The U.S. commercial litigation finance industry was in a state of flux in 2023, as notable players exited the market, numerous professionals made lateral moves, and capital committed to new funding deals shrank by 14%, according to Westfleet Advisors’ annual report on the litigation finance market.

The drop in new capital to finance litigation in exchange for a cut of any recoveries was primarily driven by macro trends in the broader financial markets, rather than a softening in demand, according to the report.

“The interest rate environment has afforded investors the ability to generate attractive risk-adjusted returns in other assets, making legal finance relatively less attractive,” said Charles Agee, managing partner at Westfleet.

Additionally, private credit and private equity asset classes have experienced a widespread pull-back as asset allocators rebalanced their portfolios, resulting in less capital available for legal finance.

In the litigation funding sector, assets under management (AUM) totaled $15.2 billion in 2023, up slightly from a $15.1 billion in 2022 and $13.7 billion in 2021.

While AUM saw a slight gain, new commitments to funding litigation declined. Westfleet reported $2.7 billion in new funding commitments in 2023, down from $3.2 billion in 2022 and $2.8 billion in 2021.

Faced with a challenge to raise new funding, many providers of litigation funding began rationing their capital, leading to a reduction in capital commitments to new deals and a shake-up of professionals leaving their roles with funders. These individuals made lateral moves to other funders, started their own litigation finance funds, pursued careers in adjacent areas like contingent risk insurance, or left the industry entirely.

Westfield noted there is speculation that the growth of contingent risk insurance has dampened commercial litigation financing activity, but said it believes that it has not materially displaced litigation finance, except in areas such as appellate monetizations. However, the firm acknowledges the importance and increased utilization of contingent risk insurance in recent years. Contingent risk insurance offers coverage against identified legal risks.

There were 39 active funders in the U.S. market last year, down from 44 in 2022.

The litigation funding market generally consists of three types of firms, according to Westfleet:

  • Dedicated funders, which specialize in litigation finance. This includes one publicly traded litigation finance firm, Burford Capital Ltd.
  • Multi-strategy funders, typically hedge funds, that invest in various markets and asset classes.
  • Ad hoc funders, which are entities like hedge funds and family offices that occasionally participate in litigation finance deals.

Amidst the downward trend in new funding last year, some established funders thrived in terms of new capital raised, capital committed to new deals, headcount growth, and profitability, according to the report.

“Current conditions favor industry incumbents with strong track records and a proven ability to consistently attract new capital,” Westfleet noted.

Funders that have been inconsistent in servicing new transactions may face problems with origination relationships, potentially leading to a vicious cycle if their deteriorating pipelines make it even more difficult to attract new capital, the analyst stated.

To view the complete report, visit Westfleet Advisors website. &

The post US Commercial Litigation Finance Saw 14% Drop in New Deals in 2023 appeared first on Risk & Insurance.

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