Litigation funding – a progressive option for investors and corporations

April 2016 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

Litigation funding is a dynamic, growing, worldwide industry, ripe for both investors and companies to explore and use to gain a competitive advantage. For investors, litigation funding provides an opportunity to bet on the outcome of commercial lawsuits, with substantial returns. Corporate counsel can utilise third party funding to manage their litigation risk, relieve the constant pressure on legal budgets, protect their company’s cash flow and avoid litigation expenses being a drain on their organisation’s profit and loss sheet.

An estimated £1bn market, litigation funding is growing rapidly. The industry is well-established in Australia, Germany and Canada and is growing and evolving at a rapid rate throughout the world, especially in the UK and America. Investors are increasingly attracted by the high returns fuelled by organisations using litigation funding to reduce risk in a shaky economic climate.

The basics of litigation funding

Third party litigation funding involves a third party offering financial support to a claimant, typically in return for a share of the proceeds of the claim if it is successful. The third party could be an insurer or a wealthy individual, but is often an intermediary providing the funding to pursue a claim. More easily available funding may encourage claims that would have otherwise been considered too expensive, or too risky, to pursue.

Third party funding provides an opportunity for companies to treat potential legal claims as assets to be capitalised on, much like real estate or receivables. If the claim is unsuccessful, bespoke insurance (after the event insurance) can be obtained to protect against adverse costs risks (where applicable) in return for a premium.

The attraction for investors

Litigation funding is an uncorrelated investment class, and is therefore an attractive proposition for investors in these turbulent economic times. As with any investment, to reduce their risk, investors need to have adequate due diligence and asset management processes and systems in place, and take professional advice from individuals who understand the litigation process and can evaluate the prospects of success and the economics of the investment.

Another major attraction for investors is that litigation financing is profitable. For example, Bentham IMF, the US arm of IMF Bentham Limited, listed on the Australian Stock Exchange, reported in December 2014 that it had funded 10 deals during that year, with client recoveries of nearly $100m resulting from jury verdicts and settlements. The firm itself had gross returns of more than $31m for the year, with a net profit of $17m.

There is also a trend for litigation funding becoming more international, with US funders funding claims in Europe and Australia and vice versa. This in turn will lead to further growth in the industry.

Importantly for investor confidence, third party funders are not resting on their laurels. Along with experiencing exceptional growth, the leaders in the market are also diversifying and finding their own niche, focusing on different sectors and types of disputes.

“If I suggested litigation funding to my board I would be named employee of the year”

Corporate legal departments have long endured the reputation of being a company expense rather than a revenue generating entity. To this end, they have had to endure continuous budgets cuts and expand their department portfolios with fewer resources.

Litigation funding provides corporate counsel with a vehicle to improve their organisation’s bottom line and increase shareholder profit. By using investor capital to finance the cost of litigation, potentially valuable claims can be pursued without the risk associated with using company cash reserves.

Trends in the types of commercial disputes prevalent at any one time follow economic cycles; therefore, it is anticipated that there will be an increase in both litigation and international arbitration claims related to the current economic downturn, following the slowdown in emerging markets and the threat of another global recession. For example, given the pressures on the oil industry following the drop in commodity prices, cross-border disputes are likely to increase as contracting parties are unable to honour agreements.

The expansion and globalisation of cross-border investment and trade has led to increased and ever more complex commercial relationships between businesses, investors and states. Litigation funding provides an opportunity for private and public entities to utilise international arbitration to resolve complex international disputes, free from risk.

That is why, when the concept of litigation funding was recently explained to an in-house counsel of an international clothing brand, he exclaimed that he would be named employee of the year if he presented the approach to his board.

Profitable, practical and proliferating – litigation funding is here to stay

Litigation financing takes on the best of both hedge fund and private equity investing – providing investors with high returns for a risk that has been well-calculated by the provider. But the beauty of the industry is that its growth is organic. By providing corporate counsel, CEOs and CFOs with the ability to pursue litigation in a relatively risk-free way, they are more likely to view potential litigation as a revenue-generating asset and be prepared to claim on multi-jurisdictional and complex disputes which may have been deemed too risky in the past. Alternatively, claims that may have been seen as too small to pursue can be more readily pursued if there are a number of them together which add up to a decent revenue amount. This in turn fuels growth in the fields of litigation and international arbitration, making the investment even more attractive.

The growth of the litigation funding industry shows signs of increasing further and more dramatically over the next few years. The opportunities for both investors and corporations to take advantage of this fact are well entrenched; it is simply a matter of taking advantage of the opportunity.

Jeunesse Edwards is the director of strategic development at Augusta Ventures. She can be contacted on +44 (0) 203 510 2001 or by email: jeunesse.edwards@augustaventures.com.

Jeunesse Edwards

Augusta Ventures