The litigation funding marketplace is developing fast with innovative companies such as LexShares, says Chris Smith of Vannin Capital. However, there is still some way to go.
I spend a lot of time at Vannin speaking to litigation funders around the world to explore business development opportunities. One thing that has become clear in recent months is that the market is starting to mature, with funders focussing on different types, sizes and stages of claims and using innovative business models to raise the funds necessary to carry on business.
In the same way that the venture capital market has firms focused on certain stages of the funding lifecycle - seed/early stage, Series A, Series B and so on – there are early signs that the litigation funding market may follow suit, with firms becoming known as specialists in their chosen area or areas of focus.
At the lower end of the market, where the funds required are typically less than £250,000, one entrepreneurial business based out of New York has been championing a crowd funding model. LexShares provides details of claims to its roster of registered investors via an online marketplace. Investors are able to review the details, including summaries prepared by the LexShares team, and then invest from as little as $2,500.
It will be interesting to see how widely LexShares is adopted outside the tight knit hedge fund and HNWI community, but so far the impact has been broadly positive, raising awareness of the benefits of litigation funding for both claimants and investors. And, as with start-up crowd funding, it’s likely that there will be additional entrants to the market soon, further raising the profile of litigation funding as an asset class.
As the market for funding high value, (potentially) high return cases, becomes more competitive some funders are turning to a volume based model, signing up a large number of smaller cases and trying to automate elements of the review and monitoring process.
Whilst signing up lots of cases and taking a portfolio approach to risk should improve cash flows – more cases being won more often means more money making it back to the fund – it will be interesting to see whether returns suffer as a result of automating a number of processes which have previously been carried out by highly experienced lawyers, barristers and judges.
In any event, one hopes that some funders can master this high volume, low value end of the market for the simple reason that it will enhance access to justice for those smaller cases which have traditionally been uneconomical to fund.
Whilst a number of funds are innovating to access new sources of capital and new cases, at the top end of the market there are signs of premiumisation, with a handful of funds securing their position as the ‘go to’ firms for the highest value, most complex litigation and arbitration matters.
These funds tend to have a number of things in common: they have been active in the market for several years with experience of funding successful claims; their teams are composed of practitioners with experience at the world’s leading law firms and chambers; they have established and robust investment review processes; and they have a strong, recognised brand. Any fund in this position has a significant competitive advantage as they will receive more cases leads, sign up and win more cases, and generate more cash to re-invest, increasing the barriers to entry for new market participants.
We’re probably some way off from any formal ranking of funders – there just isn’t the publicly available information to make this is a credible exercise – but perhaps it won’t be too long until we are referring to Magic Circle Funders or White Shoe Funders?
Education is key
Although it is encouraging that entrepreneurs are looking at new ways to tackle the litigation funding market, the reality is that the ecosystem remains in its infancy. It our job, as one of the leading early market participants, to continue working hard to educate lawyers, finance directors and claimants of the benefits of funding, and to deal with any lingering uncertainties people may about what we do.