Litigation finance is a line of business that is attracting interest from institutional investors including hedge funds and private equity managers as a potential diversification tool. Whilst claimants and lawyers are already taking advantage of the benefits of litigation funding, it is emerging as an interesting alternative asset class for investors.

Funding increases access to justice by enabling claimants to bring meritorious claims that they would not otherwise have been able to bring owing to a lack of funds, budgetary constraints/internal policies, or a need, or desire, to deploy money in other parts of their businesses.

 

At the same time, funding de-risks the claim (the claimant pays nothing if the claim is unsuccessful) and allows it to be taken off balance sheet. This is particularly relevant to businesses that are focussed on producing a certain level of EBITDA as a self-funded claim will result in a reduction of EBITDA equal to the costs of the claim (likely spread over a number of years) but any damages won will be recorded as a one-off item (with no positive impact on EBITDA). I am sure that my former private equity clients will be very focussed on encouraging their portfolio companies to explore funding in the event of a dispute to avoid impairing EBITDA which could, in turn, have a very negative impact on exit valuation.

Funding can also offer law firms a range of benefits. Most significantly, clients do not currently pursue all the strong potential claims that they have in their businesses because they have to work within a limited legal budget and the board/management will have a limited tolerance for risk. Funding can address both these constraints on activity and generate increased work flow for law firms. Law firm partners should, therefore, ensure that their clients are fully appraised of the benefits of funding.

Other benefits include the ability to tackle ever increasing fee pressure – in essence funding offers law firms the ability to arrange finance for their clients for the expensive purchase of litigation or arbitration services – and increased certainty around recovery of fees and disbursements, which are guaranteed by the funder provided the agreed budget is adhered to, and cash-flow.

 

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We post crowdfunding campaigns for those who need help affording legal representation yet do not qualify for legal aid. We also work with Australian Community Legal Centres to provide free legal crowdfunding advice.
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