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Key Takeaways from LFJ’s Special Digital Event “Litigation Finance: Investor Perspectives”

April 8, 2024

Key Takeaways from LFJ’s Special Digital Event “Litigation Finance: Investor Perspectives”

On Thursday April 4th, 2024, Litigation Finance Journal hosted a special digital event titled “Litigation Finance: Investor Perspectives.” The panel discussion featured Bobby Curtis (BC), Principal at Cloverlay, Cesar Bello (CB), Partner at Corbin Capital, and Zachary Krug (ZK), Managing Director at NorthWall Capital. The event was moderated by Ed Truant, Founder of Slingshot Capital. Below are some key takeaways from the event: If you were to pinpoint some factors that you pay particular attention to when analyzing managers & their track records, what would those be? BC: It’s a similar setup to any strategy that you’re looking at–you want to slice and dice a track record as much as possible, to try to get to the answer of what’s driving returns. Within litigation finance, that could be what sub-sectors are they focused on, is it intellectual property? Is it ex-US deals? What’s the sourcing been? How has deployment been historically relative to the capital they’re looking to raise now? It’s an industry that is starting to become data rich. You have publicly-listed companies that have some pretty interesting track record that’s available. I’m constantly consuming track record data and we’re building our internal database to be able to comp against. Within PE broadly, a lot of people are talking about DPI is the new IRR, and I think that’s particularly true in litigation finance. If I’m opening a new investment with a fund I’ve never partnered with before, my eyes are going to ‘how long have they been at it, and what’s the realization activity?’ There is also a qualitative aspect to this–has the team been together for a while, do they have a nice mix of legal acumen, investment and structuring acumen, what’s the overall firm look like? It’s a little bit art and science, but not too dissimilar from any track record analysis with alternative investment opportunities. Zach, you’ve got a bit more of a credit-focus. What are you looking for in your opportunities?  ZK: We want to understand where the realizations are coming from. So if I’m looking at a track record, I want to understand if these realizations are coming through settlements or late-stage trial events. From my perspective as an investor, I’d be more attracted to those late-stage settlements, even if the returns were a little bit lower than a track record that had several large trial wins. And I say that because when you’re looking at the types of cases that you’ll be investing in, you want to invest in cases that will resolve before trial and get away from that binary risk. You want cases that have good merit, make economic sense, and have alignment between claimant and law firm, and ultimately are settleable by defendants. That type of track record is much more replicable than if you have a few outsized trial wins. What are things that managers generally do particularly well in this asset class, and particularly poorly?  CB: I don’t want to paint with a broad brush here. With managers it can be idiosyncratic, but there can be structuring mistakes – not getting paid for extension risks, not putting in IRR provisions. Portfolio construction mistakes like not deploying enough and being undercommitted, which is a killer. Conversely, on the good side, we’ve seen a ton of activity around insurance, which seems to be a bigger part of the landscape. We also welcome risk management optionality with secondaries. Some folks are clearly skating to where the puck is going and doing more innovative things, so it really depends who you’re dealing with. But on the fundamental underwriting, you rarely see a consistent train wreck – it’s more on the other stuff where people get tripped up. How do you approach valuation of litigation finance portfolios? What I’m more specifically interested in is (i) do you rely on manager portfolio valuations, (ii) do you apply rules of thumb to determine valuations, (iii) do you focus your diligence efforts on a few meaningful cases or review & value the entire portfolio, and (iv) do you use third parties to assist in valuations?  CB: If you’re in a fund, you’re relying on the manager’s marks. What we do is not that – we own the assets directly or make co-investments. We see a lot of people approach this differently. Sometimes we have the same underlying exposure as partners and they’re marking it differently. Not to say that one party is rational and the other is not, it’s just hard to do. So this is one we struggle with. I don’t love mark-to-motion. I know there’s a tug toward trying to fair value things more, but as we’ve experienced in the venture space, you can put a lot of valuations in DPI, but I like to keep it at cost unless there is a material event. Check out the full 1-hour discussion here.

