month period spanning 2018 and 2019 went to firms outside of the Am Law 200.

In a connected finding, the broker also highlighted the popularity of portfolio deals that fund a collection of cases being handled by a particular law firm; 47% of capital committed over the study period took the form of law firm portfolios. These are predominantly employed by firms who have or are looking to build contingency-fee practices.

"It's a function of the fact that smaller law firms are more willing to entertain contingency fee arrangements than larger law firms," said Westfleet managing partner Charles Agee III.

Westfleet attempted to collect data from the 41 commercial litigation funders it identified as being currently active in the U.S. market. The vast majority contributed information via a third party which was then kept confidential as it was aggregated. The buyers guide also includes capsule summaries of over 30 funders.

Based on these efforts, the broker found that the industry had a total of $9.5 billion in assets under management dedicated to commercial litigation finance. Of that total, in the past year $2.3 billion was committed to commercial litigation finance transactions with a nexus to the U.S.

For Westfleet, that disparity suggests that the supply of capital available is outpacing the current rate of deployment, and it indicates that funders feel pressure to increase their pace of deployment.

That, in turn, indicates a buyers market for the users of commercial litigation finance, both law firms and entities that have viable claims they'd be eager to pursue if attorneys fees were not an issue.

"I think funders are going to be reluctant to compete on price so you'll see them competing on process. That will make for a better overall user experience and will be better for the overall industry," Agee said.

But Agee doesn't anticipate the buyers market to continue indefinitely, particularly as players in the marketplace gain a fuller picture of how litigation finance operates in differing contexts.

"Awareness of litigation funding is very, very high. It's nearly 100%," he said. "But the depth of understanding necessary for lawyers to bring up with clients or for in-house lawyer to take litigation finance as an option to the C-suite, that can be addressed through education."

One area of opportunity is corporate portfolios. Only 15% of capital currently committed is in portfolios from corporations and other entities such as universities. But as corporations gain comfort with using litigation finance to unlock the value of claims, the tides could turn and demand could ultimately outpace supply.

"I don't think it's going to happen overnight," Agee said. "It will take years, not months, to really achieve the depth of understanding in the market to bring demand up to its potential."

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