Consumer Pre-Settlement Litigation Funding: An Emerging Asset Class
The following was contributed by Joel Magerman, Managing Partner of Bryant Park Capital, a leading investment bank specializing in litigation finance, with over 35 completed transactions totaling more than $2.4 billion in this sector alone.
Executive Summary:
- Third-party funding for consumer litigants has been a growing industry in the U.S. since the 1980s.
- The need for third-party litigation funding emerged because banks do not typically provide advances to litigants whose only collateral is potential proceeds from lawsuits.
- Today, there are over two hundred companies providing pre-settlement and medical lien litigation funding to individual claimants.
- Over the past 25 years, consumer litigation finance has matured into an investment grade asset, with over 25 separate securitizations representing over $2.7 billion of invested capital since 2018.
Why the need for litigation funding? Insurance companies have found that a plaintiff’s need for a financial settlement is often a driving force in settling a case for a lower amount than if the case runs its course to a hearing. Litigation financing provides equal footing to a plaintiff to pursue claims due to an injury they have incurred due to another party’s actions or negligence.
A recipient of litigation funding benefits from certainty and speed of funding, and the fact that the funding is non-recourse. For the attorney representing the client, litigation funding allows the legal process to play out and maximize the plaintiff’s settlement while providing some financial relief until a settlement is finalized. At the same time, third-party litigation funders see the potential upside in underwriting pending lawsuits and earning a return on non-recourse advances. Generally, third-party litigation funders have no control over the litigation they fund, allowing the plaintiff and their legal counsel to decide their legal strategy.
Medical lien funding, which is closely related to consumer pre-settlement funding, provides funding to providers of medical services (imaging, doctors visits, physical therapy, surgery, etc.) to these same plaintiffs who cannot pay the medical provider until a claim is adjudicated and paid. Funding these liens is effectuated by buying the lien or the LOP (Letter of Protection) from the medical provider, depending upon state statutes.
General Industry Data (Pre-Settlement Litigation Funding)
- Funding amount as percentage of expected case value: ~10-15%
- Typical funding size: $1,000-$50,000
- Asset-level IRR for the funder: typically 25-35%
- Multiple on invested capital: 1.4-2.0x
- Weighted average life: 1-3 years
- Application time to funding: typically a couple of days
- Number of market funders: 200+
- Non-recourse to the plaintiff
An Emerging Asset Class
In recent years, consumer litigation financing has become more attractive to investors due to rising inflation, increasing interest rates, and volatility of many other classes of investments. The consistent robust returns that are uncorrelated with the economy make litigation funding attractive. Alternative lenders and multi-strategy funds have invested in litigation finance, with U.S. funders categorized into dedicated funders (specialize in litigation finance), multi-strategy funders (entities that have established a dedicated litigation finance strategy), and ad hoc funders (occasional participants in litigation finance). These investors have increasingly diversified their investments, by allocating funds to multi-claim portfolios and making fewer single-case investments.
Institutional investors have continued to enter the litigation funding industry, both through directly funding litigation and through providing billions of dollars of financing to litigation funding companies. There have been approximately $2.7 billion of securitizations of consumer pre-settlement assets since 2018, plus billions of dollars of advances to market participants from credit opportunity and hedge funds, as well as private equity firms such as Blackstone, Parthenon, Further Global, Edmond De Rothschild, and UBS. We expect that the investor sentiment of diversifying into litigation finance will continue in coming years.
Learn More
To uncover additional industry and investment insights, download the full BPC Litigation Finance Industry Primer.
