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Litigation finance has become a billion-dollar industry. Yet funders took some lumps in 2020 like many others. Despite initial forecasts that litigation funding would help firms and businesses during an economic slowdown, litigation funding only increased by about 6% in 2020, according to Westfleet Advisors, a litigation brokerage firm. Westfleet began surveying litigation financing in 2019, which has historically been a very opaque industry.
According to its second-annual report, litigation funders invested $2.47 billion in 2020. Litigation funding provides capital to either firms or clients in exchange for a portion of any recovery. Litigation funding is typically difficult to obtain, and 2020 was no different. Only about 5% of applications were closed, according to Westfleet, and the number of dedicated litigation funding firms remains small. Most dedicated litigation funding firms are privately held, although hedge funds and ad hoc investors are playing a somewhat increased role, according to Westfleet.
The average deal for litigation funding was $7.8 million in 2020, reflecting that funders prefer large or portfolio deals to small single-matter litigation. Despite the ability and willingness to enter into large single-matter litigation deals, however, most businesses were reluctant to pursue litigation even if they could have secured litigation funding. With a lowered demand law firms looked to other sources for revenue, such as increased billing or funds under the Paycheck Protection Program. Further, large law firms have historically displayed less than full enthusiasm for litigation funding. This is perhaps a primary reason why litigation funding did not take off as much as predicted in 2020. Court closures may also have played a role.
Still, litigation funding remains a force in the legal industry, and it is possible that we will see more growth in 2021. Corporations continue to look at cost-saving measures in litigation, and law firms are continually exploring alternatives to investing their own capital in contingency-fee cases, so there is room in the marketplace for increased litigation financing. Industry leaders still seem well-positioned, as in 2020 46 funders allocated $11.3 billion in assets to U.S. commercial litigation investments.
Westfleet itself cautioned that it was difficult to obtain overarching takeaways on the industry in the unusual year that was 2020. And Westfleet has received some criticism from industry insiders, with some large funders declining to participate in its surveys and suggesting its results are biased from its role as a broker. Still, any insight into this emerging, if cloudy, industry is beneficial.