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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.

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Trucking Industry Backs Federal Liability Bill Amid Litigation Funding Concerns

A bicameral bill introduced in Congress would bar liability claims premised on vehicle safety standards stricter than those set by federal regulators, and has drawn support from a trucking and insurance coalition that counts third-party litigation funding among the pressures driving up its costs.

As reported by Transport Topics, the Uniform Vehicle Safety Standards Act was introduced on August 6 by Rep. Mike Flood of Nebraska, joined by Reps. David Rouzer, Jay Obernolte and Jake Ellzey, with a Senate companion from Sens. Deb Fischer and Cynthia Lummis. The measure would amend Title 49 of the U.S. Code to prohibit common law claims alleging that a vehicle should have met standards exceeding those established by the National Highway Traffic Safety Administration.

"In recent years, we've seen a sharp rise in lawsuits awarding damages based on state standards instead of the federal safety standards trucking companies are already required to meet," Flood said. Alex Rosen of the American Trucking Associations argued that where NHTSA has determined a standard strikes the right balance, "that expert determination should carry greater weight than hindsight judgments."

The bill itself contains no litigation funding provisions. Funding enters through the coalition assembled behind it, which includes the American Property Casualty Insurance Association and the National Association of Mutual Insurance Companies alongside nine trucking organizations and Werner Enterprises. Research from the American Transportation Research Institute cited in the piece identifies third-party litigation funding and staged accidents as evolving legal threats to carriers, and links excessive litigation to insurance premiums that have climbed 36% over eight years.

For funders, the significance is positional rather than legal. The trucking sector has become one of the more organized constituencies pressing for disclosure and restriction at the state level, and preemption bills of this kind widen the front without naming the industry directly.

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Conservative Columnist Argues Litigation Funding Limits Would Disarm the Right

A guest column published this week makes a right-of-center case against pending federal restrictions on third-party litigation funding, arguing that the measures would strip conservative activists and small business owners of the capital they need to litigate against better-resourced opponents.

Writing in The State Journal, Drew Johnson takes aim at the Protecting Our Courts From Foreign Manipulation Act, led by Rep. Ben Cline of Virginia, and at Senator Thom Tillis's proposal to impose a punitive tax on litigation funding proceeds. Johnson is a senior fellow at the National Center for Public Policy Research and the 2026 Republican nominee for Nevada State Treasurer.

His central argument is that the bill's stated purpose, preventing foreign governments from bankrolling harassment suits, is already served by existing mechanisms including CFIUS review and judicial discretion, leaving the new disclosure requirements to do work their sponsors did not intend. Broad disclosure obligations, he contends, would deter funders from backing cases at all, and the resulting shortfall would fall hardest on plaintiffs without institutional balance sheets behind them.

Johnson illustrates the point with Jack Phillips, the Colorado baker who lost an estimated 40% of his income during years of litigation before prevailing at the Supreme Court with backing from Alliance Defending Freedom. Absent outside support, he writes, Phillips "could have easily been forced to surrender."

The column is notable less for its policy analysis than for its author. Litigation funding restrictions have advanced largely on Republican votes, and the industry's defenders have generally come from the plaintiffs' bar. Johnson's framing, that citizens facing wealthy opponents should not be forced to fight alone, is an attempt to contest that ground.

Commercial

Five Years On, Arizona’s ABS Data Shows No Systemic Ethical Breakdown, Article Argues

An article published in the Arizona State University Corporate and Business Law Journal argues that five years of operating data under Arizona's Alternative Business Structure framework has not produced the ethical failures its opponents predicted, and that the debate is moving from theoretical objections to observable outcomes.

Writing in the ASU Corporate and Business Law Journal, Alex Chucri traces the framework to August 2020, when Arizona became the first state to eliminate ABA Model Rule 5.4 and permit non-lawyer ownership of law firms, with the ABS regime taking effect on January 1, 2021 under Arizona Supreme Court order R-20-0034. The central claim is structural: the state did not remove oversight so much as replace blanket prohibition with licensing, compliance obligations and regulatory accountability. Non-lawyers may hold equity, share profits and participate in management, but only under Supreme Court supervision, with approved compliance counsel, reporting procedures and audit requirements.

The article marshals the program's numbers. Licenses grew from two approvals in 2020 to 15 in 2021 and 25 in each of 2022 and 2023, reaching approximately 150 licensed entities by March 2026, with 114 ABSs actively operating during 2024. No ethics complaints were filed against ABS entities in the program's first three years; the first arrived in 2024, when the State Bar initiated disciplinary action involving two ABS-affiliated attorneys. A preliminary analysis of 2024 disciplinary actions, which the author acknowledges is limited by incomplete ABS staffing data, suggests ABS-affiliated lawyers faced discipline at a rate well below the broader Arizona attorney population.

Readers should weigh the source. Chucri is founder and CEO of Pravati Capital and in 2024 founded 1787 Legal Group, the Scottsdale ABS the article offers as its case in point. The argument nonetheless lands at a moment when several states, Illinois among them this week, are moving in the opposite direction, and Arizona remains the only jurisdiction with a five-year record to argue from.