Litigation Finance Hits a Wall After Bets on Huge Gains Falter

(Bloomberg) — Litigation finance is having a bad year.

After predicting huge growth as recently as January 2024, the industry is now finding that hedge funds and other sources of capital are pulling back. The situation has led some litigation finance firms to suspend fund-raising rounds, while others are exploring alternative paths to generate cash.

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The industry — a $20 billion market that channels capital from investors to lawyers chasing corporate malfeasance — faces an array of hurdles in the form of regulatory changes, lower payouts and longer trial times, according to representatives interviewed by Bloomberg.

The risk, they warn, is that a shrinking litigation finance industry leaves consumers and workers less able to defend themselves against large corporations engaging in activities that do environmental and social harm.

“Raising private capital has become more challenging across all markets, and there’s less traditional capital generally available,” said Ellora MacPherson, managing director and chief investment officer at Harbour Litigation Funding, one of the world’s largest privately-owned litigation finance firms.

She says investors are now “looking for more predictable outcomes, and alternative deal structures such as insurance-backed arrangements, to help reduce risk.”

The Hurdles Litigation Funders Face Today:

In the UK, the Civil Justice Council recommended in June that litigation funders be subject to regulatory controls including requirements to provide information on funding sources and capital adequacy. That follows a 2023 UK Supreme Court ruling barring litigation funders from demanding a percentage of damages, and instead forcing them to base profits on a multiple of capital deployed.

Only four group action cases were filed in the UK’s Competition Appeal Tribunal as of September, down from 11 in 2024 and 17 the year before, according to data provided by Solomonic, a litigation data firm.

In the US, there are efforts to revive legislation that would levy a 41% tax on the industry’s profits.

In the EU, lawmakers just agreed to drastically curtail the reach of the Corporate Sustainability Due Diligence Directive, reducing the civil liability of companies in the bloc.

At a litigation finance conference hosted by law firm Brown Rudnick in October, attendees voiced anxiety over the challenges they now face. Against that backdrop, some litigation funders are now adjusting investment models.

In October, Therium Capital Management, a pioneer of the UK’s legal financing market, handed over day-to-day responsibility of a large part of its litigation-finance portfolio to Fortress Investment Group of the US. It has launched an “advisory services business.”

“Outsourcing day-to-day responsibility made sense in order to manage our costs and maximize returns for investors,” said Neil Purslow, co-founder and managing partner of Therium.

Litigation Capital Management said it was pausing active marketing for a fund in June, due in part to uncertainty around potential tax changes in the US market.

And Pogust Goodhead, a UK law firm backed by US-based Gramercy Funds Management, laid off a fifth of its staff in November last year, with both founders since leaving the firm. Pogust Goodhead is currently representing thousands of Brazilian claimants targeting BHP Group and its alleged liability in the collapse of a dam in Brazil.

Even large and well-capitalized firms face headwinds. Shares in Burford Capital Ltd. are down more than 25% this year. In 2023, Burford prevailed in the courts putting it on track for a $16 billion settlement in a case relating to the 2012 nationalization of Argentine oil company YPF SA. But payment has since been held up in US courts.

“Few litigation funders have made money as managers historically,” says Gian Kull, UK portfolio manager for Omni Bridgeway Ltd., a large global funder.

An oft-repeated example of the industry’s troubles was a class action lawsuit originally brought against Mastercard in 2016, and subsequently taken on by Innsworth Capital, which is owned by Elliott Investment Management. The class representative had initially estimated the plaintiff’s claim was worth £14 billion. In February, Mastercard was able to settle for just £200 million.

Such outcomes “bring into question the viability of funding,” said Ian Garrard, managing director of Innsworth. Even so, Garrard says the firm will continue to invest in legal cases “against the expectation that in due course, with more precedents and experience, there will be more certainty for investors.”

–With assistance from Jeremy Hodges.

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