Macfarlanes survey reveals London litigation trends

Leading law firm Macfarlanes has conducted a survey among London litigation funders which has provided some important insights into the likely evolution of the UK litigation funding and legal assets market.

The feedback was clear: funders are looking to deploy ever-larger sums; are open to taking portfolio risk (rather than just that of a single case); are actively seeking the development of the co-investment and secondary markets; and, in more than 50 per cent of instances, were prepared to finance non-contentious risk, as well as more traditional litigation opportunities.

A continued focus on collective actions is likely, not least because of the larger budgets typically required for such cases; the further evolution of defence funding is also inevitable. Importantly, the development of private equity-style investments into law firms may also be an area for focus as funders find ever more innovative ways to deploy capital.

However, those in the market are also wary of possible threats to what remains a relatively new asset class, including:

• Regulation: a market which is populated almost exclusively by sophisticated investors typically needs little oversight, but funders are aware of national and supra-national regulators which may seek to take a more active interest in the workings and evolution of the market. It is a challenge which may require a collective and proactive response on the part of market participants, both in Europe and further afield.
• Education: the benefits of litigation funding are not yet universally understood, and if there is to be a general recognition and acceptance of the value that funding can bring it is likely that funders will need to work together in order to educate the market. It is an open question as to whom such education and communication should be aimed at since each of law firms, the bar, the judiciary, regulators, corporates, governments and the press arguably have a stake in the development of the funding market, often across multiple jurisdictions.
• Secondary markets: what is needed for the development of a sustainable secondary market? Is it credible to think that litigation funding will coalesce around common documentation in the same way that the loan markets did with the help of LMA-standard credit agreements, or would that commonality blunt the edge of competition among funders? Will secondary market participants ultimately seek to squeeze out those who source and execute primary deals?
• Portfolio management: the greater the sums deployed, the greater the risk. As capital pours into the litigation funding sector, it is inevitable that more focus on portfolios of historical deals will be needed in order to monitor and safeguard investments.
• Adjacencies: is the litigation funding market of sufficient scale to satisfy the weight of investment coming into the sector? Will funders need to find opportunities in areas adjacent to litigation, for instance in the funding of professional services firms more generally?

The weight of capital flooding into the litigation and legal assets market suggests change will be swift and significant, and that the next five years will serve to mature what is already a multi-billion-dollar business.

The way in which funders and other market participants respond to the challenges of such an innovative and dynamic sector will be crucial in determining the extent to which the benefits of the funding model are a permanent feature of the UK justice system.