22 Jun 2022

UK litigation funders’ war chests grow as class action interest mounts

Assets increased 11% to hit a record £2.2bn last year, according to RPC study

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UK-based litigation funders have amassed record war chests to finance the growing interest in class action law suits, according to a new study by RPC.

Litigation funders' assets jumped 11% last year to hit £2.2bn, almost double the £1.3bn that had been built up in 2017/18 and a more than ten-fold increase over the past decade. RPC's analysis is based on regulatory data submitted by 15 of the largest UK litigation funders.

Gary Barnett, executive director of the International Legal Finance Association (ILFA), a lobbying group representing funders, said the increase in capital flooding into the market has been driven by a broader acceptance of such funding. While funders still only invested in meritorious cases, such cases had also seen greater levels of judicial endorsement, as there was a general acceptance of funding in the courts, including in the UK Competition Appeal Tribunal, for example.

Chris Ross, a partner at RPC, said: “Some estimates suggest that 90% of cases put forward to litigation funders are rejected, underlining how selective funders are about the cases they take on.”

With funders actively looking for and seeding new cases, the focus is on picking winners.

“[Funders] want to deliver a high ROI for their investors; that’s not easy when so much money is chasing the same legal cases,” said Ross.

As an uncorrelated asset class, Barnett said, funders are also seeing a marked increase in interest from institutional investors.

Lucy Glyn of Exton Advisers agreed, citing capital investment from multi-strategy hedge funds and global credit funds, which has generated increased market competition and increasingly innovative funding options.

Raymond van Hulst, EMEA executive director of Omni Bridgeway, added that while low interest rates and excess liquidity had previously driven growth, a combination of rising inflation and higher interest rates means only the most successful funds will likely be attractive going forwards.

“Growth of available capital for litigation funders will level off,” he said, as funders with low success rates will struggle.

One area targeted by funders and law firms alike is class actions, given the potential pay outs on offer. In August last year, the Competition Appeals Tribunal allowed a £15bn class action against MasterCard to proceed.

Ross said: “Class actions can bring big rewards for litigation funders. They allow a funder to deploy a lot of capital at once as they are expensive cases to run. Still, they can also be efficient investment vehicles because each class action can attract thousands of claimants.”

Steve Shinn, CEO at FinLegal, said many such claims were impossible to get off the ground without financing as they incurred considerable up-front costs.

“Funders must also embrace technology when financing class actions or risk-reducing the value of their returns,” Shinn said. “Opt-in claims can be expensive due to initial costs in book-building and managing hundreds, or thousands, of claimants with multiple systems that require lots of manual intervention.”

He added: “Even in opt-out claims, where the returns are better, funders are still at risk of reducing their returns by not using a holistic software solution in settlement distribution.”

Luke Harrison, a founding partner of Keidan Harrison, said: “Technological advances in the administration of class actions, via specialist software, has meant many class actions that wouldn’t otherwise have been viable are now attractive funding propositions.”

He added: “Funders are starting to see the opportunities of putting together these deals and then taking some immediate profit by selling part or all of their interest in the transaction.”

Recent research by Thomson Reuters found that FTSE 100 companies were facing a 10% increase globally in class actions compared to 2021.

John Lazar, managing director of Burford Capital’s EMEA operations, said: “We view the evolution of the class action landscape in the UK and EU as a growth opportunity, although challenges do remain – and thus far, the UK is ahead of the EU,” noting risks on jurisprudence and ensuring how funders were paid.

Investment manager Alistair Croft of Omni Bridgeway noted the UK was historically a long way behind the US and Australia in assembling collective redress claims, as well as the Netherlands, which allows class actions in most litigation and claimants to assign their claims to an SPV.

Funders, Croft said, would remain focused on ensuring tight economies of scale in book-building consumer cases.

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