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Key Takeaways from LFJs Special Event: How Investors Approach Litigation Finance

July 26, 2022

Key Takeaways from LFJs Special Event: How Investors Approach Litigation Finance

On Thursday, July 14th, Litigation Finance Journal hosted a digital event, “How Investors Approach Litigation Finance.” The event featured a unique cross-section of investor types, including David Gallagher, Co-Head of Litigation Investing at The D.E. Shaw Group, CJ Wei, Vice President of Private Credit at Northleaf Capital, Benjamin Blum, Managing Director at Flexpoint Ford, LLC, David Demeter, Director of Investment at Davidson College, and Kendra Corbett, Partner at Cloverlay. The event was moderated by Ed Truant, Founder of Slingshot Capital. Below are some key highlights from the discussion: ET: How did you start investing in Litigation Finance? What types of results did you focus on, and how has your strategy changed over time? DG: It takes time to obtain a meaningful number of results from litigation finance investments, and you can learn a lot along the way, even before the results come in. And because you invest in such a small proportion of the opportunities you look at, you try to learn from the investments you don’t make, as well as the investments you do make. And one of the lessons I’ve learned as it relates to deployment strategy, is that good deals are so hard to come by, and are a product of so many variables outside of your control, that it’s better to be responsive to the opportunity set in front of you, than to be wedded to the abstract ideas of portfolio construction or deal structuring. I think adaptiveness is key. KC: We’ve been active in deploying capital in litigation finance for over six years now, and I wouldn’t say our approach has changed dramatically. We’ve been laser-focused on maintaining diversification across cases to avoid binary risks, and finding alignment across all of the involved parties. I think we’ve looked for market specialists, and we haven’t necessarily tried to find litigation finance beta, and instead we’ve looked for partners with a demonstrable value-add and strategic advantage. ET:  For those panelists more interested in credit opportunities in the legal finance space, why did you decide to focus on credit? DG: At the D.E. Shaw Group, the litigation investing team works closely with the Private Credit group, which I like to think broadens the types of deals we do. So, in addition to investing in litigation finance deals with a more typical risk/reward profile, we also invest in less volatile opportunities that are less about litigation risk, and more about timing risk and basic credit risk. BB: There are a few ways to create a credit-like opportunity in litigation finance. In addition, the way David was describing, the other way is to create a credit-like product by lending against a diverse portfolio of individual case fundings. So the asset is a little bit less credit-like, but the investment structure creates a credit-like investment. Both areas are of interest to us, especially when there is strong alignment with the borrower and downside protection through underwriting, to justify accepting a return profile that is either capped or has limited upside. CW: At Northleaf, we have many different funds with many different return hurdles, so we view ourselves as a capital solutions provider to litigation finance businesses. That being said, our thesis around the asset class is akin to a type of Private Credit approach strategy. Principal protection is our priority. We not only have asset coverage of the legal assets, but additional covenants and protections, and bespoke structures where we have guardrails against any downside scenario. ET: From an equity perspective, how is litigation finance the same as, or different from, other equity assets in which you invest? DD: If you suspend disbelief a bit, I would equate it with early venture investing. Liquidity cycles tend to be uncorrelated in the long run, you’re generally creating milestones for capital, outcomes can be pretty skewed, where large winners make up the majority of profit (although it’s certainly more skewed in venture than in litigation finance), and the investment strategy isn’t all that scalable—managers have to be cognizant of all that they’re trying to deploy. DG: I’ll focus on some of the differences. First, a litigation finance investor has no control over the litigation, while an equity investor or investors that own the majority of the company—they do control the company. So the closest analogy is to a class of shares that has no voting rights. Second, LitFin investments are typically illiquid. Equity investments are typically liquid. Another difference is that case outcomes are typically more binary than business outcomes.  And one last difference is that a company you might invest in can pivot and respond as needed to market opportunities, a case you invest in—it pretty much is what it is, and there’s only so much that even the most talented lawyers can do, with the facts and the law involved. ET: One of the common criticisms I hear from fund managers, at least early on in the life cycle, is that investors are not willing to pay management fees to fund their operations. How does the panel respond to this criticism, given that the average litigation finance claim is small—around $3-5MM—and there is a lot of relatively sophisticated operations needed to be conducted by investment managers?   DD: I think there are ways of paying someone a full fee and making sure deployment is there. And that is my primary concern, and I think most LPs primary concern, when it comes to paying a management fee. We’re also concerned about misalignment. At the fund level, people should really be making a large amount of their compensation from performance fees, not salary. KC: It’s definitely a difficult issue. The fee drag that comes with charging investors on committed capital becomes pretty untenable when you’re comparing gross returns to net returns. So from our perspective, at a minimum, fees need to be on an as-committed basis. We’ve also seen scenarios where there is a lower management fee on committed capital that steps up once it’s drawn. It’s just really difficult with some of the commercial litigation strategies to have a full freight fee—2%–committed from investors.

