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Will the rise of US law firms in London benefit litigation funding?

US firms have form when it comes to litigation. Surely it is time for them to flex their muscles in London, says Nick Rowles-Davies, Managing Director of Burford Capital.

Carolyn Franks

Recent figures showing the legal sector in London showing rising revenues are pleasing to read. Some detractors may complain that it is no good thing when lawyers are winning the day, but to those of us in this profession, seeing income rise in the majority of City law firms is a welcome shot in the arm. The statistics showed that of 80 firms surveyed by PricewaterhouseCoopers, four in five reported more cash coming through the door over the past 12 months. This was a comfortable leap on the previous year, and the highest figure since 2008.  Following its 2014 Law Firms Survey, PWC’s law firm advisory group have been quoted as saying there was “confidence” coming back into the legal sector. 

Optimism

Clearly, there is much to be optimistic about, and it is safe to assume that much of the revenue comes from an increase in a broad spectrum work down to the economic recovery. There has been a healthy comeback for private equity and IPO work in the City. New developments continue to bring new revenue streams - it has been reported elsewhere that defamation lawyers have seen an upturn in libel work (a 23 per cent rise), partially due to actions relating to social media (and comments made by users on various platforms including Twitter and Facebook). In terms of commercial litigation, the rise of litigation boutiques and a continuation of work stemming from the recession, when it can be said more wronged entities seek redress through the courts, point to this side of the industry also doing its bit.  Anecdotally, litigators say that business is still steady, but of course they are looking for new work streams constantly.

Litigation funding goes mainstream

By the side of this resurgence in the legal market, is a very healthy outlook for the side of the industry in which I operate – litigation funding.  Clearly there is a symbiosis with litigation itself, but added to the growth of the market is the rise in the number of practitioners with awareness of how funding works and indeed the number going on to use it.

It has been reported of late that new players entering the market means litigation funding will finally enter the mainstream. It takes more than a few new funders to do that – fresh players have been venturing into the world of funding for years now. Whether traditional third party funding is yet a mainstream tool remains to be seen. Its use is widespread but it does not work for every case largely due to the size of case, by way of recoverable damages. However the notion of litigation finance and the benefits of risk transfer are becoming every day discussions for litigators. There is a keener sense of the interaction between finance and the law than in previous years. 

London is certainly the most condensed and competitive market in the world right now – make no mistake, that is good thing for funders, particularly those confident of their own abilities, and it is a good thing also for claimants and of course law firms. At Burford Capital, our most recent figures tell a similar story to those of law firms which took part in the PWC survey. Our half-year postings in September 2014 showed an 89 per cent  increase in Burford's profit before tax for the period and an 85 per cent increase in income from the litigation portfolio amid continuing increases in activity levels. We also enjoyed continued strong investment returns. 

US assault on London 

So in terms of the funding market, and the wider legal market, there is landscape which has many positives. But, contained within the wider legal picture is a movement that could further benefit litigation funding in the London market. US law firms are widely said to have launched their assault on Europe in 2010 (again the recession being the catalyst). New research figures for The Lawyer magazine show that US firms are collectively generating over £2bn annually from their London offices. It also shows that they are major players in the 100 firms bringing in the most revenue from the UK, and dominate the mid-tier of the top 200 firms in the UK.

The legal press has been awash with stories of US firms headhunting UK talent for big bucks, while statistics from Dealogic released in July show four North American firms are in the top five of a league table for M&A acquisition advisers in London. While not litigators, the growth of these powerhouse departments in US law firms can serve as a wider catalyst for growth and revenue which can boost reputation and reach of other sectors within the law firm.  Litigation teams over the past two years have also been bolstered, while the entry into London by US litigation specialists are other elements of the jigsaw.

Growing influence

For funders, this brings a two-fold opportunity. Firstly, the rise in number of heavyweight litigation players means a bigger pool for funders to do business with. The growing influence of US firms should lead them to flexing their muscles to a greater extent in the litigation space, their reputations leading to a greater swell of cases.The second point is perhaps more important than the first. As with many elements to running cases and funding, it relates to the Jackson Reforms.  The Jackson Reforms opened the door for Damages Based Agreements, which allow lawyers to take fees from eventual damages awarded to the client. When Jackson came into play, some commentators remarked they would present an opportunity for third party funders, with law firms predicted to increasingly look to share risk with a funding company.

DBA take-up

In truth, the take up of DBAs has been very low. Indeed, this was addressed by Jackson himself at the recent Law Society’s commercial litigation conference, where he supported the need to introduce a hybrid DBA which would allow a no win, low fee deal. The government has since moved to quash this idea. Jackson said he believes opposition to hybrid DBAs was probably coming from the same interests who opposed the introduction of DBAs during his costs review.

But the DBA – and therefore the opportunity for funding first mooted last year – is perhaps better understood by American law firms who are more used to dealing with contingency agreements.  They recognise the need for liquidity in running such cases. The knock-on effect of this knowledge from the US-based litigators to their cousins in the growing UK offices should be a positive influence. Indeed the understanding carried by the US boutiques adds to the knowledge pool.  In addition, the litigation funding model – by which funders agree deals to take a slice of any eventual winnings from a funded case – also has similarities with the concept of DBAs, meaning an understanding of contingency fees should bring a greater understanding of Third Party Funding. 

It would be wrong to say the US firms are more sophisticated when it comes to funding – each lawyer is different and has different views. But the cultural idiosyncrasies they bring with them , regarding funding, present an opportunity for Third Party Funders. This, in turn, could bring yet further growth among the wider legal sector in London.

Nick Rowles-Davies is Managing Director at Burford Capital

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