A guest post by Ian Madej, chief executive of Asertis
Madej: New entrants may find that the harsh realities of market economics will work against them
As litigation funding progresses at different speeds across the world, the United States has inevitably led the way. Although the market has also reached a level of maturity and sophistication in the UK and Australia, it nevertheless remains dynamic as other countries, such as Canada, are catching up fast.
Singapore and Hong Kong opened their doors to litigation funding in 2017, but only for international arbitration and mediation until recent announcements from Singapore which are set to open the market up further to domestic arbitration and other court matters.
Meanwhile, other important jurisdictions, such as India, are at a more embryonic stage.
The Financial Times recently praised litigation funding. When the criminal convictions of 39 British sub-postmasters were quashed, its headline ran “Post Office scandal shows value of litigation funds”, followed by the comment: “When it comes to challenging appalling behaviour by a deep-pocketed establishment entity, some private firepower is essential.”
Funders regularly work with international law firms in financing individual claims, as well as group and class actions. The long-running Dieselgate scandal is a case in point. Litigation funding has facilitated a swath of actions against the German auto giants.
Where next?
The general industry consensus is that multiple new entrants will continue to enter the litigation funding market, attracted by what they perceive as the potential gains and the lack of barriers to entry.
Being a member of the Association of Litigation Funders (ALF) is not a prerequisite, for example. But I fear that some new entrants may try to achieve what appear to be uncorrelated and outstripped returns.
As new funders endeavour to reshape the landscape, this may result in some unwise decision-making, because they will need to rely on external advice without having built up sufficient infrastructure to make properly vetted decisions.
Many experienced funders have gone through this cycle and successfully emerged at the other end. Ultimately, their success lies in implementing the right strategy: putting the appropriate infrastructure in place, rather than relying exclusively on external counsel.
The reality is that external advice often serves as the ladder near the top of the board. But to complete funding successfully, there has to be a navigation of multiple other obstacles before that point is reached.
Should this occur, these new entrants may find that the harsh realities of market economics will work against them.
In practical terms, this means that the market will wash out any businesses that are over-leveraged or inefficient – or worse still, that do not have a clear investment strategy from the outset. Such opportunistic funders are unlikely to survive.
Consolidation and specialisation
And what of the existing market players? You only have to look at the banking sector for pointers as to what might happen next.
The US and UK have both experienced successive waves of bank mergers over the past 50 years, while among Europe’s lenders, led by Italy and Spain, long-awaited consolidation is finally underway.
The same pattern is likely to occur among litigation funders. An early indicator of what we might expect came with the 2019 merger between Omni Bridgeway and IMF Bentham, which they described as a ‘strategic combination’.
Economies of scale, increased access to funds and an enhanced geographic footprint were just some of the obvious advantages.
Beyond consolidation at the top, there will be other developments at different levels of the market.
It is equally probable that niche funders will appear to focus on specific sectors – a natural consequence of increased sophistication, maturity and knowledge.
We started out as a niche insolvency funder, for example, and that would have remained the case without the opportunity to enter the broader litigation funding market.
Perhaps prematurely, some market players have been pioneers: they looked at the applicability of litigation funding across a number of jurisdictions and practice areas and tried to industrialise it.
Although the market was not yet ready to accommodate the move, such initiatives show how it is destined to develop much further.
As it forms and reforms in a process of dynamic evolution, the number, size and scale of market participants will change over time. Some new entrants will undoubtedly become dominant players of the future.
Market dynamics will also continue to change, encouraging more consolidation in addition to greater specialisation as market fragmentation develops apace.
Accordingly, an ever-wider range of cases will be funded as the scale of the institutional capital and the number of market participants increase.