Trending Now

Why Litigation Finance is Suited to Public Markets

Why Litigation Finance is Suited to Public Markets

The following was contributed by Nick Rowles-Davies, Executive Vice Chairman of Litigation Capital Management (LCM). The recent and well documented attacks by activist short-seller Muddy Waters on Burford Capital have brought litigation finance into the limelight. Whilst largely focussed on Burford’s accounting methods and corporate governance, the hedge fund’s accusations have raised concerns around the practices and legitimacy of the industry more broadly. One key question raised is around whether funders should even be listed on a public market. More pointedly, why can companies with questionable governance practices, an unpredictable revenue forecast, and operating in an industry with limited access to a secondary market against which claims can be evaluated, be listed? A lot of this is down to varying levels of understanding around Burford’s accounting practices, and indeed those of the wider industry. It is important to recognise that while there are many companies operating in the growing litigation finance space, they do not all do the same thing, or account the same way and shouldn’t all be tarred with the same brush. Fair value accounting – adopted by Burford and others under IFRS 9, is not an evil. But the application of it does matter. There are differing ways of adopting fair value accounting and how it is used is ultimately a management team decision. The accounting treatment for litigation projects varies across the industry and some approaches are more reliant on subjective judgement by management teams than others. For a clear representation, fair value numbers should always be given alongside historical cash accounting figures, so investors and counterparties are able to see the underlying performance of the business. It is vital that funders are fully transparent and have numbers that can be easily verified and valued externally. In practice, this entails the development of a fair value accounting method that can be scrutinised and tested by external parties. This probably results in lower valuations than management may have reached alone. But ultimately, as we’ve seen over the past fortnight, it is prudent to be cautious and conservative. The importance of disclosure to shareholders and clients cannot be underestimated. Subject to the right application of fair value accounting, there are several significant advantages to being listed – relating to transparency, regulation and access to capital – that make it a highly appropriate model for funders. Being listed on any stock exchange ensures a level of regulation and transparency that the private markets do not. We say this with some authority having been listed on both a main market (the Australian Securities Exchange) and the Alternative Investment Market (“AIM”). Our experience has been that there is little difference in standards and accountability between the two. As a constituent of a public market, there is pressure to ensure that standards of corporate governance are upheld. Natural checks exist to hold companies to account in the form of selling investors, analysts publishing negative research, and, at the most extreme level, activists or short sellers publicly targeting companies. What’s difficult is that there is no formal regulation of the litigation finance sector, although its introduction in multiple jurisdictions is inevitable in time. It is hard to predict what form it will take, but I have no doubt that respectable funders will welcome it when it arrives, and we should do. In the meantime, our listed status provides a platform through which we can continue to meet regulatory standards. This is particularly important for firms like LCM looking to fund corporate portfolio transactions. Naturally, sophisticated corporates have stringent KYC protocols, and being listed demonstrates a level of oversight and transparency around where your capital is coming from, often in stark contrast to some. Furthermore, litigation finance is capital-intensive by its very nature and being listed provides funders with access to public sources of capital in the equity and bond markets. Equity raises provide funders with permanent capital to invest from the balance sheet, thereby avoiding any potential liquidity mismatches that might occur with some alternative fund structures. It also means investors of all types (from institutions to individuals) can gain access to the asset class’s attractive, uncorrelated returns. There will be a failure in this industry soon. This will be in large part due to the use of contingent revenues to hide loss positions, as well as funders being over reliant on one part of the market, such as single case investments. This is clearly not a sustainable business model and further illustrates the need for the considered use of fair value accounting. Recent events have been no help to the ongoing education process around the benefits of legal finance generally. It is a rude awakening that the practices of one business in our industry have raised so many questions around the governance and reporting of its peers. It will take time for the jitters to settle. In the meantime, the regulatory oversight that being a listed company provides should be seen as a positive. Nick Rowles-Davies is Executive Vice Chairman of Litigation Capital Management (LCM) and leads the company’s EMEA operations.
Secure Your Funding Sidebar

Commercial

View All

Legalist Expands into Government Contractor Lending

By John Freund |

Litigation funder Legalist is moving beyond its core offering of case-based finance and launching a new product aimed at helping government contractors manage cash flow. The San Francisco-based firm, which made its name advancing capital to plaintiffs and law firms in exchange for a share of litigation proceeds, is now offering loans backed by government receivables.

