Litigation finance in ‘state of flux’ as capital commitments fall

Litigation funders suffered a nearly 14% decline in capital commitments to new deals in 2023 as alternative asset classes paled in the new interest rate regime, stalling AuM growth and even shaking up employment in the sector, a key industry watcher has declared. 

“Last year’s results are indicative of an industry in a state of flux, with some notable players exiting the industry, numerous professionals making lateral moves, and capital commitments to new deals contracting by nearly 14%,” analysts at litigation finance advisory Westfleet Advisors said in their latest annual report. 

The reduction in new capital commitments “is not a reflection of softening demand,” Westfleet analysts insist, putting the decline rather to the waning appeal of alternative investments in a new higher interest rated world.

That decline in flows held industry assets under management to less than a 1% gain to $15.2 billion, a notable stall after a 10% increase in the prior year, Westfleet data indicated. 

Average deal size slipped 9% as gains for smaller single-matter deals, which make up 1/3 of the market, were more than offset by declines on larger and more prevalent portfolio deals. Westfleet notes some traditional variability in the figures and claims a “fairly stable pattern” towards larger deals sizes over the longer-term. 

The closing of the spigot cost jobs and Westfleet cites “the shake-up of dozens of professionals who left their roles with funders during 2023.”

That shake up could alter the industry roster. Westfleet claims outperformance for best-in-class incumbents and a shake-down for more middling performers. 

“We expect to see continuing consolidation and likely additional shakeout in 2024,” analysts wrote. 

Westfleet brushes off concern that increased usage of contingent risk insurance, a means of insuring against legal costs and even unfavourable court outcomes, may be squeezing litigation finance off the market. “We do not believe it has materially displaced litigation finance except in areas such as appellate monetization,” analysts wrote. 

Westfleet tracks deals via a survey of what Westfleet calls "most" of the major litigation funders. Data covers only commercial litigation finance, excluding other related formats such as consumer litigation finance, law firm finance, receivables factoring, and other legal finance contingent courtroom outcomes. Data covers the 12M through mid-year 2023.

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