Trending Now
  • Consumer Legal Funding Is a Lifeline for Americans Living Paycheck to Paycheck
Commercial Investor's Corner Slingshot Capital Special Features

2020 Co-Investment Survey Results

April 24, 2020

2020 Co-Investment Survey Results

The following article is part of an ongoing column titled ‘Investor Insights.’  Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance.  EXECUTIVE SUMARY
  • Survey suggests the litigation finance industry has demand for co-investment capital
  • Speed to commitment and having a fully funded commitment ranked highest in terms of co-investor characteristics
  • Most funders expect a co-investment commitment within less than 4 weeks
INVESTOR INSIGHTS
  • While investors might be attracted to co-investment opportunities, diversification is a strong component to successful long-term investing in commercial litigation finance
  • Co-investing should only be considered in the context of creating a portfolio, or to add specific exposures to an existing portfolio, but should never be viewed as a single investment
Slingshot Capital and Litigation Finance Journal recently undertook a survey of commercial litigation finance participants to obtain a deeper understanding of the extent to which there is demand for third-party co-investment capital. The survey was distributed globally, with the majority of responses coming from constituents in the USA (50%) and UK (18%) markets, or from funders that invested globally (18%).  Of the responses, 22% were from advisors/intermediaries and 78% were from funders (with the vast majority of funders having dedicated litigation finance funds). Co-Investment in Litigation Finance  Co-investment opportunities are an attractive sub-set of opportunities for many investors in a variety of asset classes, with particular appeal for private equity (buy-out, growth equity, real estate and venture capital) asset classes.  However, in the context of litigation finance, an investor needs to take a different perspective when considering co-investment opportunities. Whereas it may be perfectly acceptable for a family office, endowment or pension plan to co-invest in a specific private equity opportunity as part of their larger portfolio, the quasi-binary nature of litigation finance should make investors think twice about how they approach investing in litigation finance.  The key difference lies in the probability weighted set of outcomes accorded to each asset class. In a private equity buy-out transaction, a high number produce positive results, and the results vary across a spectrum of potential return outcomes (from 1+ X original investment, to a 5+ X original investment). In litigation finance, even though many cases settle before going to court, there tends to be two outcomes – a win or a loss.  The wins are allocated across a tighter spectrum than private equity, and the losses tend to be absolute (with exceptions).  Accordingly, due to the quasi-binary nature of the outcomes of litigation finance, co-investing should only be considered where the investors are committed to assembling a portfolio of such co-investment opportunities, and have the ability to assess the fundamental aspects of litigation finance.  Alternatively, to the extent an investor has existing investments in litigation finance, but is looking to round out his or her portfolio with specific case exposures to achieve a particular portfolio objective, co-investment opportunities may play a role in that investor’s portfolio construction approach. 2020 Co-Investment Survey results are summarized below: Demand Of the 23 respondents, 70% stated they had a need for co-investment capital, whereas 30% did not.  However, 13% indicated that the need for co-investment was occasional, and that sometimes their LPs had pre-emptive rights with respect to investing in those opportunities. Frequency In terms of frequency of co-investment opportunities, almost 50% of respondents indicated they have from 1 to 5 opportunities in a given year, with just over 20% in the 6-10 range, and a few managers indicating they had 20 such opportunities in a given year.  The number of opportunities directly correlated with the size of the funder and the size of the cases they typically finance. Co-Investor Characteristics Regarding the characteristics that are most important in a co-investment partner, speed to commitment and having a funded capital source ranked the highest, with responsiveness and understanding complex litigation also ranking highly.  However, there was not a huge disparity in terms of the importance of the six criteria listed, suggesting that all criteria were factored into their decision-making process. Keep in mind that the compilation of rankings on the chart below is an average of the six criteria, so a high number on the chart should be viewed as being more important (even though that answer drew more 1’s and 2’s), whereas a low number on the chart should be viewed as less important. For example, ‘Speed to Commitment’ and ‘Having a Funding Capital Source’ both received the most 1’s and 2’s, but their average ranking is the highest and therefore most important.  ‘Flexible Capital’ received the most 6’s, but has the lowest average score, and is therefore the least important metric. When we dive further into the ‘speed to commitment’ characteristic, we find the vast majority of respondents expect a commitment within 3-4 weeks.  It remains to be seen if expectations and reality are in alignment, a good question to include in the next survey. Expected Duration With respect to the underwritten expected duration, most fall within the 12-36 month range, which is consistent with duration expectations for the industry as a whole.  However, 30% of respondents did indicate that duration was a function of the type of case being underwritten, with certain case types (patent, international arbitration, etc.) having longer durations and appeal cases having shorter durations. Co-Investment Structuring In terms of insight into how these co-investment transactions are typically structured, the responses varied.  In the ‘other’ category, some respondents indicated they have used a variety of the choices offered, whereas one respondent stated that they received a specified interest in the profits produced by the investment. Current Co-Investors As it relates to where the current co-investment opportunities are being offered, the majority were offered to other funders, suggesting there is a fair amount of cooperation in the litigation finance marketplace.  However, within the ‘other’ category, most respondents suggested it was a combination of all of the choices listed. This brings to a close the results of our first commercial litigation finance co-investment survey.  Slingshot Capital and Litigation Finance Journal would like to thank those that participated in the survey for their time and feedback. Our next survey will cover fundraising initiatives by fund managers in the commercial litigation finance sector. We anticipate making the fundraising survey an annual survey so we can track fundraising activities over time. If you would like to participate in future surveys, please contact Ed Truant here to register your interest. Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.
Secure Your Funding Below
Secure Your Funding Sidebar

