2023 was a busy and turbulent year in the UK litigation funding and legal assets sector, dominated as it was by the fallout from the Supreme Court decision in PACCAR. However, other themes emerged, and we expect many of them to continue into 2024:
Signs of a maturing market
As the sector has matured, new capital has entered the market and transactional focus is evolving from the traditional single case funding model. Secondaries transactions are more common, with funders investing in established portfolios of claims with a view to greater diversification and (potentially) a shorter investment lifecycle. While the macroeconomic climate has made fundraising more challenging across all asset classes, we have seen a number of established private equity firms and hedge funds becoming increasingly active in the legal assets sector. Larger and more diverse deals have led to co-investments, and we anticipate that the countercyclical and uncorrelated nature of disputes, together with the prospect of high returns, is likely to continue to attract a broad range of market participants.
The rise of law firm lending
2023 saw traditional litigation funders look to expand their offering of law firm and professional services funding. Highlighting their knowledge of the legal market, and their understanding of the business needs of professional service firms, specialist legal assets funders are increasingly seen as attractive funding partners for law firms at all stages of the business cycle. In the last year, in addition to traditional single case and portfolio funding deals, the Macfarlanes team advised on facilities used to establish new law firms, to fund law firm acquisitions, to establish new divisions and offices of legal practices, and to fund general working capital needs of law firms. We expect to see this diversification continue.
Single case funding still dominant
2024 promises to be a busy year for the UK disputes market. Single case funding will no doubt continue to dominate and, like in 2023, CAT claims, securities claims and financial services litigation more generally are expected to be areas of interest. This year may see ESG related claims being added to that list.
Risk transfer and the increasing role of insurance
Insurance will continue to play an important role in the funding sector. While the ATE insurance market is well developed, funding deals are increasingly being backed by other developing products underwritten by specialist insurers in the market, including judgment preservation insurance, capital protection insurance, and a range of other bespoke products.
Fallout from PACCAR
2023 was undoubtedly a year dominated by the fallout from PACCAR and that trend will no doubt continue in 2024. The market is seeking certainty, and there is the prospect of legislative intervention to provide clarity as to the enforceability of case-specific funding packages. Until that clarity is provided, disputes concerning the enforceability of litigation funding agreements are expected to feature in the courts and arbitration proceedings, and the market will continue to develop alternative funding structures and return formulae to ensure compliance with the courts’ interpretation of the law.
One eye on regulation
While funders in the UK have not been subject to third party regulation to date, funders will have one eye on developments in Europe. The EU Parliament voted in favour of proposed regulations for the sector in October 2022 but after concerns were raised by the industry around a lack of consultation, the Commission now plans to conduct a mapping study of the funding landscape in Europe before finalising proposals for reform.
Macfarlanes LLP has the leading practice in London in the litigation and legal assets funding space. Please do contact us if you would like to know more.