Interest Rate Hikes A Mixed Blessing For Litigation Funders

David Greene, our Head of Class Action and Finance Litigation recently spoke to Law360 about the state of litigation funding sector, in the light of the current economic situation, particularly as interest rates continue to rise.

Litigation funders have been buoyed by more than a decade of low interest rates. But central banks worldwide have hiked up rates to fight inflation — and other more traditional asset classes, such as bonds and money market assets, could make risky litigation funding look less appealing.

Whether this will actually harm the sector — and if so how much — remains unclear. Some industry players even argue that the sector could use the moment to grow bigger…

…David Greene, senior partner and head of group action litigation at Edwin Coe LLP, also expressed concerns about whether funders would have enough capitalization to see their cases through.

“Capital has become a bit of an issue, with one or two funders finding it difficult to continue to trade through the lack of capital,” Greene said at the forum in October.

Observers say that whether a third-party litigation funder is hit by the rising cost of capital will depend on where their own money comes from…

…Greene of Edwin Coe told Law360 that the rise in interest rates has an effect on funding firms for two reasons.

“If the returns on other investments rise, like simple bank deposits, which have little or no risk, the returns on alternative investments which carry high risk will need to increase,” he said.

The result is that funders are trying to reduce risk as much as possible, for example by rejecting those cases with lower value and higher risk, Greene added. Returns have to be higher as costs rise.

This is a potential double-whammy for law firms, with the cost of funding and of litigation going up. The labor market has remained tight as salaries in the capital have been pushed upward.

“In London, the cost of labor is increasing,” Greene said…

You can read the full article on Law360’s website (Subscription required)