Nobody Knows Litigation Finance Size, but It’s Not $85 Billion

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, we examine just how big the litigation funding market could get, using one funder’s very striking estimate of U.S. plaintiff lawyers’ yearly fee haul. Sign up to receive this column in your Inbox every Thursday morning.

There is no consensus figure for how much money investors plow into U.S. lawsuits each year.

But it is not $85 billion, a number recently put forward as the “addressable market” for litigation finance by a publicly traded litigation financier.

Omni Bridgeway, which merged with IMF Bentham in November, has used that number since at least August, and it was republished in an investor presentation last month. The figure roughly represents the total annual fees estimated to be paid to U.S. plaintiff lawyers.

Paying plaintiff lawyers in exchange for a portion of their case’s rewards is, of course, what litigation funders do with much of their money. But the $85 billion figure may make members of the industry stand up and take notice.

That’s because the industry spent only about 2.7% of $85 billion during a 12-month span that started in mid-2018, according to a Westfleet Advisors survey.

And that raises some nagging questions for the nearly 15-year-old litigation finance industry in the U.S. Does that low penetration rate portend explosive growth ahead? Or is it an indication that litigation finance is a niche product most plaintiffs and lawyers find unnecessary?

Debate around the size of the addressable market is another example of questions surrounding metrics in the litigation finance business. When Westfleet, a broker in the industry, released its $2.3 billion figure, Burford Capital called “obviously self-interested” the survey’s conclusion that the high levels of capital in the industry make it a “buyer’s market” for claim holders.

Burford, meanwhile, had aspects of its public company accounting attacked by short-seller Muddy Waters last summer.

The trajectory of litigation finance remains a subject of disagreement even within the industry, and some executives bemoan marketing materials that set sky-high expectations for investors and lawyers alike.

To be sure, Omni Bridgeway’s U.S. investment officer Allison Chock said her company does not expect the litigation finance market will ever grow to the “full capacity” of $85 billion. Chock said in an interview that $2.3 billion was a “fair enough” estimate of how much money was invested in corporate U.S. lawsuits over a 12-month span.

“That figure will undoubtedly grow,” Chock said. “And I think there is easily capacity for it to become 10 times the current size. That said, it will never reach the ‘full capacity,’ most likely.”

Litigation funders shouldn’t even be trying to reach full capacity if that means financing all of the fees paid to U.S. plaintiff lawyers. That’s for the simple reason that plaintiff lawyers lose a lot, and litigation funders only make money on winning cases.

Plus, bankrolling every plaintiff lawyer in the country would seriously damage the industry’s argument that is in the business of helping meritorious cases reach courtrooms rather than gambling on the odds.

Chock agreed that Omni Bridgeway “would not want to fund 100% of every dollar paid to a plaintiff’s law firm and experts” for several reasons, including that many cases are too small, too weak, or pursued by plaintiffs for reasons other than money.

But she said the company “does its best” to provide an estimate of the addressable market because it is something investors, shareholders—and even journalists—ask about.

She also said there is a portion of the legal market beyond attorney fees that funders can address: the amount of claims, judgments, settlements, and verdicts. Funders increasingly are asked to monetize those assets, Chock said. The size of that market is also difficult to estimate, she said.

“It’s an evolving industry, and people are still trying to understand the market opportunity,” said GLS Capital co-founder David Spiegel, whose firm raised more than $345 million in January.

Still, the industry is very much in growth mode. Investors this year have already put more than $825 million in new capital into litigation finance firms.

I spoke with Parabellum CEO Howie Shams last month as his company has raised more than $450 million for a new fund. Shams said the market has seen greater adoption from lawyers but cautioned against projections of tremendous future growth.

“I’m not one of those people who think of this like it’s an infinite market,” he said.

LexShares was the latest to announce new funding this week. The online marketplace that allows investors to buy into single cases brought in $30 million from institutional investors and is hoping to raise another $70 million.

Greenberg, LexShares’ founder and CEO, said it is difficult to determine the addressable market is for litigation finance. He said if deals are priced based on the returns from lawsuits, the number might be higher than the fees paid to plaintiffs.

“One of the things I’ve called for repeatedly in our market is greater transparency,” Greenberg said. “I think it is beneficial to our market.”

LexShares on Wednesday released a set of metrics that show its historical returns. The company has invested in 103 cases and concluded 43 of those. The median internal rate of return for those cases is 52%, and 70% of the concluded cases returned more money to investors than their principal.

Bill Farrell, co-founder of Longford Capital, said it could take 10 to 20 years for the litigation finance market to account for 25% of the fees spent on plaintiff lawyers.

“We are going to keep growing over a number of years,” Farrell said in an interview.

Litigation finance is undoubtedly carving out a bigger space. But nobody should view it as an $85 billion opportunity.

Worth Your Time

On Black Lives Matter: Perkins Coie is representing Black Lives Matter in a new lawsuit against the City of Seattle, accusing local police officers of using “unconstitutional” force during recent protests, my colleague Meghan Tribe reports.

On Institutional Racism: Paul Weiss partner Jeh Johnson, a former U.S. Secretary of Homeland Security, will lead an independent review of the New York State Court System’s efforts to combat institutional racism, my colleague Madison Alder reports.

On Bankruptcy Business: Kirkland & Ellis is cleaning up in the market for representing large, public companies filing for bankruptcy protection. This week I dug into some numbers to find Kirkland has represented 11 of 24 publicly traded companies filing for bankruptcy this year with more than $100 million in assets. The firm has now earned more than $109 million in those cases.

On Capital Markets: Latham & Watkins says their capital markets practice revenue was up 25% during the first quarter this year from last year. I spoke with corporate chair Marc Jaffe and capital markets chair Ian Schuman about a booming market for corporate debt and a range of other topics, including what will happen if Chinese companies are forced to de-list from U.S. exchanges.

That’s it for this week. Thanks for reading and please send me your thoughts, critiques, and tips.