Litigation Finance Industry Shrinks After Years of Growth

Investors slowed the flow of new money into lawsuits last fiscal year, as it became more difficult to raise capital for litigation finance.

Investors made $2.7 billion in new commitments to lawsuits in the year that ended June 30, 2023, down from $3.2 billion in fiscal year 2022, according to litigation finance consultant Westfleet Advisors. Total assets under management grew less than 1% to $15.2 billion.

Lawyers learned some funding channels were limited, said Charles Agee, Westfleet’s chief executive officer. “Many litigators learned the hard way in 2023 that it makes more sense to be connected to the broader market rather than to concentrate on a relationship with a single funder,” he said.

The litigation finance industry enables investors to pool money into the cost of lawsuits in exchange for a portion of any award that results from cases. After years of steady growth, the 14% drop in new commitments shows macro trends in financial markets had a dampening effect on the sector.

Amid tight credit and a slumping appetite for mergers and acquisitions and initial public offerings, investors piled money into safe havens such as money-market funds, which surpassed $6 trillion at the end of January.

As lawsuit investments tailed off, some litigation funders such as UK-based Augusta Ventures were forced to lay off workers. As of late September 2023 there were 15 employees listed on the company website, down from 38 in December 2022. Other firms sold off portions of assets.

Still, despite the drop off in new dollars for litigation finance, the largest US law firms increased their participation in the space last fiscal year, Westfleet found. Big Law represented 35% of new commitments, up from 28% in 2022.

“Despite the overall decrease in new commitments, we noticed a clear uptick among more sophisticated users and deal structures,” Agee said.

Portfolio structures, in which funders finance bundles of cases as a way to hedge risk, made up 66% of the types of deals. The largest category of funded matters continued to be patent litigation, accounting for 19% of commitments, Westfleet found.

The year was also marked by a wave of employees leaving established funders to open their own firms or to work in adjacent sectors such as insurance.

“Dozens of litigation finance industry professionals made career moves in 2023,” Agee said. “Some capital sources exited the market while others launched new litigation finance businesses.”

Westfleet Advisors’ data includes commercial funders investing in cases and law firms in the US. The firm said it changed its methodology for calculating assets under management by more accurately accounting for undrawn capital commitments for certain industry participants.

In its 2022 report, Westfleet said there were $13.5 billion assets under management. In the new report, it revised last year’s figure to $15.1 billion.