What is really driving the growth of litigation finance?

Coverage of litigation finance in the press tends to emphasize the category’s rapid growth over the past few years, and while that tendency is not at all surprising given the growth that has in fact occurred, it reveals something of an imbalance. That imbalance has to do with a tendency in press coverage to emphasize the supply side of litigation finance’s growth over and above the demand side of that story, which is to say the reasons that litigation finance is useful to firms and clients.

Arguably, the demand side of the story is far more interesting in revealing the real drivers of the growth of litigation finance.

So let’s unpack some of the clearest indications of demand drivers as demonstrated in the most recent research on the space available, the 2016 Litigation Finance Survey—which showed that reported usage of litigation finance by firms has increased four-fold since 2013.

Pressure on client budgets continues to create reasons to move costs off their balance sheets…
More than nine out of ten clients (94 percent) say that increased pressure on legal budgets, staffing and spending is a significant challenge today, up from 80 percent in 2014 and 73 percent in 2013. This challenge is among the top three challenges predicted for the next five years.

Yet firms are not always willing and able to share as much cost and risk as clients expect…
Lawyers and their clients agree that sharing risk is good—but they disagree about how to share it. Significantly more in-house lawyers prefer contingency, for example. But firms can only tolerate so much risk. This explains why firms have been quicker to embrace litigation finance. We encounter this routinely, as firms seek litigation finance as a way to hedge their risk, or to stabilize their balance sheets for the duration of contingency cases.

Simultaneously, far from turning down business, firms need to work harder to win new clients…
Competitive pressures make law a buyers’ market in which private practice lawyers have to work harder for less business. They cite increased pressure for business development (97 percent) and struggles to differentiate and compete with other firms (90 percent) as two of their three top business challenges.

And access capital in new ways…
Among the challenges identified by over eight in ten (81 percent) private practice lawyers both now and in the future is a lack of capital to invest back into the firm, an obstacle that is in large part due to the peculiar capital structure of the partnership-based law firm business model.

But at the end of the day, among the greatest demand drivers is lawyers talking to their clients
Lawyers report that litigation finance is part of many of their client conversations—and not just when the client can’t afford to pay hourly fees. Almost six out of ten (58 percent) of private practice lawyers believe that clients that can afford to pay their lawyers still benefit from litigation financing because of positive impact on accounting outcomes or to reserve capital for other business needs.

Additional data from the research is available on Slideshare


Additional reading

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