Reviewing the first three months of 2020, we would be remiss if we did not first discuss the impact of COVID-19 on the broader commercial litigation finance industry and LexShares beginning in March. In light of current macroeconomic volatility, we continue to believe that the ability to access cash flows from assets that are uncorrelated to capital markets has only become more attractive.
Even in a period of reduced liquidity, alongside a flight to assets such as U.S. dollars and government debt, investor demand for litigation related assets has remained strong--an assertion echoed by fellow litigation funders. We can corroborate these claims based on the level of subscription we have seen from both institutional and individual investors in discrete LexShares platform case offerings since the pandemic began.
As with the 2008 recession, which sparked rapid growth of the litigation finance market in the U.S, our immediate expectation is that the current dislocation of capital markets will drive greater demand and utilization of litigation finance products among plaintiffs and law firms. We are beginning to see this play out in real time. Our thesis is that the increased demand for funding will come in two waves. We have begun to see the first wave of increased demand with an influx of funding applications from both plaintiffs and attorneys. While inbound applications usually account for only 25% of LexShares’ deal flow in a given quarter, we have seen a material uptick since mid-March.
These funding applicants fall into a few distinct categories. The first category consists of plaintiffs whose traditional financing sources have been postponed or canceled as a result of market volatility. The second category includes plaintiffs and attorneys who have already received judgments and are looking to monetize the judgment or accelerate related fees, given the potential delay in receiving proceeds. And the third category relates to law firms searching for financing to cover operating costs as a result of falling revenues, attributable to lack of new work and delayed cash collections from prior billings.
Following this first wave of increased demand for litigation funding, we believe that we will see inbound applications return to pre-COVID-19 levels, followed by a resurgence of inbound applications fueled directly by the pandemic, including claims relating to insolvency and bankruptcy matters, as well as insurance claims. As we have witnessed in prior economic downturns, the volume of litigation filed is traditionally countercyclical. However, a direct, short-term consequence of COVID-19 is that both state and federal courts are mostly closed across the U.S. (Law360 has an excellent resource for court restrictions and closures that are updated in near real time, which can be accessed here.)
Knowing this, we expect that trial dates will likely be postponed for 3 to 6 months for cases that are close to trial. It is important to note that pricing for the vast majority of litigation finance investments is structured to accrue as time elapses. For example, a successful resolution in 36 months typically generates a greater cash-on-cash return than a successful resolution within 12 months, even though the annualized rates of return for both investments may be similar. Thus, COVID-19 may influence litigation funding returns in such a way that favors the investor.
Another near-term impact of the pandemic is the potential deterioration of defendants’ credit profiles, which can affect their ability to pay damage awards. Given that collectability is a pillar of LexShares’ underwriting process, our team will pay special attention to the solvency of the defendants named in any legal claim investments we evaluate.
Ultimately, we remain confident that commercial litigation funding will serve as a much-needed financial resource for undercapitalized attorneys and legal claimants during a period of great uncertainty. We are likewise encouraged by the percentage of new investors participating in our platform offerings, viewing it as a leading indicator of additional investors who are looking for exposure to our asset class. COVID-19 has undoubtedly changed life for millions of investors, businesses, and legal professionals. Commercial litigation funding patterns should remain strong, however, as we all adjust to a strange “new normal.”
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This release may contain “forward looking statements” which are not guaranteed. Investment opportunities posted on LexShares are offered by WealthForge Securities, LLC, a registered broker-dealer and member FINRA / SIPC. LexShares and WealthForge are separate entities. Investment opportunities offered by LexShares are “private placements'' of securities that are not publicly traded, are not able to be voluntarily redeemed or sold, and are intended for investors who do not need a liquid investment. Investments in legal claims are speculative, carry a high degree of risk and may result in loss of entire investment.