Once a little-known area in the UK - and much larger in the US - litigation funding is expanding and drawing attention. This article explores what is going on.
Recent years have seen the rise of what is still a bit of a niche area in the UK – litigation funding. The ability to profit from legal actions and the business of lawyers generally might bring a wry smile to the lips of wealth managers, who in the past only thought of legal tussles as a net drain on assets, rather than a way to build them. In the US with its no-win, no-fee legal arena, litigation funding has been a far stronger area for some time. As often can be the case, American practices have a habit of traversing the Atlantic. One attraction, so this publication has been told, is how payouts from lawsuits are not correlated to mainstream markets or economic conditions, providing investors with a welcome portfolio diversification. Clearly, however, such an area is one where “the Devil is in the details” and expert guidance is necessary. Readers will, therefore, profit from reading this article by Elena Rey-Sabinina, of Brown Rudnick LLP. The editors here are pleased to share these insights with readers and invite responses. The editors do not as usual necessarily agree with all views of guest contributors. Email the editor at email@example.com
On 10 September 2018 Vannin Capital, a specialist litigation fund, announced plans for a £70 million ($91.6 million) stock market listing in London, with a projected valuation of £1 billion. Vannin follows a number funds that have looked at tapping the fast-growing UK litigation funding market. In the last year alone, litigation funder Augusta raised £150 million in June, Harbour Litigation raised £350 million in March, Therium unveiled a £300 million fund in February, and Burford Capital raised £130 million in January.
According to information from its ITF (Intention to float) document, Vannin estimates that approximately £800 million to £900 million of global dispute resolution spend was funded by legal finance providers in 2016, accounting for approximately 4 per cent of the addressable market in the US, the UK and Australia. From its research, Vannin stated that dispute spend funded by third parties grew at a compound annual growth rate of approximately 40 per cent from 2012 to 2016 and is estimated to grow by approximately 20 to 30 per cent each year reaching up to $2.7 billion by 2021.
The exponential rise of litigation has in part been driven by increasing interest from investors looking for a credible alternative asset class to offset poor returns from traditional asset classes. What’s more, unlike traditional asset classes, such as real estate or securities, litigation funds are not correlated to the markets and wider economic and political forces. Each case will be decided individually on its own merits and so will not depend on wider movements in either the bond or equity markets.
As such, investors have typically included hedge funds and large institutions such as pension funds, who have often used litigation funds as a diversification and hedge against other investments. More recently, we have seen family offices and ultra-high net worth individuals becoming more engaged as investors in litigation funding.
The growth of litigation funding has not come without challenges, particularly from the varying regulatory regimes in different jurisdictions. Yet the success of fundraising to date and the potential size of the market indicates that there is money to be made through litigation finance.
Litigation funding explained
The Association of Litigation Funders describes litigation funding as: “where a third party provides the financial resources to enable costly litigation or arbitration cases to proceed. The litigant obtains all or part of the financing to cover its legal costs from a private commercial litigation funder, who has no direct interest in the proceedings. In return, if the case is won, the funder receives an agreed share of the proceeds of the claim. If the case is unsuccessful, the funder loses its money and nothing is owed by the litigant. The funders’ share of the proceeds of a successful case is negotiated with the litigant at the outset. This financial reward typically consists of either a percentage of the damages recovered, or a multiple of the amount advanced by the funder, or a combination of the two.”
One can see the immediate attraction of the litigation funding for both the borrower who may not be able to fund its claim on its own as well as the funder who, if it chooses its cases carefully, may be receiving higher returns than on traditional asset classes.
Although traditionally associated with class action suits, litigation funding has since been used in a range of contentious matters, including IP, fraud and commercial disputes as well as bankruptcy, tax, asset recovery and enforcement.
Keys to success
As the litigation funder’s return is tied to the success of the case, it is essential that funders apply stringent selection criteria when choosing potential cases. Various funds will possess different strategies and criteria, but the most important will include:
• whether the defendant can afford to pay the award if the litigation is won;
• the minimum realistic value of the claim, i.e. whether the pay-out is worth the time and effort;
• the maximum budget for the case and whether the funder has sufficient committed capital to cover it (many funds fail as they overstretch their capital and do not manage to get the returns in time to reinvest); and
• the merit and the legal value of the claim; and the length of the trial and the enforcement risk.
Both the funded costs and the claim values vary significantly depending on the particular case and type of the dispute. On average, clients interested in obtaining litigation funding typically seek either between £100,000 and £500,000 or, for more complex cases, between £3 million and £5 million to fund single matters.
The actual value of the claims attracting litigation funding are normally significantly higher than the funding amounts themselves, with the average value of claims ranging from between £3 to £5 million for the smaller cases and between £30 to £50 million for the more complex cross border cases.
In certain cases, such as IP/patents, or cases involving disputes in high risk jurisdictions, such as Russia/CIS, awards can range from between £100 million - £300 million.
Diversification of funders and funding products
Litigation funding products are becoming increasingly diverse. Litigants are now able to choose from case-specific funding, funding for multiple cases or monetising their claim to leverage their business and provide capital for operational or other purposes.
Role of separate counsel
The appointment of an independent legal counsel by funders, which is separate and independent of the legal counsel advising the funded party, is another important emerging trend. Historically the funders would use the same legal counsel as that of the party that they have funded. However, although the interests of the litigant and funder are aligned, recent cases have evidenced the necessity for funders to receive independent legal advice throughout the litigation process, including: advice on structuring the funding arrangement and documenting it; analysing and structuring the security package; advice on maintaining control over the litigation process and involvement in settlement decisions/voting without triggering the champerty restrictions; and assessing enforcement risk.
With nearly £1 billion of funds raised this year alone and an estimated market size of more than £2 billion by 2020, it is clear that the litigation funding has come out of the shadows. This growth is set to continue with an increasing number of funders entering the market and financing a variety of disputes. A developing legal framework will add a layer of credibility that will only help the rise of this emergent asset class.
About the author
Elena Rey-Sabinina is a partner in Brown Rudnick LLP's Litigation Funding and Special Situations group. http://www.brownrudnick.com/