An article in Considerable outlines how Legalist’s latest product is designed to serve small and midsize contractors facing long payment delays—often 30 to 120 days—from federal agencies. These businesses frequently struggle to cover payroll, purchase materials, or bid on new work while waiting for disbursements, and traditional lenders are often unwilling to bridge the gap due to regulatory complexities and slow timelines.

Unlike litigation finance, where returns are tied to legal outcomes, these loans are secured by awarded contracts or accounts receivable from government entities. Legalist sees overlap in risk profiling, having already built underwriting systems around uncertain and delayed payouts in the legal space.

For Legalist, the move marks a significant expansion of its alternative credit offerings, applying its expertise in delayed-cashflow environments to a broader market segment. And for the legal funding industry, it signals the potential for funders to diversify their revenue models by repurposing their infrastructure for adjacent verticals. As more players explore government receivables or non-litigation-based financing, the definition of “litigation finance” may continue to evolve.

Funders’ Hidden Control Spurs Calls for Litigation‑Funding Transparency

By John Freund |

Litigation funding contracts are usually sealed from public view—but recently disclosed agreements suggest they often grant funders much more power than commonly acknowledged. A batch of nine contracts submitted by Lawyers for Civil Justice, a corporate and defense‑oriented group, to a judicial panel considering a proposed federal rule to mandate disclosure reveals funders in some instances reserve the right to reject settlement offers, choose or even replace counsel, and take over lawsuits entirely.

An article in Reuters explains that one example involves a 2022 contract between Burford Capital and Sysco Corp, in which Sysco is forbidden to accept a settlement without the funder’s written approval. Another case shows a contract with Longford Capital treating a change of counsel as a “Material Adverse Event,” again requiring funder consent. These terms reveal control far beyond the “passive investor” role many funders claim.

Currently, many funders argue that because their agreements do not always alter case control in practice, full disclosure of the contracts is unnecessary. But defenders of transparency say even the potential for control—whether or not exercised—can materially affect litigation outcomes, especially in settlement negotiations.

There is increasing momentum toward mandatory disclosure. Over 100 corporations, including those in tech, pharma, and automotive sectors, have urged the U.S. Advisory Committee on Civil Rules to adopt a rule requiring disclosure of funder identities and control rights. Several states (like Kansas, Louisiana, Indiana, West Virginia) have also put disclosure requirements into law. In Kansas, for instance, courts may review full funding agreements in private, while opposing parties receive more limited disclosures.

LCM Exits Gladstone Class Action; Writes Off A$30.8M

By John Freund |

Litigation Capital Management has pulled funding from a long-running Australian class action brought by commercial fishers against the state-owned Gladstone Ports Corporation, opting to cut its losses and reset capital allocation. The funder said the case has now settled on terms that provide a full release between the parties and a payment to the defendant toward costs—covered in full by after-the-event insurance—pending court approval in late October.

An announcement on Investegate details that LCM will write off A$30.8 million, equal to its cash invested, and has launched a formal strategic review with Luminis Partners. Management attributed the exit to portfolio discipline following adverse outcomes and noted preparation issues and aspects of expert evidence that, in the company’s view, no longer supported the case theory.

LCM is pursuing two potential recovery avenues: a costs assessment it says could recoup a portion of legal fees paid, and a prospective claim against the original solicitors for alleged breach of contract and negligence. Beyond this case, LCM flagged near-term milestones: an expected judgment within roughly three weeks in a separate UK commercial litigation co-funded alongside Fund I (A$20.6 million LCM capital at stake), and a decision soon on permission to appeal an April 1 arbitration loss.

Full-year FY25 results will be presented on October 1, when management plans to update investors on strategy and portfolio priorities.