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Commercial Regulatory Issues

Liability Insurers Push Disclosure Requirements Targeting Litigation Funding

By John Freund |

Commercial liability insurers are escalating their long-running dispute with the litigation funding industry by introducing policy language that could require insured companies to disclose third-party funding arrangements. The move reflects mounting concern among insurers that litigation finance is contributing to rising claim costs and reshaping litigation dynamics in ways carriers struggle to underwrite or control.

An article in Bloomberg Law reports that the Insurance Services Office, a Verisk Analytics unit that develops standard insurance policy language, has drafted an optional provision that would compel policyholders to reveal whether litigation funders or law firms with a financial stake are backing claims against insured defendants. While adoption of the provision would be voluntary, insurers could begin incorporating it into commercial liability policies as early as 2026.

The proposed disclosure requirement is part of a broader push by insurers to gain greater visibility into litigation funding arrangements, which they argue can encourage more aggressive claims strategies and higher settlement demands, particularly in mass tort and complex commercial litigation. Insurers have increasingly linked these trends to what they describe as social inflation, a term used to capture rising jury awards and litigation costs that outpace economic inflation.

For policyholders, the new language could introduce additional compliance obligations and strategic considerations. Companies that rely on litigation funding, whether directly or through counterparties, may be forced to weigh the benefits of financing against potential coverage implications.

Litigation funders and law firms are watching developments closely. Funding agreements are typically treated as confidential, and mandatory disclosure to insurers could raise concerns about privilege, work product protections, and competitive sensitivity. At the same time, insurers have been criticized for opposing litigation finance while also exploring their own litigation-related investment products, highlighting tensions within the market.

If widely adopted, insurer-driven disclosure requirements could represent a meaningful shift in how litigation funding intersects with insurance. The development underscores the growing influence of insurers in shaping transparency expectations and suggests that litigation funders may increasingly find themselves drawn into coverage debates that extend well beyond the courtroom.

Case Developments Commercial

Diamond McCarthy Backs Lansdowne Oil Treaty Claim Against Ireland

By John Freund |

US-based litigation funder Diamond McCarthy has agreed to back a high-stakes investment treaty claim brought by Lansdowne Oil and Gas against the Irish state, with the claim reportedly valued at up to $100 million. The dispute arises from Ireland’s policy shift away from offshore oil and gas development, which Lansdowne argues has effectively wiped out the value of its investment in the Barryroe offshore oil field.

According to NewsFile, Lansdowne Oil and Gas, a small exploration company listed in London and Dublin, is pursuing arbitration against Ireland under the Energy Charter Treaty. The company alleges that Ireland’s 2021 decision to halt new licences for offshore oil and gas exploration, followed by regulatory actions affecting existing projects, breached treaty protections afforded to foreign investors. Lansdowne contends that these measures frustrated legitimate expectations and amounted to unfair and inequitable treatment under international law.

Diamond McCarthy’s involvement brings significant financial firepower to a claim that would otherwise be difficult for a junior energy company to pursue. The funder will cover legal and arbitration costs in exchange for a share of any recovery, allowing Lansdowne to advance the case without bearing the full financial risk. The arbitration is expected to be conducted under international investment dispute mechanisms, with proceedings likely to take several years.

Ireland has previously defended its policy changes as part of a broader climate strategy aimed at reducing fossil fuel dependence and meeting emissions targets. Government representatives have indicated that the state will robustly contest the claim, arguing that the measures were lawful, proportionate, and applied in the public interest. Ireland is also in the process of withdrawing from the Energy Charter Treaty, although existing investments may remain protected for a period under sunset provisions.

Case Developments Commercial

Tata Steel Hit With €1.4 Billion Dutch Environmental Class Action

By John Freund |

Tata Steel is facing a major legal challenge in Europe after a Dutch environmental foundation launched a large-scale collective action seeking approximately €1.4 billion in damages related to alleged environmental and public health impacts from the company’s steelmaking operations in the Netherlands. The claim targets Tata Steel Nederland and Tata Steel IJmuiden, which operate the sprawling IJmuiden steelworks near Amsterdam.

An article published by MSN reports that the lawsuit has been filed by Stichting Frisse Wind.nu, a nonprofit representing residents living in the vicinity of the IJmuiden plant. The claim alleges that years of harmful emissions, particulate matter, noise, and other pollution from the facility have led to adverse health effects, reduced quality of life, and declining property values for people in surrounding communities. The foundation is seeking compensation on behalf of affected residents under the Netherlands’ collective action regime, which allows representative organizations to pursue mass claims for damages.

According to the report, the lawsuit has been brought under the Dutch Act on the Resolution of Mass Claims in Collective Action, known as WAMCA. This framework requires the court to first assess whether the claim is admissible before any substantive evaluation of liability or damages takes place. If the case proceeds, it could take several years to resolve given the scale of the alleged harm and the number of potential claimants involved.

Tata Steel has strongly rejected the allegations, describing them as speculative and unsupported. The company has stated that it intends to vigorously defend the proceedings and argue that the claims fail to meet the legal standards required under Dutch law. Tata Steel has also pointed to ongoing efforts to reduce emissions and modernize its European operations as part of its broader sustainability strategy.