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Implications of Portfolio Financings on Litigation Finance Returns

January 15, 2020

Implications of Portfolio Financings on Litigation Finance Returns

The following article is the first in 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 Summary
  • Portfolio financings represent as much as 62% of all US commercial litigation finance investments
  • Strong growth trend for Law Firm and Corporate portfolios
  • Law firms recognize the inherent value in incubating portfolios
  • Not prevalent in non-contingent fee jurisdictions
Investor Insights
  • Potential effect of reducing overall investor returns relative to a portfolio of single case risks
  • Investors benefit from better risk-adjusted returns than single case investing
  • Cross-collateralized nature significantly reduces risk & shifts value to law firm
  • Portfolio financings may limit upside potential for investors
  • Review the portfolio composition (single vs. portfolio), past and future, to set return expectations.
One of the most significant trends in litigation finance for fund managers over the last few years has been the strong trend toward “portfolio financings”. Litigation finance can be broadly segmented between single case investments and portfolio financing investments. Single case is a reference to the provision of litigation finance to a single litigation, the outcome of which is completely dependent on the idiosyncratic case risk and binary litigation process risk.  Portfolio financing is a reference to the aggregation and cross-collateralization (typically) of a portfolio of cases, whether Law Firm or Corporate, whereby the results are determined by the performance of the portfolio as opposed to a single case. The trend has been so significant, that according to WestFleet’s 2019 Buyer’s Guide, Law Firm portfolio financings now account for 47% of capital commitments and Corporate portfolios account for 15% of commitments, for an aggregate of 62% of the commitments of the US industry. Why is Portfolio Financing Growing So Quickly? 
  1. The primary growth driver of portfolio financings is that the industry, arguably, started in the area of single case financings and is now evolving its offerings into a more complex and larger area of litigation finance. It is typical for an industry to begin with the financings of single exposures, and then as the industry gets more comfortable and gains deeper experience, it evolves into other larger applications like portfolio financing.
  2. The second driver is that as litigation funders have expanded their capital base, they have had to look further afield in terms of where they can effectively invest their capital at scale. To this end, portfolio financings are an ideal way for litigation funders to put large amounts of capital to work quickly and in a better risk-adjusted way than undertaking the laborious task of assembling a series of single case investments into a portfolio.
  3. One of the knocks against litigation finance is a low degree of capital deployment. Managers are motivated to reduce risk by slowly investing capital into the case in a measured way so as to mitigate loss of capital. Unfortunately, this negatively impacts the amount of capital they deploy and is inversely proportional to the effect their management fees have on returns. Portfolio financings, on the other hand, allow litigation funders to commit large amounts of capital and also expedite the deployment of capital, as they typically replace dollars that have been deployed (actual or notional) previously by the law firm. One could view a portfolio as a series of cases that have been ‘incubated’ by the law firm, and are now ready to be invested in by a litigation funder.
  4. Law firms have, astutely, come to realize there is value in (i) originating cases, arguably one of the most difficult and expensive services litigation funders provide, and (ii) applying modern portfolio theory to a series of cases and cross-collateralizing the pool, both to the benefit of the law firm. Progressive law firms married the new availability of large amounts of capital with the value inherent in their incubated portfolios and parlayed that into significant portfolio financings at a reasonable cost of capital, thereby capturing some of the economics for themselves.
  5. As awareness for litigation finance has grown throughout the legal community, awareness has also grown for plaintiff bar firms with large portfolios of cases. This market has also evolved and extended into corporate portfolios (LCM, an Australian litigation finance manager, is actively pursuing corporate portfolios). Accordingly, the increased awareness of the industry in general has also increased awareness for portfolio financing opportunities.
What Does it All Mean for Investors in the Asset Class? The following quote from Burford’s 2018 capital markets event sums it up nicely: “When we moved from single cases to portfolio investments, people wondered whether returns would decline, but they went up” This statement suggests that on a risk-adjusted basis, portfolio financings deliver superior outcomes. However, when you look at Burford’s return profile over a long period of time, you will see that relatively few single case investments contributed to their overall multiple of capital, with the Pedersen & Teinver claims being considerable contributors. In fact, the size of the gross dollar returns of these single case investments dwarfs the rest of the portfolio and skews the overall results. Burford makes the point in their disclosures that removing these outliers disrupts the core of their strategy, which is more akin to venture capital. As with all portfolios, one needs to assess the outliers. Yet having witnessed a large number of portfolio results, I would suggest the return profile of a portfolio is more aligned to the approach, strategy, size and nature of cases in which the manager has chosen to invest, as opposed to the notion that portfolio financings produce inherently superior results than investing in a cross-section of single cases. Some funders produce very consistent results in terms of returns and duration, whereas other strategies are more volatile; it just depends on what risk profile you are willing to accept (i.e. are you looking for venture capital or leveraged buy-out type returns). I think it is fair to say that the public domain lacks enough data to determine whether portfolio financings are better risk-adjusted returns than a diversified portfolio of single cases. However, when you consider that most portfolio financings are cross-collateralized, this single feature does have a significant impact on risk. The question then becomes how much return does the Law Firm or Corporation extract for delivering a fully originated portfolio with cross-collateralization features. I would expect that over a large portfolio of transactions, portfolio financings will outperform in terms of returns in relation to volatility, and that single cases will outperform in terms of returns, but at the expense of higher volatility. The other aspect that is difficult to control in comparing results of two sets of portfolios is whether the nature of the cases (case type, life cycle, jurisdiction, size, etc.) are common across the single case control group and the portfolio financings group. We may never know the answer, but logic dictates that portfolio financings should be lower returning, lower volatility investments, as compared to a portfolio of single cases – the key difference being the cross-collateralization feature. Investor Insights When reviewing fund manager results one should look closely at the composition of the portfolio to understand what portion is being derived from portfolios compared to single cases.  It will also be important to note the trending in these case types.  If the manager is scaling its operations, as many currently are, their motivations are to deploy large amounts of capital quickly in large portfolios with lower risk.  While this is a prudent approach for the manager, one then has to determine whether the historic return profile based on a portfolio of single case exposures is indicative of a future portfolio which will be mainly comprised of portfolio financings.  The portfolio financings will have a different risk-reward dynamic and so investors will need to model their return expectations accordingly.  Either way, I expect the return profile for litigation finance to remain robust both in the areas of single cases and portfolios and continue to believe that diversification is a key success factor to prudent investing in the commercial litigation finance asset class. Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.

