A Dynamic Decade


Tets Ishikawa examines the past 10 years in the litigation funding market

Article originally posted in the Litigation Funding Magazine
How we live in exciting times!
  The legal industry is finally embarking on a belated journey of innovation and commercialisation, driven by the growth of law tech and the influx of institutional investor capital, starved of yield, diversification and immature markets. But as law firm IPOs become increasingly common and the legal sector consolidates like the investment banking industry in the 1980s and 1990s, what will the litigation funding market look like in ten years’ time? In 2008, Burford Capital – a £3bn market cap company today – didn’t even exist in what was then a very greenfield market. Obviously, a lot can happen in ten years – Uber and AirBnB didn’t exist either. So it’s unsurprising that opinions, coloured by vested interests, vary as to where the broader legal funding market will be in 2028, which is why one should take a step back and consider how all evolving markets develop. In a nascent market, unproven concepts are backed by private investors, who invest in the conviction of the individual rather than the concept, and angel-type investors, who hope their vision banks them a winner out of every ten shots. And if successful, the returns will be multiples so large they look like a “typo”. As concepts become proven, expensive institutional investors – the likes of hedge funds, private equity, and venture capital – enter, hoping to ride the scaling-up of the proven concept for returns which suit their 20% to 50% IRR-target portfolios. Once the market is truly established, bank-type funding (such as credit lines, working capital facilities) become widely available to market suppliers, with the demand and supply side promoting competition and pricing transparency. Litigation funding has yet to get to this final stage. Some will argue that some funders already have bank funding. But bank-funded litigation funders usually benefit from an ATE wrap (i.e. it is not true bank funding) and, in any case, most litigation funds are still backed by the considerably more expensive capital of institutional investors. This explains why most of the capital is targeting the market for very high value claims where returns can be astronomically high. And that market is so deep that arguably it is now a permanent feature of the landscape. But it’s also where the issues of access to justice – which the funding market championed itself as the saviour for – are less engrained. Claims below this high value spectrum operate in a very different world where claimants (perhaps in greater number than solicitors even recognise) seek funding but where funding options are very limited. There is a consensus that this “mid-value” spectrum (call it the £250k to £5m claim mark) remains “untapped” because of the natural barriers to entry for most funders. They have issues with scalability. Pricing remains another major obstacle because a share of the award is economically unviable. On a practical level, the time and resource spent arranging funding for mid-value claims doesn’t make business sense for them or the lawyers they so rely on. But as this mid-value market also represents the mass market, this conundrum needs resolving for the market to truly develop. For many, it remains a long-term conundrum but there are enough trends to suggest that this conundrum may not exist in ten years’ time.  
1. Law firms are having to become more commercial
    Law firm IPOs are not just a fad. It is a once-only roll of the dice for partners to monetise significant value from their partnership. But with listings come other obligation: prioritising shareholder value; organic or acquisition-fuelled growth (bringing more law firms into the “listed” category); an experienced commercial management team who focus on maximising revenues and fees. That requires cross-selling of all revenue generators in the firm, promoting customer loyalty for repeat business (perhaps a corporate version of reward cards), improved brand recognition and marketing and the provision of other non-legal services. Oh and of course, using their core skills to maximise fees through contingent fee structures. If a law firm is good, surely it knows how to maximise its fees through a CFA or a DBA? Or perhaps even “do a Rosenblatt”, which is not about fulfilling a life-long dream to be funding litigation cases but is simply maximising revenues from their workload by being able to do more DBA-type work? It’s not inconceivable that in the future, law firms will assess their workload much like a bank loan book, through a matrix of prospects, contingent uplifts and capital at risk, and manage it using portfolio optimisation techniques such as cross-collateralisation and hedging (through ATE, funders and discounted / partial CFAs). If that sounds far-fetched for lawyers, it’s everyday financial services stuff.  
2. Corporate clients judge law firms on their commerciality
    One less well-known legacy of Burford’s listing is that it has raised the awareness of litigation funding amongst the many business owners and wealthy individuals who have stockbroker accounts or equity portfolios. As an unusual equity with a non-cyclical business, it draws attention. And if those owners or individuals end up in litigation, they tend to explore how funding can help, even before they speak to solicitors. This certainly seems to ring true based on how Sparkle Capital’s resource-based websites receives most of its enquiries directly from litigants, not solicitors. Today, many litigants shop around for legal services through their own beauty parade process, usually instructing those who share their commercially minded, innovative and progressive mindset. And the most heavily weighted metric on that beauty parade is funding. The inability or unwillingness to discuss funding may for now not cost solicitors too much business but over time, it will catch up with solicitors who remain blind to funding as a source of revenues.  
