As Westfleet Advisors notes, behind many litigation funders’ enthusiastic pitches lies a hidden tension. The business development team promises efficient execution and market-standard terms but must ultimately navigate a much lengthier process and propose materially different terms to satisfy investor requirements. Even lawyers who have handled multiple funded matters and clients with significant funding experience encounter this phenomenon. This highlights a critical dynamic in litigation finance that’s often underappreciated: Litigation funders operate under competing pressures – their desire to win repeat business from potential clients and their obligations to their funds’ investors.
As the litigation funding market matures, with more than $12.4 billion in deployed capital in the U.S., understanding this dynamic has become essential for law firms and clients seeking funding. The tension between funders’ marketing promises to litigation parties and their obligations to investors fundamentally shapes how deals are priced and structured and, more importantly, whether they are completed at all.
Understanding the Two-Client Dynamic
Every litigation funder faces an inherent conflict. To build market share and reputation, they must present themselves as efficient, flexible partners offering competitive pricing. However, their fiduciary duty to investors requires them to maximize returns while maintaining rigorous due diligence standards. This isn’t just a practical tension — it’s often a legal one, with funders’ obligations to investors taking precedence over their aspirational pitches to the market.
The Marketing Pitch vs. Reality
When pitching to law firms and clients, funders typically emphasize:
- Quick, efficient processes
- “Market” or “best available” pricing
- Flexible deal structures
- Understanding of litigation dynamics
- Ability to move quickly
However, their investor obligations typically require:
- Maximizing returns on each investment
- Exhaustive due diligence
- Conservative risk assessment
- Multi-layered approval processes
- Strict investment criteria
This disconnect between marketing promises and investor obligations creates a significant challenge for parties seeking funding. These parties often plan their litigation strategies around funders’ optimistic timelines and pricing indications.
Where These Interests Collide
The impact of these competing pressures creates several practical challenges:
Process Issues: While funders promise quick decisions, their investor obligations often require multiple layers of review and approval. Investment committees, often meeting on fixed schedules, must sign off, and external experts may need to weigh in. Each step adds time and uncertainty that can disrupt litigation timelines.
Pricing Complications: Despite making aspirational claims about “market” pricing, funders must also strive to obtain the highest possible returns for their investors. Once investment committees weigh in, initial pricing indications often prove optimistic, leading to late-stage renegotiations and/or failed deals.
Risk Assessment Challenges: Most frustratingly, deals can fail for reasons that have little to do with their risk-adjusted value. Investment committees may reject strong cases because they don’t fit specific parameters or because of concerns about optics. For instance, the fear of quick losses — particularly damaging to newly raised funds — can override pure risk/return analyses.
Navigating These Competing Interests
Understanding this dynamic is crucial for parties seeking litigation funding. Some practical strategies:
- Remember that funders’ marketing promises are aspirational, while their investor obligations may be legally binding
- Anticipate that some funders are far more likely to hold to their initial pricing than others
- Tailor your case presentation materials to both the litigation merits and the individual funder’s investor requirements
- Be prepared to run parallel processes with multiple funders
- Consider working with advisors who understand both sides of the dynamic and can help run an efficient funding search
Understanding this hidden dynamic in litigation funding is not just academic; it’s essential for protecting your interests and achieving optimal funding outcomes in today’s market.
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