Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, we look at how litigation funders have changed their tune as the pandemic continues. Sign up to receive this column in your inbox on Thursday mornings.
Early on in the pandemic, some of the largest litigation finance companies sought to assure investors that returns would hold up in the face of the health care crisis and economic downturn.
As courtrooms closed and businesses shuttered, some funders said the number of opportunities to invest in lawsuits was setting records. That kind of talk, and more cash entering the industry, was enough to give the impression that litigation finance would be like at-home fitness or online shopping: a winner in the Covid-19 economy.
Seven months later, industry sources say the pandemic hasn’t yet turned into a boon for litigation finance.
“The actual investment-grade opportunities coming into the market were more or less unchanged,” said Charles Agee, chief executive officer at litigation finance brokerage firm Westfleet Advisors. “It was that fizz that really seemed to hit the market with Covid.”
Much of the new litigation stemming from the pandemic is insurance coverage disputes that the financing industry has largely avoided. Funders—like Big Law firms—are still looking for longer-term answers about how Covid-19 will impact the business.
Burford Capital, the industry’s largest player, last week used words like “collapse” and “sharp fall” to describe its business activity in the first half of the year. Their business was far from hitting any sort of record highs during the height of the pandemic.
Burford’s half-year financial results were well received in large part because it hit a big winner during its reporting period, worth more than $423 million. It’s forward-looking data was less rosy.
But the level of commitments Burford made to spend on new legal finance assets fell 74%, to $195 million, in the first half of 2020 after a years-long run of growth. And the company over the same stretch spent $258 million, or 42% less than the year-ago period, on ongoing litigation.
Burford CEO Chris Bogart said in an interview that the firm’s commitments fell because fewer lawyers and companies were spending time looking for financing early on in the pandemic. They were instead focused on more important issues, he said, like transitioning to remote work.
Burford also took a step back from new investments as it was concerned with “credit risk,” Bogart said, fearing bankruptcies or other economic damage could hinder defendants’ ability to pay.
As for deployments, Bogart said the company was spending less on lawyer fees in active litigation because courts were largely on pause. Add that to rising infection rates in some states, and the future of the litigation finance market is murky, he said.
“What does the future hold? I don’t know is the short answer,” Bogart said. “Six weeks ago I probably would have said things were rebounding. It felt like courts were trying to hold cases. With the resurgence in Covid cases, that is a more cloudy landscape. It’s almost a week-by-week question now: What are courts doing?”
Some funders are still trying to get a hold on what the current landscape means for their business.
Ralph Sutton, CEO of Validity Finance, which raised $100 million earlier this summer, said his company has seen 40% more investment opportunities this year compared to last.
A surge of inquiries earlier in the pandemic were related to businesses seeking to sue insurance providers for not covering losses incurred by business closures, Sutton said. Those cases have not been attractive to funders, given a number of rulings in favor of the insurance industry so far.
“We are trying to do a poll of the people we speak to all the time who have their ears to the ground about these things so we can go back to our investors and say this is what’s happening. This is what Covid did,” Sutton said.
Worth Your Time
On Litigation Finance: Brandon Baer, former managing director of Fortress Investment Group’s Credit Funds business, launched a new litigation finance business, Contingency Capital. He is backed by TFG Asset Management and has secured commitments of up to $1.4 billion from his former shop, Fortress Investment Group, and another large asset manager to co-invest in cases and assets.
On Automation: Wilson Sonsini’s automation arm, SixFifty, has launched a product to help companies manage diversity and inclusion programs as their popularity surges.
On M&A: Kirkland & Ellis has advised on deals with the highest total value through three quarters in a year when M&A volume has fallen about 24% since 2019.
On Bar Exams: The traditional bar exam could soon become a thing of the past, Sam Skolnik reports, following a year when state after state has struggled to administer it during the pandemic.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.
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