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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

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Case Developments Commercial

CAT Rules in Favour of BT in Harbour-Funded Claim Valued at £1.3bn

By Harry Moran |

As LFJ reported yesterday, funders and law firms alike are looking to the Competition Appeal Tribunal (CAT) as one of the most influential factors for the future of the UK litigation market in 2025 and beyond. A judgment released by the CAT yesterday that found in favour of Britain’s largest telecommunications business may provide a warning to industry leaders of the uncertainty around funding these high value collective proceedings.

An article in The Global Legal Post provides an overview of the judgment handed down by the CAT in Justin Le Patourel v BT Group PLC, as the Tribunal dismissed the claim against the telecoms company following the trial in March of this year. The opt-out claim valued at around £1.3 billion, was first brought before the Tribunal in 2021 and sought compensation for BT customers who had allegedly been overcharged for landline services from October 2015.

In the executive summary of the judgment, the CAT found “that just because a price is excessive does not mean that it was also unfair”, with the Tribunal concluding that “there was no abuse of dominant position” by BT.

The proceedings which were led by class representative Justin Le Patourel, founder of Collective Action on Land Lines (CALL), were financed with Harbour Litigation Funding. When the application for a Collective Proceedings Order (CPO) was granted in 2021, Harbour highlighted the claim as having originally been worth up to £600 million with the potential for customers to receive up to £500 if the case had been successful.

In a statement, Le Patourel said that he was “disappointed that it [the CAT] did not agree that these prices were unfair”, but said that they would now consider “whether the next step will be an appeal to the Court of Appeal to challenge this verdict”. The claimants have been represented by Mishcon de Reya in the case.

Commenting on the impact of the judgment, Tim West, disputes partner at Ashurst, said that it could have a “dampening effect, at least in the short term, on the availability of capital to fund the more novel or unusual claims in the CAT moving forward”. Similarly, Mohsin Patel, director and co-founder of Factor Risk Management, described the outcome as “a bitter pill to swallow” for both the claimants and for the law firm and funder who backed the case.

The CAT’s full judgment and executive summary can be accessed on the Tribunal’s website.

Commercial Fundraising

Sandfield Capital Secures £600m Facility to Expand Funding Operations

By Harry Moran |

Sandfield Capital, a Liverpool-based litigation funder, has reached an agreement for a £600 million facility with Perspective Investments. The investment, which is conditional on the identification of suitable claims that can be funded, has been secured to allow Sandfield Capital to strategically expand its operations and the number of claims it can fund. 

An article in Insider Media covers the the fourth capital raise in the last 12 months for Sandfield Capital, with LFJ having previously covered the most recent £10.5 million funding facility that was secured last month. Since its founding in 2020, Sandfield Capital has already expanded from its original office in Liverpool with a footprint established in London as well. 

Steven D'Ambrosio, chief executive of Sandfield Capital, celebrated the announced by saying:  “This new facility presents significant opportunities for Sandfield and is testament to our business model. Key to our strategy to deploy the facility is expanding our legal panel. There's no shortage of quality law firms specialising in this area and we are keen to develop further strong and symbiotic relationships. Perspective Investments see considerable opportunities and bring a wealth of experience in institutional investment with a strong track record.”

Arno Kitts, founder and chief investment officer of Perspective Investments, also provided the following statement:  “Sandfield Capital's business model includes a bespoke lending platform with the ability to integrate seamlessly with law firms' systems to ensure compliance with regulatory and underwriting standards.  This technology enables claims to be processed rapidly whilst all loans are fully insured so that if a claim is unsuccessful, the individual claimant has nothing to pay. This is an excellent investment proposition for Perspective Investments and we are looking forward to working with the management team who have a track record of continuously evolving the business to meet growing client needs.”

Announcements Case Developments Commercial

Australian Google Ad Tech Class Action Commenced on Behalf of Publishers

By Harry Moran |

A class action was filed on 16 December 2024 on behalf of QNews Pty Ltd and Sydney Times Media Pty Ltd against Google LLC, Google Pte Ltd and Google Australia Pty Ltd (Google). 

The class action has been commenced to recover compensation for Australian-domiciled website and app publishers who have suffered financial losses as a result of Google’s misuse of market power in the advertising technology sector. The alleged loss is that publishers would have had significantly higher revenues from selling advertising space, and would have kept greater profits, if not for Google’s misuse of market power. 

The class action is being prosecuted by Piper Alderman with funding from Woodsford, which means affected publishers will not pay costs to participate in this class action, nor will they have any financial risk in relation to Google’s costs. 

Anyone, or any business, who has owned a website or app and sold advertising space using Google’s ad tech tools can join the action as a group member by registering their details at www.googleadtechaction.com.au. Participation in the action as a group member will be confidential so Google will not become aware of the identity of group members. 

The class action is on behalf of all publishers who had websites or apps and sold advertising space using Google’s platforms targeted at Australian consumers, including: 

  1. Google Ad Manager (GAM);
  2. Doubleclick for Publishers (DFP);
  3. Google Ad Exchange (AdX); and
  4. Google AdSense or AdMob. 

for the period 16 December 2018 to 16 December 2024. 

Google’s conduct 

Google’s conduct in the ad tech market is under scrutiny in various jurisdictions around the world. In June 2021, the French competition authority concluded that Google had abused its dominant position in the ad tech market. Google did not contest the decision, accepted a fine of €220m and agreed to change its conduct. The UK Competition and Markets Authority, the European Commission, the US Department of Justice and the Canadian Competition Bureau have also commenced investigations into, or legal proceedings regarding, Google’s conduct in ad tech. There are also class actions being prosecuted against Google for its practices in the ad tech market in the UK, EU and Canada. 

In Australia, Google’s substantial market power and conduct has been the subject of regulatory investigation and scrutiny by the Australian Competition and Consumer Commission (ACCC) which released its report in August 2021. The ACCC found that “Google is the largest supplier of ad tech services across the entire ad tech supply chain: no other provider has the scale or reach across the ad tech supply chain that Google does.” It concluded that “Google’s vertical integration and dominance across the ad tech supply chain, and in related services, have allowed it to engage in leveraging and self-preferencing conduct, which has likely interfered with the competitive process". 

Quotes 

Greg Whyte, a partner at Piper Alderman, said: 

“This class action is of major importance to publishers, who have suffered as a result of Google’s practices in the ad tech monopoly that it has secured. As is the case in several other 2. jurisdictions around the world, Google will be required to respond to and defend its monopolistic practices which significantly affect competition in the Australian publishing market”. 

Charlie Morris, Chief Investment Officer at Woodsford said: “This class action follows numerous other class actions against Google in other jurisdictions regarding its infringement of competition laws in relation to AdTech. This action aims to hold Google to account for its misuse of market power and compensate website and app publishers for the consequences of Google’s misconduct. Working closely with economists, we have determined that Australian website and app publishers have been earning significantly less revenue and profits from advertising than they should have. We aim to right this wrong.” 

Class Action representation 

The team prosecuting the ad tech class action comprises: 

  • Law firm: Piper Alderman
  • Funder: Woodsford
  • Counsel team: Nicholas de Young KC, Simon Snow and Nicholas Walter