STRATEGY
LAW SCHOOL LITIGATION FUNDS
Litigation funds are fast-becoming a fundamental part of the global justice system. While the ‘assets’ they manage differ greatly to those of traditional private capital funds, the way in which they operate is almost identical. What are litigation funds?
The concept is simple: a third party provides cash to fund a legal claim in return for a share of the damages. James Bryant, head of fund operations at Highvern, who has been working closely with these funds explains: “There are generally two types of litigation fund managers; those that seek to back small claims (on a volume basis) and those whose main focus is on larger disputes. Not all litigation funders are created equal, though. The operations and scale of managers can vary, some with strong corporate governance structures and large teams of legal and financial professionals who undertake thorough due diligence, screen cases and analyse/model outcomes.” Unlike investing in assets, where a proportion of losses might be recouped, if a litigation fund backs a legal case that is lost, there is no recourse. A litigation fund only receives a return if the case is won or a settlement is reached. However, exactly as in private capital markets, litigation financiers raise funds from institutional investors, and seek to deploy that capital in successful cases. Says Bryant, “All sorts of cases can arise, which makes it such an interesting asset class for our team - anything in the news or any scandals, where there’s a claim or some form of injustice and especially in cases where claimants are unable to fund. Users of litigation finance range from individuals, class action and mass tort claimants, Fortune-500 companies, universities and businesses of all sizes.”
Operating a litigation fund
Typically, litigation funds cover legal fees and expenses. However, funds have their own approaches. “Pricing terms are unique to each case and ideally managers are looking for a settlement as this de-risks the portfolio and creates a quicker return of capital - and better IRR,” explains Bryant. From an operational perspective, there are many similarities between traditional private 22 September 2021
Crib sheet UK litigation finance market worth Global litigation finance market worth (2019) Forecast growth (2020-2028)
£2bn $11bn 8.76%
capital funds and litigation funds, however Bryant points out that litigation funds will typically have a higher volume of investments and capital distributions, making them more intensive. “Some are more innovative in structuring, just because of the way the deals fall and some of the debt needs to be more creative,” he adds.
Outlook for litigation funds
In the UK, litigation funds have been able to flourish following the Jackson Reforms, which came into effect in 2013. Following a review of the civil justice system, Lord Justice Jackson recommended ways in which to deal with spiralling legal costs. His report set out a package of interlocking reforms aimed at controlling costs and promoting access to justice, including third party funding. Jackson found this form of financing had no impact on costs between the parties, rather, they brought much needed costs discipline to civil litigation. Says Bryant, “Previously, and especially outside of the US, people weren’t pushing for compensation but now they do. These funds came to the fore after the 2008 crash when so many companies failed and investors may have been misled on performance. Now, with Covid, businesses are collapsing and, for example, those who have been supported by the state or have raised money from investors on false pretences could create a new wave of litigation cases.” On top of these shifting dynamics, litigation funds present several attractions for investors. First, the asset class is uncorrelated to traditional markets; regardless of macroeconomic headwinds, there will always be legal claims and the outcome of those claims are not dependent on market factors. Second, litigation funds have been delivering outsized returns. A 2016 quantitative study performed by Professor Michael McDonald on industry ROI showed an average annual return of 36%. Third, returns are quick to materialise. The median time to liquidity for litigation finance is hovering around 24 months. ◆
Many of the world's most prestigious law firms are working with litigation funders to provide a more streamlined financing solution for their clients
Q&A Polly Bahl, chief operating officer of Augusta Ventures Established in 2013, Augusta provides funding for litigation and dispute resolution. It has offices in London, Sydney, Melbourne & Toronto, and has deployed more than £300m in funding.
Q: What is the biggest misconception about litigation funds?
A: There are several misconceptions about litigation funds. The most common are that we are new, and that we are niche. In truth, litigation funding has been around for circa 20 years; is well established in multiple mainstream jurisdictions including Australia, North America and the UK. It’s essentially a risk management tool that can be used by claimants to manage the amount of risk that they take in pursuing a commercial dispute. In many cases claimants can reduce their financial risk to zero. Increasingly many of the world's most prestigious and well-known law firms are working with litigation funders to provide a more streamlined and simple financing solution for their clients. Most traditional funders are now members of the ALF (Association of Litigation Funders) and abide by its Code of Conduct, which helps to ensure that the highest levels of ethical and procedural standards are maintained.
Q: What is the biggest challenge for operating a litigation fund versus more traditional private capital funds?
A: Every asset class offers its own challenges and opportunities. When engaging with investors who are less familiar with litigation funding, we often start from first principles
to explain the attractions and opportunities we have to offer. While this may sometimes take a little more time than with longer established private capital options, it allows us to form deep and long term relationships with our investors and also to offer creative solutions that are not available to more standardised structures.
Q: What do you enjoy most about operating a litigation fund?
A: We think the litigation funding sector is one of the most fascinating areas of finance and law combined. We apply our model to a wide diversity of different cases, sectors and types of claim - and all opportunities that we see require sophisticated analysis and due diligence to determine which to fund. We have the opportunity to collaborate with our talented team of people to bring together the many skill sets necessary to ensure success. It's great to be able to support the resolution of claims that might otherwise not see the light of day due to lack of funds - and we make money for our investors in doing so.
Q: What advice would you give to anyone considering setting up a litigation fund?
A: There are many great firms in the market and finding the best cases is competitive. At Augusta, we are privileged to have a team that has the skill and experience, in collaboration with our exceptional law firm clients, to identify, underwrite and manage investments in this challenging space. In addition, we have the backing of some of the largest financial institutions in the world, and we're very proud of the track record we've built over the years. September 2021 23