Costs, courts and disputes: the financing of the sold out litigation

Costs, courts and disputes: the financing of the sold out litigation

The UK litigation finance sector has doubled its total assets, to now sit at £2bn (€2.35bn), over the past three years, according to law firm RPC. On a global scale, the industry is valued at $39bn (€45.94bn) according to law firm Brown Rudnick. 

However, most law firms in targeted jurisdictions are considering using it, with up to 70% of US law firms involved in litigation finance in 2020. ‘Demand is growing fast and it’s going to attract more capital. It’s definitely becoming more mainstream,’ he said.

Highlights

  • ‘The lack of correlation is interesting, not only in terms of correlation to equity markets and interest rates, but also the lack of correlation between cases. You’re not going to have a correlation between an intellectual property case in the UK and a breach of contract in the US.’ 

  • It is the alluring promise of uncorrelated, out-of-the-ordinary returns that have gained fund managers’ attention, said Maurice.

Direct investing

Citywire Selector asked two investors in the space to outline the allure of investing in accountability.

Syz Capital is investing directly in litigation cases together with originators and litigation funding partners. They generally exclude personal cases and complex disputes against governments, which can take years to play out.

Instead, the investment firm opts for cases with short duration, focusing on large commercial cases where damage claims tend to be very high.

Aggressive approaches are out of the question; instead of relying only on the outcome of a few single cases, Maurice favours a quantitative approach. Syz’s litigation offerings currently include approximately 50 ongoing litigation cases, with the objective to triple the number of ongoing cases over the next one-and-a-half years. This to ensure diversification, which Maurice stresses as a key consideration for consistent returns.

‘At the end of the day, you’re sitting on a bunch of options which are binary by nature. There’s not a ton of outcomes; either you win, or you lose. These cases are non-recourse, and when you lose, you lose it all.’ Due to a conservative valuation process, cases are not valued until they have been won. There are no monthly or quarterly valuation changes.

Instead, investments are booked at cost until there is a profit. But this, Maurice added, should not be a problem for those with a long-term perspective and ‘the right investor mindset’. ‘On average, you lose between 20-30% of cases, which means that you lose the money that has been spent so far, on legal bills, expenses, and so on – for example, if you budgeted $5m for that case, you might lose $2m.

Stock exposure Citywire AAA-rated Martin Schulz, head of the international equity growth team at Federated Hermes, is a near decade-long investor in leading litigation funder Burford Capital, the only litigation firm currently listed on the LSE and NYSE. 

‘So, for winning cases, you’re picking up an outcome between two or three times your money, and potentially ten times your money if you negotiated a share of a large award sum,’ said Maurice. ‘But in 80% of cases, you know that you’re going to win, normally a multiple of invested capital or a percentage of the award for damage claims. For example, a 10% share of a damage claim worth $100 million.