Trending Now
Commercial Investor's Corner Slingshot Capital Special Features

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.

Commercial

View All
Community Spotlights

Community Spotlight: Dr. Detlef A. Huber, Managing Director, AURIGON LRC

By John Freund |

Detlef is a German attorney, former executive of a Swiss reinsurance company and as head of former Carpentum Capital Ltd. one of the pioneers of litigation funding in Latin America. Through his activities as executive in the insurance claims area and litigation funder he gained a wealth of experience in arbitrations/litigations in various businesses. He is certified arbitrator of ARIAS US and ARIAS UK (AIDA Reinsurance and Insurance Arbitration Society) and listed on the arbitrators panel of DIS (German Arbitration Institute).

He studied law in Germany and Spain, obtained a Master in European Law (Autónoma Madrid) and doctorate in insurance law (University of Hamburg).

Detlef speaks German, Spanish, English fluently and some Portuguese.

Company Name and Description:  AURIGON LRC (Litigation Risk Consulting) is at home in two worlds: dispute funding and insurance. They set up the first European litigation fund dedicated to Latin America many years ago and operate as consultants in the re/insurance sector since over a decade.

Both worlds are increasingly overlapping with insurers offering ever more litigation risk transfer products and funders recurring to insurance in order to hedge their risks. Complexity is increasing for what is already a complex product.

Aurigon acts as intermediary in the dispute finance sector and offers consultancy on relevant insurance matters.

Company Website: www.aurigon-lrc.ch

Year Founded: 2011, since 2024 offering litigation risk consulting  

Headquarters: Alte Steinhauserstr. 1, 6330 Cham/Zug Switzerland

Area of Focus:  Litigation funding related to Latin America and re/insurance disputes

Member Quote: “It´s the economy, stupid. Not my words but fits our business well. Dont focus on merits, focus on maths.”

Read More
Announcements Commercial

Manolete Partners Releases Half-Year Results for the Six Months Ended 30 September 2024

By Harry Moran |

Manolete (AIM:MANO), the leading UK-listed insolvency litigation financing company, today announces its unaudited results for the six months ended 30 September 2024. 

Steven Cooklin, Chief Executive Officer, commented: 

“These are a strong set of results, particularly in terms of organic cash generation. In this six-month period, gross cash collected rose 63% to a new record at £14.3m. That strong organic cash generation comfortably covered all cash operating costs, as well as all cash costs of financing the ongoing portfolio of 413 live cases, enabling Manolete to reduce net debt by £1.25m to £11.9m as at 30 September 2024. 

As a consequence of Manolete completing a record number of 137 case completions, realised revenues rose by 60% to a further record high of £15m. That is a strong indicator of further, and similarly high levels, of near-term future cash generation. A record pipeline of 437 new case investment opportunities were received in this latest six month trading period, underpinning the further strong growth prospects for the business. 

The record £14.3.m gross cash was collected from 253 separate completed cases, highlighting the highly granular and diversified profile of Manolete’s income stream. 

Manolete has generated a Compound Average Growth Rate of 39% in gross cash receipts over the last five H1 trading periods: from H1 FY20 up to and including the current H1 FY25. The resilience of the Manolete business model, even after the extraordinary pressures presented by the extended Covid period, is now clear to see. 

This generated net cash income of £7.6m in H1 FY25 (after payment of all legal costs and all payments made to the numerous insolvent estates on those completed cases), an increase of 66% over the comparative six-month period for the prior year. Net cash income not only exceeded by £4.5m all the cash overheads required to run the Company, it also exceeded all the costs of running Manolete’s ongoing 413 cases, including the 126 new case investments made in H1 FY25. 

The Company recorded its highest ever realised revenues for H1 FY25 of £15.0m, exceeding H1 FY24 by 60%. On average, Manolete receives all the cash owed to it by the defendants of completed cases within approximately 12 months of the cases being legally completed. This impressive 60% rise in realised revenues therefore provides good near-term visibility for a continuation of Manolete’s strong, and well-established, track record of organic, operational cash generation. 