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Federal Judiciary Advisory Committee Moves Forward with Litigation Finance Transparency Rules

By John Freund |

A federal judiciary advisory committee agreed on Tuesday to develop transparency obligations for third-party litigation funders, advancing one of the most closely watched rulemaking efforts in U.S. civil procedure. The decision came despite what participants described as "vehement" opposition from segments of both the defense and plaintiffs' bars, underscoring how contentious disclosure of funding arrangements remains within the legal community.

As reported by Law360, the committee, which shapes the Federal Rules of Civil Procedure, signaled that it will continue drafting specific disclosure requirements rather than shelving the project, as some stakeholders had urged. Alongside the litigation finance item, the panel also advanced proposed updates to subpoena rules addressing remote testimony and service of process.

For funders, the development marks a significant shift in the regulatory conversation. Industry groups have long argued that existing discovery tools are sufficient to address concerns about control and conflicts, while proponents of disclosure contend that parties and courts need a clearer view of who stands to benefit from a case. The committee's decision indicates that federal rulemakers are prepared to put that debate to the test with concrete drafting, even as both sides continue to press their positions.

Next steps will involve developing rule text and further public input before any proposal moves up the Judicial Conference's rulemaking chain. Market participants will be watching closely, as any federal disclosure rule would likely influence how funders structure deals, negotiate with claimants, and manage portfolios across U.S. commercial litigation.

Commercial

Judge Preska Orders Argentina’s Economy Minister to Produce Texts in YPF Enforcement Fight

By John Freund |

A U.S. federal judge has ordered Argentina's economy minister to turn over text messages sought by plaintiffs pursuing enforcement of the multibillion-dollar YPF judgment, the latest development in one of the most prominent litigation finance-backed cases in the world. The ruling expands the discovery footprint available to creditors working to collect on the landmark award against the Republic of Argentina.

As reported by Bloomberg, U.S. District Judge Loretta Preska ruled on Tuesday that plaintiffs backed by Burford Capital are entitled to messages from Argentina's sitting economy minister. The decision continues a pattern in which Judge Preska has pushed Argentina to produce internal communications and financial information as the plaintiffs seek to identify attachable assets and pierce through sovereign defenses.

Burford, which funded the underlying claims brought by former YPF minority shareholders, has pursued a sprawling enforcement campaign following a 2023 judgment of approximately $16 billion plus interest. Argentina has resisted enforcement on multiple fronts, appealing the merits ruling and contesting asset-identification discovery, while the plaintiffs have sought turnover of Argentina's interest in YPF itself.

For the litigation finance market, the order is another marker of how far-reaching post-judgment discovery can be in high-stakes sovereign enforcement — and how central funder-backed plaintiffs have become to the mechanics of collecting against state defendants. The decision is likely to intensify the ongoing standoff between Argentina and its creditors in the U.S. courts.

Commercial

South Korea Recovers Record ISDS Legal Costs After Schindler Pays 9.6 Billion Won

By John Freund |

South Korea has recovered a record amount in investor-state dispute settlement legal costs, with Swiss elevator manufacturer Schindler paying approximately 9.6 billion won to satisfy a cost award following its unsuccessful arbitration claim against the Korean government. The payment marks the largest ISDS cost recovery in the country's history and offers a notable data point for parties evaluating the downside risk of treaty-based claims.

As reported by Chosunbiz, Jo Ara, head of the international investment disputes division at South Korea's Ministry of Justice, confirmed the recovery during a briefing on the government's handling of the case. Schindler had pursued a long-running claim tied to its investment in Hyundai Elevator, which the tribunal ultimately declined to sustain, exposing the investor to a substantial cost-shifting order.

The outcome highlights the growing willingness of tribunals to allocate costs against unsuccessful claimants in investor-state proceedings, a trend that has direct implications for litigation funders active in the international arbitration market. Cost awards of this scale can materially affect the economics of funding ISDS claims and are increasingly a factor in underwriting decisions.

For the broader litigation finance community, the Schindler payment underscores why funders evaluating treaty claims closely monitor both merits risk and cost exposure. As more states pursue aggressive recovery strategies after successful defenses, the downside profile of funded ISDS portfolios continues to evolve.