Huge Growth Opportunities in the Litigation Finance Market
One of the primary advantages of litigation finance as an asset class is its countercyclical nature. Not only is the asset uncorrelated to the stock market and the factors which affect it, but times of financial stress tend to cause a spike in legal cases as companies use litigation as a means of recovering potential losses they may have suffered.
For instance, analysis by law firm RPC found that the increased availability of litigation finance in the 2010s contributed to rising numbers of litigation cases involving the world’s largest banks throughout the decade in the wake of the 2008 financial crisis.
The increasing availability of third-party litigation funders has allowed more companies and individuals to pursue litigation as a means of recovering losses suffered during financial crises, such as the current crash precipitated by the COVID-19 pandemic. Litigation finance is thus an emerging investment opportunity that is a Non Correlated Asset with inherently strong growth potential, especially in the current global macroeconomic climate.
Despite its relatively young age, the global market for litigation finance is already large and growing fast. IMF Bentham in their January investor presentation forecast that the available Total Addressable Market may even be as high as $100 billion. The company also reported indicatively impressive average returns of
134% across their portfolio of cases, demonstrating why this is such an attractive asset class.
Several large cases involving up to nine figure sums often contribute materially to the generation of such impressive returns. For example, IMF Bentham have staked roughly $25 million into covering the costs of a class action lawsuit on behalf of 6,800 plaintiffs seeking damages over the failure of the Wivenhoe dams, which caused the Brisbane floods in 2011. After the judge presiding over the case recently ruled in favour of the plaintiffs, IMF Bentham is forecasting returns of $100-$130 million against their investment, although it is still subject to ongoing appeals.
It is difficult, however, to reliably estimate the size of the litigation finance market, given the privacy which surrounds many cases and the different methods of valuing the market across different territories. For comparison, a 2018 report by Absolute Market Insights valued the global market at $10.9 billion and forecast an annual growth rate of 8.3% to take the market to $22,3 billion by 2027.
The report was even published in February 2020, before the full extent of the COVID-19 pandemic had caused global markets to crash in March, and it makes the point of reiterating that litigation finance “may be inversely correlated to financial markets, as litigations may increase in recession time due to high number of insolvencies”. What is clear though, is the wealth of investment opportunities as one of the best short term high yield investments that exist within the sector, particularly those precipitated by the anticipated spike in COVID-19 related lawsuits.
Many litigation finance providers are already seeing or preparing for heightened demand in the wake of the pandemic. According to Bloomberg Law, the amount raised just by five major litigation finance firms announcing nine figure sums has already exceeded $1bn this year, giving this emerging asset class increasingly major credibility. Many smaller amounts raised by smaller litigation finance firms often go unreported, and thus the true extent of the opportunities for investment within the market are much larger, but difficult to estimate.
Yet as uncertainty surrounds the stock markets, driving investors to pump these large sums into litigation finance as means of seeking alternative high yield investments, Charles Agee, CEO and Managing Partner of Westfleet Capital, still predicts that demand for litigation finance may outstrip supply this year. In an interview with Bloomberg Law he outlined that “our assessment last year was there was at least a temporary oversupply of capital in the market relative to attractive cases, and I think the tables have turned.” He is now “concerned about whether there is enough capital in the market currently to support the next 12 months of demand.” Statements such as this demonstrates that the litigation finance sector has plenty of room to grow for new investors.
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