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Litigation Funding Founder Reflects on Building a New Platform

By John Freund |

A new interview offers a candid look at how litigation funding startups are being shaped by founders with deep experience inside the legal system. Speaking from the perspective of a former practicing litigator, Lauren Harrison, founder of Signal Peak Partners, describes how time spent in BigLaw provided a practical foundation for launching and operating a litigation finance business.

An article in Above the Law explains that Harrison views litigation funding as a natural extension of legal advocacy, rather than a purely financial exercise. Having worked closely with clients and trial teams, she argues that understanding litigation pressure points, timelines, and decision making dynamics is critical when evaluating cases for investment. This background allows funders to assess risk more realistically and communicate more effectively with law firms and claimholders.

The interview also touches on the operational realities of starting a litigation funding company from the ground up. Harrison discusses early challenges such as building trust in a competitive market, educating lawyers about non-recourse funding structures, and developing underwriting processes that balance speed with diligence. Transparency around pricing and alignment of incentives emerge as recurring themes, with Harrison emphasizing that long-term relationships matter more than short-term returns.

Another key takeaway is the importance of team composition. While legal expertise is essential, Harrison notes that successful platforms also require strong financial, operational, and compliance capabilities. Blending these skill sets, particularly at an early stage, is presented as one of the more difficult but necessary steps in scaling a sustainable funding business.

Commercial Regulatory Issues

Australian High Court Limits Recovery of Litigation Funding Costs

By John Freund |

The High Court of Australia has delivered a significant decision clarifying the limits of recoverable damages in funded litigation, confirming that claimants cannot recover litigation funding commissions or fees as compensable loss, even where those costs materially reduce the net recovery.

Ashurst reports that the High Court rejected arguments that litigation funding costs should be treated as damages flowing from a defendant’s wrongdoing. The ruling arose from a shareholder class action in which claimants sought to recover the funding commission deducted from their settlement proceeds, contending that the costs were a foreseeable consequence of the underlying misconduct. The court disagreed, holding that litigation funding expenses are properly characterised as the price paid to pursue litigation, rather than loss caused by the defendant.

In reaching its decision, the High Court emphasised the distinction between harm suffered as a result of wrongful conduct and the commercial arrangements a claimant enters into to enforce their rights. While acknowledging that litigation funding is now a common and often necessary feature of large-scale litigation, the court concluded that this reality does not convert funding costs into recoverable damages. Allowing such recovery, the court reasoned, would represent an expansion of damages principles beyond established limits.

The decision provides welcome clarity for defendants facing funded claims, while reinforcing long-standing principles of Australian damages law. At the same time, it confirms that litigation funding costs remain a matter to be borne out of recoveries, subject to court approval regimes and regulatory oversight rather than being shifted onto defendants through damages awards.

Case Developments Commercial

Janus Henderson Affiliates Lose Early Bid in Litigation Finance Dispute

By John Freund |

Janus Henderson Group affiliates have suffered an early procedural setback in a closely watched litigation finance dispute that underscores the internal tensions that can arise within funder-backed investment structures and joint ventures.

Bloomberg Law reports that a Delaware Chancery Court judge has refused to dismiss claims brought by Calumet Capital Partners against several entities linked to Janus Henderson. The ruling allows the case to proceed into discovery, rejecting arguments that the complaint failed to state viable claims. Calumet alleges that the defendants engaged in a concerted effort to undermine a litigation finance joint venture in order to force a buyout of Calumet’s interests on unfavorable terms.

According to the complaint, the dispute centers on governance and control issues within a litigation finance vehicle that was designed to deploy capital into funded legal claims. Calumet contends that Janus Henderson affiliated entities systematically blocked proposed funding deals, interfered with relationships, and restricted the venture’s ability to operate as intended. These actions, Calumet claims, were aimed at depressing the value of its stake and pressuring it into an exit at a steep discount.

The defendants moved to dismiss the case, arguing that their actions were contractually permitted and that Calumet’s allegations were insufficient to support claims such as breach of contract and tortious interference. The court disagreed at this stage, finding that Calumet had plausibly alleged misconduct that warrants further factual development. While the ruling does not determine the merits of the case, it keeps alive serious allegations about how litigation finance partnerships are managed and unwound when commercial interests diverge.