Commercial

View All
Case Developments Commercial

Pogust Goodhead Secures Landmark Win Against BHP in Brazil Dam Case

By John Freund |

In a major breakthrough for cross-border group litigation, Pogust Goodhead has secured a resounding victory in its long-running claim against mining giant BHP over the 2015 collapse of the Fundão tailings dam in Mariana, Brazil. The UK High Court has ruled BHP liable for the disaster, which killed 19 people and unleashed a wave of toxic sludge through the Rio Doce basin, displacing entire communities and leaving lasting environmental damage.

According to Non-Billable, the ruling confirms BHP’s liability under both Brazilian environmental law and the Brazilian Civil Code. In rejecting the company’s jurisdictional and limitation defenses, the court made clear that English law recognizes the right of over 600,000 Brazilian claimants to pursue redress in UK courts. The judgment underscores BHP’s operational and strategic control over the Samarco joint venture and found that the company was aware of critical dam defects more than a year before the collapse. The attempt to distance itself through the argument of being an indirect polluter was also dismissed.

This outcome is a critical milestone in one of the largest group actions ever brought in the UK. A trial on damages is now scheduled for October 2026, with case management proceedings set to resume in December.

The win comes amid internal turbulence at Pogust Goodhead, including recent leadership changes and reported tensions with its litigation finance backers, but the firm remains on course to press forward with what could be a multibillion-dollar compensation phase.

Commercial

Incentive Payments Not Essential for Named Plaintiffs, Study Finds

By John Freund |

A new empirical study by Brian Fitzpatrick of Vanderbilt Law School challenges a widely held assumption in class action litigation: that incentive payments are necessary to recruit named plaintiffs. The research, published in the Journal of Empirical Legal Studies, analyzed federal class-action filings from January 2017 through May 2024, using data drawn from the legal-tech platform Lex Machina. It leveraged a natural experiment created by the United States Court of Appeals for the Eleventh Circuit’s 2020 ruling that barred incentive payments in the 11th Circuit (Florida, Georgia, Alabama) while other circuits continued permitting them.

An article in Reuters states that according to the analysis, the volume of class-actions filed in the 11th Circuit did not meaningfully decline relative to other circuits after the ban on incentive payments. In other words, the absence of such payments did not appear to impair the ability of plaintiffs’ counsel to find willing named plaintiffs.

Fitzpatrick and his co-author, graduate student Colton Cronin, observed that although courts routinely approve modest incentive awards (averaging about $7,500 in non-securities class actions) to compensate the named plaintiff’s extra effort post-settlement, the data suggest that payments may not be a driving factor in recruitment.

Fitzpatrick emphasizes that this is not to say incentive payments have no role. He notes that there remains a moral argument for compensating named plaintiffs who shoulder additional burdens. These include depositions, discovery responses, trial participation, and public exposure. Yet the study’s finding is notable. Motivation for class-representation may be rooted more in altruism, reputation or justice-seeking than in straightforward financial gain.

For the legal-funding industry and class-action litigators, the findings are significant. They suggest that reliance on incentive payments to secure named plaintiffs may be less critical than previously assumed, potentially lowering a transactional cost input in structuring class settlements. On the other hand, third-party funders and litigation financiers should consider how the supply of willing named plaintiffs might remain stable even in jurisdictions restricting such payments.

Commercial Regulatory Issues

Merricks Calls for Ban on Secret Arbitrations in Funded Claims

By John Freund |

Walter Merricks, the class representative behind the landmark Mastercard case, has publicly criticized the use of confidential arbitration clauses in litigation funding agreements tied to collective proceedings.

According to Legal Futures, Merricks spoke at an event where he argued that such clauses can leave class representatives exposed and unsupported, particularly when disputes arise with funders. He emphasized that disagreements between funders and class representatives should be heard in open proceedings before the Competition Appeal Tribunal (CAT), not behind closed doors.

His comments come in the wake of the £200 million settlement in the Mastercard claim—significantly lower than the original £14 billion figure cited in early filings. During the settlement process, Merricks became the target of an arbitration initiated by his funder, Innsworth Capital. The arbitration named him personally, prompting Mastercard to offer an indemnity of up to £10 million to shield him from personal financial risk.

Merricks warned that the confidentiality of arbitration allows funders to exert undue pressure on class representatives, who often lack institutional backing or leverage. He called on the CAT to scrutinize and reject funding agreements that designate arbitration as the sole forum for dispute resolution. In his view, transparency and public accountability are vital in collective actions, especially when funders and claimants diverge on strategy or settlement terms.

His remarks highlight a growing debate in the legal funding industry over the proper governance of funder-representative relationships. If regulators move to curtail arbitration clauses, it could force funders to navigate public scrutiny and recalibrate their contractual protections in UK group litigation.