M&A in Legal Funding Services

Colonnade publishes industry commentary on legal funding services.

The legal funding services industry is a collection of related investment businesses that allow investors to participate in the financial outcomes of the U.S. legal system.  The industry is built on a shift in perspective – legal claims are assets that can be harvested.

Annual volume in the consumer and commercial segments of the legal funding services industry is estimated between $3 to 4 billion. The penetration rate is low in the industry. This niche specialty finance industry is growing, and significant enterprises are emerging, but the market remains fragmented.  Favorable industry dynamics and compelling economics of legal funding are characteristics that appeal to a broad range of potential investors.  Capital is flowing into the sector, which has led to a more robust effort by legal funding professionals to originate transactions and communicate the benefits of this financial tool to plaintiffs and their attorneys.

Investment activity in the sector has accelerated recently, with both consumer and commercial litigation funding firms raising significant amounts of capital.  Legal funding firms have sourced senior debt, subordinated debt and equity capital from a broad range of providers (commercial banks, non-bank lenders, hedge funds, institutional private capital, high net worth individuals, family offices, etc.).  Legal funding firms have raised over $1.4 billion since early 2013, and there have also been at least four legal funding companies sold in the past two years.

We anticipate further growth in the legal funding sector, particularly in commercial litigation.  In the corporate sector, internal legal expense budgets are “first line” targets for cost reduction initiatives, which has led general counsels to push their law firm vendors to cut billings by structuring alternative fee arrangements.  Commercial litigation funding is one of the tools that help address these forces – by offsetting legal “spend” and monetizing contingent legal claims.