Shifts in the U.S. Commercial Litigation Finance Landscape Amid Economic Fluctuations

In 2023, the U.S. commercial litigation finance industry encountered significant shifts. Key industry players withdrew, numerous professionals transitioned roles, and there was a notable 14% decrease in capital allocated to new litigation funding agreements, as detailed in Westfleet Advisors’ annual litigation finance market report. This contraction was largely attributed to macroeconomic trends rather than a decline in demand for litigation finance. High interest rates offered more appealing risk-adjusted returns elsewhere, leading investors to reconsider the attractiveness of legal finance.

The industry’s landscape was further reshaped by a general pullback in private credit and equity, prompted by portfolio rebalancing efforts, which in turn reduced the available capital for legal finance ventures. Despite these challenges, the sector’s Assets Under Management (AUM) experienced a slight increase to $15.2 billion in 2023, up from $15.1 billion the previous year. However, new funding commitments saw a decline, dropping to $2.7 billion from $3.2 billion in 2022.

The reduction in new deal capital commitments prompted many litigation financiers to ration their resources, leading to professional mobility within the sector. Some pursued opportunities in related fields like contingent risk insurance, while others left the industry entirely. The growth of contingent risk insurance, although speculated to be affecting litigation finance activity, was recognized for its significant role without substantially displacing traditional litigation finance practices.

With the number of active funders decreasing to 39 from 44 in 2022, the market’s dynamics highlighted the competitive advantage of established funders. These incumbents demonstrated resilience through new capital generation, deal commitments, and profitability, amidst a backdrop of cautious investor sentiment. Westfleet’s analysis underscores the critical importance of consistent performance and robust origination networks for funders aiming to navigate the current economic landscape effectively.