Hedge funds, private equity and sovereign wealth funds are piling billions into the outcome of high stakes court cases at a faster rate than ever before.
Litigation finance—the practice of paying legal fees up front with a promise to share in any eventual payout -- soared to a $39 billion global industry in 2019, according to law firm Brown Rudnick. It’s being used to fund everything from Russian oligarch’s divorces to take on banks in fraud suits. And now regulators are asking whether there’s enough oversight.
“More companies than ever before are exploring how legal finance can help their bottom line,” said Jack Neumark, head of Fortress Investment Fund LLC’s legal assets business. “We lose money if the claims we fund are unsuccessful, so we only finance claims that are supported by strong evidence and the law.”
In the U.K. the sector saw record flows of money last year of 2 billion pounds, up from a little over 500 million pounds ($669 million) in 2016, according to data from law firm RPC. And that growth is showing no signs of slowing. The reality is though, that the real size of the market isn’t known because of a lack of transparency and disclosure across the sector. Omni Bridgeway Ltd., a public Australian funder, estimates a $100 billion global “addressable market.”
D.E. Shaw & Co., Elliott Management Corp. and TowerBrook Capital Partners are among those who have who’ve gotten in on the action. Litigation financier Burford Capital Ltd. scored big with a $103 million return from a divorce after backing the ex-wife of a Russian oligarch after she sought to recover a 450 million pound award that ended in a 135 million pound settlement.
Burford, another listed litigation funder—has a $4.8 billion current investment portfolio, up from $4.5 billion at the end of 2020. Last year, it made $758 million in new commitments to commercial legal assets, according to a client update. The stock is up 15TK% this year.
Aside from the Russian divorce settlement, litigation financing has been used in the U.K. to fund Amanda Staveley’s losing bid to recover 660 million pounds from Barclays Plc and a failed class-action privacy suit against Alphabet Inc’s Google. In the U.S., Bench Walk Advisors LLC has been linked to cases including for dating app Tinder against its parent company Match Group Inc., and is also funding Jay Edelson, founder and CEO of law firm Edelson, in his divorce.
“There is plenty of money available through the hedge funds for the right opportunity,” said Malcolm Hitching, a partner at London-based law firm Macfarlanes LLP. “The hedge funds love it because it’s non-correlated—they can get their arms around the risk.”
Proponents of litigation funding say it’s an important way of ensuring lawyers get paid and helps to allow individuals or firms with less resources to be able to afford costly lawsuits.
But critics say it can leave investors with a bigger slice of the pie than the claimants. European Union lawmakers are reviewing the need for rules for third-party litigation funding, while in the U.K. the industry is currently self-regulating.