Litigation Finance: Industry at Crossroads

The modern litigation finance market expanded rapidly from a niche practice into a multi-billion-dollar asset class. Early funders deployed non-recourse capital into individual cases in exchange for a share of any recovery, often bearing the full downside risk in pursuit of a portion of proceeds.

This approach proved effective in establishing the market. It enabled claimants without financial resources to pursue litigation, extending beyond the traditional contingency-based model used by law firms, while offering capital providers the prospect of uncorrelated, potentially high and repeatable returns.

However, the structure of that model, shaped by the industry’s origins, also embedded many of the challenges now coming to the surface.

Early underwriting emphasized case merits and probability of success. While necessary, this approach often placed less emphasis on portfolio construction, capital allocation across cases, and the pricing of duration. In practice, investment decisions frequently resembled legal analysis rather than institutional underwriting.

A related question historically was why law firms themselves did not become the primary risk transferees. While some smaller firms operated on contingency, larger firms were generally not structured to absorb sustained downside risk, given overhead and business models. This gap helped give rise to dedicated litigation funders, entities combining legal expertise with capital provision, but often retaining a legal, case-by-case approach to risk.

The case-by-case, venture-style model reinforced these dynamics. Returns depended heavily on binary outcomes, and duration, the time required for cases to resolve, was not systematically incorporated into return expectations.

As the market scaled, these design choices came under pressure.Courts have increasingly scrutinized funding arrangements. The UK Supreme Court’s PACCAR decision determined that litigation funding agreements entitling funders to a percentage of damages could fall within damages-based agreement regulations, rendering many existing agreements unenforceable. 

Subsequent rulings in the Competition Appeal Tribunal, including the refusal to certify collective proceedings in Riefa v. Apple and Amazon, highlighted concerns that success fees could generate excessive returns for funders, that payment structures could prioritize funders over claimants, and that confidentiality provisions could limit transparency.

These developments reflect underlying structural tensions. Funding arrangements can create misalignment between funders seeking higher returns and claimants seeking timely resolution. Courts, recognizing these dynamics, have shown a willingness to intervene.

Duration risk has also become more visible. Litigation timelines frequently extend beyond expectations, tying up capital without additional compensation under traditional models.

Taken together, these factors are reshaping how litigation finance is evaluated by allocators, structured by fund managers, and supported by insurers.