New case investment opportunities arise daily from our wide-ranging, proprietary, UK referral network of insolvency practitioner firms and specialist insolvency and restructuring solicitor practices. We are delighted to report that the referrals for H1 FY25 reached a new H1 company record of 437. A 27% higher volume than in H1 FY24, which was itself a new record for the Company this time last year. That points to a very healthy pipeline as we move forward into the second half of the trading year.” 

Financial highlights: 

  • Total revenues increased by 28% to £14.4m from H1 FY24 (£11.2m) as a result of the outstanding delivery of realised revenues generated in the six months to 30th September 2024.
    • Realised revenues achieved a record level of £15.0m in H1 FY25, a notable increase of 60% on H1 FY24 (£9.4m). This provides good visibility of near-term further strong cash generation, as on average Manolete collects all cash on settled cases within approximately 12 months of the legal settlement of those cases
    • Unrealised revenue in H1 FY25 was £(633k) compared to £1.8m for the comparative H1 FY24. This was due to: (1) the record number of 137 case completions in H1 FY25, which resulted in a beneficial movement from Unrealised revenues to Realised revenues; and (2) the current lower average fair value of new case investments made relative to the higher fair value of the completed cases. The latter point also explains the main reason for the marginally lower gross profit reported of £4.4m in this period, H1 FY25, compared to £5.0m in H1 FY24. 
  • EBIT for H1 FY25 was £0.7m compared to H1 FY24 of £1.6m. As well as the reduced Gross profit contribution explained above, staff costs increased by £165k to £2.3m and based on the standard formula used by the Company to calculate Expected Credit Losses, (“ECL”), generated a charge of £140k (H1 3 FY24: £nil) due to trade debtors rising to £26.8m as at 30 September 2024, compared to £21.7m as at 30 September 2023. The trade debtor increase was driven by the outstanding record level of £15.0m Realised revenues achieved in H1 FY25.
  • Loss Before Tax was (£0.2m) compared to a Profit Before Tax of £0.9m in H1 FY24, due to the above factors together with a lower corporation tax charge being largely offset by higher interest costs. 
  • Basic earnings per share (0.5) pence (H1 FY24: 1.4 pence).
  • Gross cash generated from completed cases increased 63% to £14.3m in the 6 months to 30 September 2024 (H1 FY24: £8.7m). 5-year H1 CAGR: 39%.
  • Cash income from completed cases after payments of all legal costs and payments to Insolvent Estates rose by 66% to £7.6m (H1 FY24: £4.6m). 5-year H1 CAGR: 46%.
  • Net cashflow after all operating costs but before new case investments rose by 193% to £4.5m (H1 FY24: £1.5m). 5-year H1 CAGR: 126%.
  • Net assets as at 30 September 2024 were £40.5m (H1 FY24: £39.8m). Net debt was reduced to £11.9m and comprises borrowings of £12.5m, offset by cash balances of £0.6m. (Net debt as 31 March 2024 was £12.3m.)
  • £5m of the £17.5m HSBC Revolving Credit Facility remains available for use, as at 30 September 2024. That figure does not take into account the Company’s available cash balances referred to above.

Operational highlights:

