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Commercial Special Features

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

Burford Capital CEO: Government Inaction on PACCAR is Harming London Market

By Harry Moran |

As we approach the beginning of summer, the litigation funding industry is growing impatient in waiting for the outcome of the Civil Justice Council’s (CJC) review of litigation funding, with funders anxious to see the government provide a solution to the uncertainty created by the Supreme Court’s ruling in PACCAR.

An article in The Law Society Gazette provides an overview of an interview with Christopher Bogart, CEO of Burford Capital; who spoke at length about the ongoing impact of the UK government’s failure to introduce legislation to solve issues created by the PACCAR ruling. Bogart highlighted the key correlation between funders’ reluctance to allocate more capital to the London legal market and “the government non-response” to find a quick and effective solution to PACCAR.

Comparing the similarities in effect of the government inaction over funding legislation to the Trump administration’s tariff policy, Bogart said simply, “markets and businesses don’t like such uncertainty.” He went on to describe the London market as “not as healthy as you would like it to be”, pointing to statistics showing a decrease in capital allocation and the examples of major funders like Therium making job cuts.

One particular pain point that Bogart pointed to was Burford’s newfound hesitancy to name London as an arbitral seat and choose English law for international contracts, saying that the company has moved those contracts to jurisdictions including Singapore, Paris or New York. Bogart said that it was “unfortunate because this is one of the major global centres for litigation and arbitration”, but argued that the strategic jurisdictional shift was a result of having “a less predictable dynamic here in this market”.

As for what Bogart would like to see from the upcoming CJC’s review of litigation funding, the Burford CEO emphasised the longstanding view of the funding industry that there is “no need for a big regulatory apparatus here.” Instead, Bogart suggested that an ideal outcome would be for the CJC to encourage Westminster “to restore a degree of predictability and stability into the market.”

Commercial Deals

Insurance CEO Ceases Trading with Firms Linked to Litigation Finance

By Harry Moran |

The tensions between the insurance industry and litigation finance are well established, with insurance industry groups often at the forefront of lobbying efforts calling for tighter regulations of third-party funding. In one of the most significant examples of this tension, the CEO of a speciality insurance company has declared that his company will cease doing business with any firm that is linked to litigation funding activity.

An article in Insurance Business highlights recent comments made by Andrew Robinson, chairman and CEO of Skyward Specialty Insurance Group, where he said that the company would no longer do business with companies who have any ties to litigation finance. Citing the uptick in the use of third-party funding as one of the primary contributors to social inflation, increasing product costs and reduced availability; Robinson declared that Skyward are “not going to trade with anybody who's involved in this”.

According to the article, Robinson’s decision was triggered by the company’s discovery that an asset manager it worked with was involved in litigation funding. Skyward then “shut off” its business relationship with the asset manager and is in the process of redeeming any remaining assets with the firm. Robinson said that the idea of Skyward having ties to firms involved with litigation finance “is wrong at all levels”, saying that he told his executive leadership team that “we can’t have that anywhere near us”.

Aside from the asset manager, Skyward was trading with a company involved in contingent insurance whose work included litigation finance, but Robinson stated that the unnamed company is reducing its already minor presence in the funding space.

Despite targeting his ire primarily at litigation funding, Robinson suggested that the wider issue stems from a “broken” tort system and that “you have to get to the root cause and toward reform”.  

Commercial Regulatory Issues

Bell Gully Report: New Zealand Courts are “Enablers of Litigation Funding”

By Harry Moran |

Following a 2022 report from New Zealand’s Law Commission, there has been a distinct lack of action by successive governments to introduce a Class Actions Act or any forms of oversight for the use of third-party funding in large group claims.

A new report released by Bell Gully looks at the current state of class actions in New Zealand, examining the rise of large group claims  and the role of litigation funding as a key driver. In ‘The Big Picture: Class Actions’, Bell Gully says that “in the past five years class actions have moved from being a threat on the horizon to a regular feature in New Zealand’s courts”. 

The introduction to the report appears to paint litigation funders as the prime moving force behind this trend, saying that the swell in class actions is “being driven by the availability of third-party litigation funding rather than a groundswell of consumer action.” Identifying the most prominent funders at work in New Zealand, Bell Gully points to LPF Group as the dominant local funder, Omni Bridgeway for its strong market reach from Australia, and Harbour for its global strength across litigation and arbitration funding. 

Without any legislative measures regulating funding and with no established industry association like Australia’s AALF, Bell Gully highlights the courts as the main mechanism of control over funding activity. The report goes further and suggests that “funder-friendly court decisions have contributed to the growing influence of litigation funders in New Zealand”, noting the admission of opt-out class actions and courts’ willingness to make common fund orders.

In its review of the need for a Class Actions Act in New Zealand, Bell Gully argues that the current lack of oversight on funding has led to a situation where the courts are acting as “enablers of litigation funding” rather than regulators of the practice.

The full report can be accessed here.