In this article, president and CEO of litigation funding company Baker Street Funding explains about the growing market of litigation financing.
A non-correlated asset with potentially billions of dollars of investment
In the past ten years, the litigation finance industry has exploded. The industry is primarily unregulated except for a few states that site century-old legal precedents such as champerty to try and restrict this new and growing industry.
Plaintiffs in these states are now at a significant disadvantage by not being able to access legal funding; therefore, many of these plaintiffs end up settling their cases to cover their bills and expenses at a much lower amount than they are actually worth.
Global leaders in the industry such as Baker Street Funding and Lex Shares Financial provide value to clients and attorneys by allowing them to leverage the future asset that is a settlement to cover immediate expenses. This allows the attorneys that litigate these claims to have enough time to settle for a higher value than if their client was forced into a settlement because of their financial circumstances.
Many of these plaintiffs have had catastrophic injuries and can no longer support themselves or their families.
Law firms across the country see the value that litigation funding provides to their clients by allowing them to leverage their future receivables; they are able to negotiate longer with insurance companies who notoriously make low offers in order to drag the case along or generate a quick settlement below the cases true value.
Additionally, many attorneys are leveraging their future fees to pay for expert testimony, marketing, and new client onboarding.
Plaintiffs attorneys generally have an extremely erratic income stream, especially in the first few years when they have to spend monthly money on litigating cases and wait until they settle to see any income.
Why invest in legal funding?
- Non-correlation: legal funding is a non-correlated industry, which means that it does not follow the traditional stock market or economic trends. Generally, the economy and the stock market do not affect the industry or investors’ returns. Even some people speculate that in a down economy, there is actually a boom in the legal funding space.
- Higher-yielding investments: The return that investors receive by investing into either individual cases or a portfolio of cases is larger than other assets with similar risk profiles. Since a large amount of due diligence goes into underwriting every claim, the risk of losing principal is usually greatly reduced.
Traditionally legal funding investors were high net worth individuals and family offices. Now we have seen a glut of banking institutions, private equity firms, and alternative investment managers pour into the space. While there is much more money in the space, there is also more risk. Some firms sacrifice case quality to make sure that enough capital is deployed on a monthly or quarterly basis.
What is the state of the industry?
Despite there being increased regulatory scrutiny, the legal funding industry has ballooned to over $10 billion in the US. This growing sector has the potential to level the playing field between large insurance companies and individual plaintiffs. While increased regulation is going to happen, there will still be an enormous need for legal funding in the future, and more money will be invested in the industry.