In the fiscal year ending June 30, 2023, investors exhibited a reluctance to pour fresh capital into lawsuits, signaling a slowdown in the litigation finance sector. According to data from litigation finance consultancy firm Westfleet Advisors, new commitments to lawsuits amounted to $2.7 billion during this period, down from $3.2 billion in the previous fiscal year. Despite this decrease, total assets under management experienced a marginal growth of less than 1%, reaching $15.2 billion.
Challenges in Capital Raising for Litigation Finance
Charles Agee, CEO of Westfleet Advisors, highlighted that lawyers encountered limitations in funding channels. He emphasized the importance for litigators to diversify their funding sources, noting, “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.”
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Factors Contributing to the Downturn
The litigation finance industry, which allows investors to invest in legal cases in exchange for a share of potential awards, faced headwinds due to macro trends in financial markets. Amidst tight credit conditions and reduced enthusiasm for mergers, acquisitions, and initial public offerings, investors diverted their funds to safer options like money-market funds, which exceeded $6 trillion by the end of January.
Impacts on Industry Players
The decline in lawsuit investments had repercussions on litigation funders such as UK-based Augusta Ventures, which had to downsize its workforce. By late September 2023, the company’s employee count dwindled to 15 from 38 in December 2022. Additionally, some firms resorted to selling portions of their assets to navigate the challenging landscape.
Shifting Dynamics Among Major Players
Despite the overall decrease in new commitments, major US law firms intensified their involvement in litigation finance, according to Westfleet’s findings. These firms accounted for 35% of new commitments, up from 28% in the previous year, indicating a growing interest among sophisticated users and in diverse deal structures.
Trends in Deal Structures and Case Types
Portfolio structures, where funders finance bundles of cases to mitigate risk, dominated 66% of deals. Notably, patent litigation remained the largest category of funded matters, representing 19% of commitments.
Industry Personnel Movement and Evolution
The fiscal year was characterized by a significant exodus of professionals from established funders, many of whom ventured into entrepreneurship or explored adjacent sectors like insurance. Agee remarked, “Dozens of litigation finance industry professionals made career moves in 2023, reflecting a dynamic landscape where capital sources enter and exit the market while new ventures emerge.”
Methodological Changes in Reporting
Westfleet Advisors revised its methodology for calculating assets under management, resulting in a revised figure of $15.1 billion for the previous fiscal year, up from $13.5 billion as reported in the 2022 report. This adjustment aimed to provide a more accurate depiction of undrawn capital commitments for certain industry participants.
In summary, while the litigation finance sector experienced a slowdown in investor inflow, the evolving landscape witnessed shifts in participation among major players, changes in deal structures, and a dynamic movement of industry professionals.
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