3. Pricing transparency and simplicity
    Accepted convention in the litigation funding market is that pricing should not be transparent. There is an argument for larger cases where each case is unique (analogous to say commercial loans in real estate) and pricing can vary. However, on mid-value claims (which – to continue the analogy – are the vanilla residential primary mortgages), there is no reason why pricing transparency should not exist. In fact, lack of pricing transparency is damaging for all. Most claimants, more so than solicitors, accept that non-recourse funding for litigation is expensive because of its inherent risk. So not being transparent on pricing simply raises suspicions amongst claimants about the funder or its intentions, neither being great advertising for the industry. It also invites a round of time consuming negotiations on price, which ultimately cost more in time and fees than the amount being negotiated. If this sounds theoretical, it’s not. Pricing transparency wins Sparkle Capital business because it saves time and money for all.  
4. Changes in the legal system
    With so much focus on the cost of litigation funding, one tends to overlook the actual cost of litigation and in particular the efforts being made by the judiciary to bring down these costs. The benefits of such cost reduction will ultimately help make access to justice easier for all, including making third party litigation funding more viable to a broader range of cases. Various pilots are frequently mentioned, the most common being the reduction of hearings through the use of paper and technology. CPR 27.10, 54.18 and 78 all set precedents for matters to be dealt with without hearings and is therefore not far removed from what’s already in place. As for audio-visual hearings through tele-presencing technology, there’s no reason why it can’t be implemented in short order, given today’s tele-presencing technology is already widely in use elsewhere. Walk through most investment banks or technology companies and the phone systems include built-in cameras so multi-way conference calls with visuals can be done with anyone on any desk at any time. Combine with modern calendar-sharing technology and document management systems, it does not need much to be adapted for court hearings. It could even improve the principle of public justice, using a C-Span-type online streaming service for all hearings, so people can “attend hearings” from anywhere in the world. The real benefit of all this? Huge cost savings per hearing and quicker turnarounds, making more mid-value cases viable.  
5. Advanced Legal Technology
    And how about the development of artificial intelligence in the legal technology sector? Some estimates claim around $200m was invested in legal tech companies in May and June of 2018 alone, mostly looking to capitalise on the use of artificial intelligence to manage the heavy-lifting processes of a legal operation more efficiently. But if AI sounds too sci-fi for the legal industry, think again. You only have to appreciate Google’s AI technology Duplex (best demonstrated in Google Assistant) to observe the power of natural speech processing. This is the cousin to natural language processing technology, used increasingly in fund management to scroll over subjective research, earnings and press reports to predict stock price movements. And many of these funds are the ones funding the surge in law firm IPOs and legal funding. While questions may remain as to how quickly and deeply the legal industry will embrace AI technology, AI is so strongly rooted in the era of “big data’ we live in that it is undisputably here to stay. And the benefit of AI? Potentially vast cost savings in assessing and running litigation cases.  
6. Recoverability of ATE Premiums
    For many, this debate has been and gone. But as on-going reviews of legal costs continue alongside an ever-evolving and ever-growing funding and insurance market, it would not be impossible to think that over the next ten years recoverability of ATE premiums under certain criteria could be re-introduced. To date, this seems only to have been considered in black and white terms (recoverable or not) with a single shade of temporary grey (for clin neg and insolvency) It doesn’t seem so far-fetched that this could be modified over a ten-year period, given recoverability of ATE premiums not only limits access to justice in instances where the claim is meritorious and recoverability is wholly justified. Even in a glacially slow market, more surprising things have happened in 10 years than this.  
    So, where will we be in ten years’ time? It’s hard to be precise but the trends are clear in pointing to a mature litigation funding market, with the mass market mid-value claims, driven by corporates who are increasingly aware of litigation funding, far deeper and broader than it is today. Law firms will need to adapt to this changing market place, as will funders and their funding structure. The real question that remains is how many more jurisdictions will see have embraced litigation funding by then?