  • Ongoing delivery of record realised returns: 137 case completions in H1 FY25 representing a 18% increase (116 case realisations in H1 FY24), generating gross settlement proceeds receivable of £13.9m for H1 FY25, which is 51% higher than the H1 FY24 figure of £9.2m. This very strong increase in case settlements provides visibility for further high levels of cash income, as it takes the Company, on average, around 12 months to collect in all cash from previously completed cases.
  • The average realised revenue per completed case (“ARRCC”) for H1 FY25 was £109k, compared to the ARRCC of £81k for H1 FY24. That 35% increase in ARRCC is an important and an encouraging Key Performance Indicator for the Company. Before the onset and impact of the Covid pandemic in 2020, the Company was achieving an ARRCC of approximately £200k. Progress back to that ARRCC level, together with the Company maintaining its recent high case acquisition and case completion volumes, would lead to a material transformation of Company profitability.
  • The 137 cases completed in H1 FY25 had an average case duration of 15.7 months. This was higher than the average case duration of 11.5 months for the 118 cases completed in H1 FY24, because in H1 FY25 Manolete was able to complete a relatively higher number of older cases, as evidenced by the Vintages Table below.
  • Average case duration across Manolete’s full lifetime portfolio of 1,064 completed cases, as at 30 September 2024 was 13.3 months (H1 FY24: 12.7 months).
  • Excluding the Barclays Bounce Back Loan (“BBL”) pilot cases, new case investments remained at historically elevated levels of 126 for H1 FY25 (H1 FY24: 146 new case investments).
  • New case enquiries (again excluding just two Barclays BBL pilot cases from the H1 FY24 figure) achieved another new Company record of 437 in H1 FY25, 27% higher than the H1 FY24 figure of 343. This excellent KPI is a strong indicator of future business performance and activity levels.
  • Stable portfolio of live cases: 413 in progress as at 30 September 2024 (417 as at 30 September 2023) which includes 35 live BBLs.
  • Excluding the Truck Cartel cases, all vintages up to and including the 2019 vintage have now been fully, and legally completed. Only one case remains ongoing in the 2020 vintage. 72% of the Company’s live cases have been signed in the last 18 months.
  • The Truck Cartel cases continue to progress well. As previously reported, settlement discussions, to varying degrees of progress, continue with a number of Defendant manufacturers. Further updates will be provided as concrete outcomes emerge.
  • The Company awaits the appointment of the new Labour Government’s Covid Corruption Commissioner and hopes that appointment will set the clear direction of any further potential material involvement for Manolete in the Government’s BBL recovery programme.
  • The Board proposes no interim dividend for H1 FY25 (H1 FY24: £nil).

The full report of Manolete’s half-year results can be read here.

Read More
Commercial Legal Innovation

LegalPay’s CIO Highlights the Opportunities and Challenges for Defense-Side Funding

By Harry Moran |

As the legal funding industry has matured and become a mainstream feature of many jurisdictions’ legal systems, funders are increasingly looking at ways to diversify their activities.

In an article for Insolvency Tracker, Tanya Prasad, CIO of LegalPay, addresses the niche topic of defense-side funding and examines whether there is potential for this type of legal funding to grow in the same way that plaintiff funding has over recent years. Prasad notes that in an environment where “the demand for risk management tools in litigation grows”, large corporations may look to third-party funders to help supplement legal budgets “while potentially achieving favourable outcomes”.

Prasad acknowledges that compared to traditional plaintiff-side funding, defense-side funding “comes with unique challenges”. Whilst claimants may seek to maximise their financial returns in the form of damages and compensation, a defendant will “generally focus on minimizing loss exposure.” As a result of this difference in goals, Prasad suggests that funders would need to not only “employ creative pricing structures”, but would also need to find new metrics to define success.

The latter point is one that Prasad argues is key to creating a viable defense-side funding ecosystem, noting that “establishing a clear definition of success” may have different parameters for different defendants. Examples of this could include structuring funding agreements to incorporate “avoided loss” measures, which would define success based on “achieving a favorable settlement or dismissal at a lower financial cost than anticipated.”

If these difficulties that Prasad highlights can be overcome, she suggests that “defense-side litigation funding has the potential to redefine legal finance, supporting fair representation for both plaintiffs and defendants and expanding access to justice across the board.” Additionally, Prasad points to a handful of examples where defense-side funding has been successfully employed, such as the Gillette v. ShaveLogic case, where Burford Capital provided funding for the defendant to successfully oppose Gillette’s claims of trades secret misappropriation and unfair competition.