Litigation Funders Thrive as Companies and Law Firms Seek Financing

U.S. funder Lake Whillans is receiving increased interest in funding from both law firms and companies.

"Demand for capital is sharply increasing. Litigation funding inquiries have picked up universally," said Lee Drucker, managing director and co-founder of the firm.

"The most interesting pocket of demand is coming from large corporations—global companies with healthy balance sheets and robust revenues. In this unprecedented economic environment, even the most well-heeled companies are seeking to fortify their cash reserves and to contain capital expenditures to core operations."

In Australia, Burford Capital is receiving inquiries from companies it hasn't previously had contact with. Companies are cutting back spending their own cash on anything that's "nonessential" so they can "keep the lights on," said Sydney-based principal Matt Lee.

"Now, with companies going through a period where there's a tightening of belts, there'll be more that will have their eyes wide open to the potential of how to offset the risk and offset the financial burden of something that's not within their core business function," said Lee.

London-listed Litigation Capital Management, which operates in the U.K., Australia and Asia, is also receiving more inquiries for corporate portfolio funding, where litigation financers fund a range of legal matters for a company.

"Even though it's very early in the cycle of the changing economic conditions, we're seeing an uptick in terms of inquiries from large corporates who in our experience in the past would not have considered litigation finance," said chief executive Patrick Moloney.

Companies are seeking to save their capital to use in their core business and to remove the drain of legal action on their cash flow by borrowing against a portfolio of their litigation.

Litigation finance has traditionally suffered from a stigma in Australia in particular, where it is primarily associated with class actions. "But you get a crisis such as the one that global economies are facing at the moment and people are less choosy about who they deal with. They're really looking for solutions as opposed to worrying about who their counterpart is," Moloney said.

Along with Burford, LCM has been making a concerted push to establish portfolio funding of corporate litigation in Australia.

The firm is also seeing an uptick in interest from global trading companies in Asia, although less so in the U.K. But Moloney expects demand to increase as corporates there adjust to the new circumstances.

The firm is actively looking for more staff, particularly from law firms. "A lot of law firms are having constraints in terms of revenue, so there's opportunity out there for us to recruit really talented and experienced people," he said.

Tech-driven litigation funder Legalist is also looking for staff after it received an upswing in inquiries from potential new clients who have not previously used litigation finance, particularly law firms.

"We have a bunch of job postings up," said Eva Shang, founder and CEO of the U.S. funder.

Legalist expects credit will be hard to come by in the wake of the coronavirus crisis. Law firms, which have always struggled to obtain financing because of their structure and because banks don't understand them, will have an even greater need for funding—a "prime opportunity" for litigation funders.

"Law firms are very fragile. You rarely see industries where all the money that the company has made is taken out at the end of every calendar year," she said.

That said, Shang believes firms are currently seeking funding out of an "abundance of caution" and after seeing their clients struggle financially rather than because of any immediate cashflow pressure.

Litigation finance is also appealing to corporations that are seeking an alternative to the hourly billing model and whose law firms don't offer contingency fees, said William P. Farrell Jr., managing director and general counsel of Longford Capital Management.

In particular, "the pandemic has created an increasing number of these circumstances; clients are struggling to pay outside legal bills and law firms are less likely to offer contingency arrangements in this unprecedented and uncertain environment," he said.

Along with inquiries from law firms and corporates seeking portfolio funding, the firm is also receiving interest in the monetization of claims.

Andrew Saker, chief executive of Omni Bridgeway, says his firm is also seeing a "significant uptick" in the number of inquiries from law firms and corporates looking to lessen the risk of litigation or to monetize litigation assets. The crisis has driven up awareness of litigation as an asset class that can be managed in a similar way to other assets on a company's balance sheet.

"We're seeing an important transition from being perceived to be that ambulance-chasing, shareholder-class action company to actually being focused on how to deliver solutions to clients with that kind of capital," he said.

The Australian-listed firm, formed through the merger of Australian litigation and disputes funder IMF Bentham and Dutch litigation funder Omni Bridgeway Holdings BV, is in a business that is inversely correlated to the economic cycle, Saker noted. And Omni Bridgeway is now looking for staff in Australia, the U.S. and Europe to help with the additional workload.

"Our investment committee has been flat strapped through the last three or four weeks with new applications that have been funded," he said.