Recent reports in the press have highlighted the significant amount of growth in litigation funding capital there has been in the last two years. A study by RPC identified an increase of 55% in the amount capital available to deploy into litigation funding from 20 funders active in the UK. This is not surprising given the amount of fresh capital raises announced during that period ranging between GBP 50m -500m.
With ever present rumours of even more new funding entrants with similar sums available to them, capital is not in short supply. However, whilst the size of the capital pool has risen sharply, the increase in the number of parties seeking funding, albeit relentless in its own right, has not spiked so dramatically.
A massive surge is capital matched by moderate increases in demand for that capital leads to three things:
· A reduction in price through competition for good quality funding opportunities
· A willingness to invest in cases with features that might otherwise have been considered to be too risky before
· A readiness to invest in opportunities that are not traditional litigation funding
In respect of the last point, a readiness to diversify has resulted in several funders declaring an interest in award monetisation, an area previously considered outside of litigation funding arena and closer to distressed debt. Similarly, funders are far more willing now to provide a facility for operating capital to help a business survive or expand, using a pending litigation as security.
That is not to say that these new business channels for funders are not good business, it simply corroborates the RPC study in so far as we have seen the behaviour of litigation funders changing over the same period, when this glut in supply has emerged.
Of course, a strategic decision to deploy capital in different ways where there is some connection to a litigation or arbitration matter is one thing but the funder has to have the ability to do so. For many funders, who have raised money from investors based on a specific mandate, there may be no flexibility. The pressure on funds who have raised these enormous amounts of money, now facing much tougher competition coupled with little flexibility to adjust, will become more desperate. At best this will naturally lead to some funds taking on riskier and riskier cases and at worst we will see a repeat of events in the US just recently.
The US regulator, the Securities and Exchange Commission (SEC) has filed an administrative suit against the principal of a fund, RD Legal Capital LLC, for deploying large sums of investors capital in a concentrated high risk litigation matter that allegedly was not consistent with the type of litigation funding opportunity described to investors when they subscribed. That legal action is on-going and is being defended but will we see investors launch legal action in the UK over the way their money was spent over similar allegation in the future? It could be inevitable at some stage.
Matthew Amey, Director