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Covid-19 and Defendant Collectability Risk

April 15, 2020

Covid-19 and Defendant Collectability Risk

The following article is part of 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 SUMARY
  • Covid-19 will likely lead to the biggest financial crisis since the Great Depression
  • The crisis has affected the solvency and viability of corporations and sovereigns
  • Litigation managers need to re-assess collectability risk, immediately and regularly, of each defendant in their portfolio
INVESTOR INSIGHTS
  • Diligencing litigation managers should involve a deep understanding of how they assess defendant collectability risk
  • Defendant collectability risk is an ongoing risk that changes over time, therefore managers need a continuous risk assessment methodology
  • Investors looking to invest in litigation finance secondaries to take advantage of the current dislocation should avoid single case risk and look to portfolio acquisitions, but must assess collectability risk across the portfolio being acquired
As Covid-19 has taken the planet and the legal community by surprise, I think there are some lessons learned from private equity that can be applied to litigation finance.  In short, focus on cash – its collection, generation, distribution and availability. So, how does this relate to Litigation Finance? This novel Coronavirus-driven healthcare crisis which has spiralled into a broad-based economic crisis, the likes of which the modern global economy hasn’t seen since the Great Depression, has had the effect of taking otherwise viable, profitable and cashflow positive businesses and stopping them in their tracks.  Overnight, certain businesses and industries have performed a complete one-eighty, whereby they went from solvent to being on the precipice of insolvency.  For many litigation finance firms, their immediate reaction has and should be to undertake an immediate and urgent review of the defendants involved in each and every case in which their portfolios have an investment, in order to re-assess collectability risk, one of the key areas of litigation finance underwriting. When an economy, especially a consumer driven economy like the US, effectively shuts down overnight, there are few industries and companies that will be spared from a diminution in their value and blockage from access to capital.  Former “recession-resistant” and “necessity” businesses have just experienced a new reality, which is that necessity is determined by context.  The current context states that the only necessity is feeding, hand washing, shelter and healthcare, and this has had a massive impact on the economy. While this too shall pass, the economic impacts will likely linger for a number of months and years.  The hope for a “V” shaped recovery has been dashed, as the crisis has extended beyond initial duration estimates.  My personal opinion is that it will at best look like a “U” shaped recovery with the possibility of a double “W”, meaning there will likely be some ups and downs along the way, should the dreaded “C-19” rear its ugly head again going into the next flu season, or should it fail to be contained due to premature ‘return to daily activity’ policy.  My hope is that the massive amounts of stimulus that are being pumped into the global economy actually make their way to the most hard-hit regions of the economy, namely ‘Mainstreet’, and thereby mitigate the damage that would otherwise be experienced for many small and medium-sized businesses on which most economies rely. While we tend to focus on home first, litigation funders should also be mindful that the economy is global.  As bad as developed countries think they may have it, fund managers who participate in the international arbitration market, which by definition, involve developing countries and corporations therein, need to be mindful that those defendants in developing countries will likely be even more greatly affected. Yes, even sovereigns. Those managers that are focused on patent litigation involving start-up technology companies should also ensure the plaintiff is solvent through the end of the litigation, not to mention the collectability risk of the defendant, which may have been negatively impacted. All of this is to say, that it is in the best interests of litigation finance managers to undertake a re-assessment of collectability risk of each and every defendant in their portfolio, and to do so on a regular basis for the foreseeable future.  Managers will need to assess (i) the degree to which the defendant’s industry has been impacted, (ii) the strength of each defendant’s business and balance sheet, (iii) the ability for the defendant (business or sovereign) to access sufficient capital to maintain solvency, (iv) the degree to which the value of such business has declined, (v) a study of the defendants’ behaviour during the last economic crisis, as it relates to litigation ongoing at that time, if any, (vi) determine the extent to which other parties have security and seniority ahead of the plaintiff’s claims and (vii) assess the defendants’ ability to raise capital outside of financing (i.e. asset sales, equity raises, etc.). Once a determination has been made as to the relative collectability risk, managers will then need to determine next steps with respect to protecting themselves from those cases where the defendant collectability risk has materially changed.  This may involve the withdrawal of any further financing provisions (to the extent the financing was milestone-based), partnering with other parties to share the increased risk of the case, or selling all or a portion of a case or a portfolio (although the manager would be selling into a weak secondary market with relatively few participants, which will be reflected in the valuation, if they can secure bids).  While the options may not be great, they may be better than investing ‘good money after bad’. Investor Insights For investors that are invested in the sector or considering making an investment in the litigation finance market, now is a good time to diligence how and the extent to which managers were on top of their portfolio in assessing collectability risk.  For those investors interested in secondary market opportunities, caveat emptor.  The risk profile for a single case secondary is much higher given the high level of uncertainty in today’s market so a portfolio of secondaries may be a better risk-adjusted avenue to pursue but the portfolio’s diversification benefits would not negate the need to reassess the collectability risk of each defendant in the portfolio.  Edward Truant is the founder of Slingshot Capital Inc., and an investor in the consumer and commercial litigation finance industry.

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Private Investors Eye Profits in L.A. County Sex Abuse Settlements

An investigation reveals that private investors are positioning themselves to profit from the enormous pool of money flowing from Los Angeles County’s historic sex abuse litigation. The county has already agreed to spend nearly $5 billion this year resolving thousands of claims related to alleged sexual abuse in its juvenile detention and foster care systems, including a $4 billion settlement—the largest of its kind in U.S. history.

An article in the Los Angeles Times explains that proponents of this investor involvement argue such financing gives plaintiffs’ attorneys the capital they need to take on deep-pocketed defendants and helps victims who lack resources access justice. Records reviewed by the Times show that several law firms bringing these claims receive financial backing from private investors, often through opaque out-of-state entities and Delaware-based companies.

Backers contend the arrangement can level the legal playing field and expedite case filings and settlements. However, public officials and critics express alarm over the lack of transparency surrounding these investments and the possibility that significant portions of settlement money intended for survivors could instead flow to private financiers. Some county supervisors reported being contacted by investors asking about the potential profitability of the sex abuse suits, raising ethical concerns about treating human trauma as an “evergreen” revenue stream.

The backdrop to this investor interest is a surge in litigation following changes in California law that revived long-dormant abuse claims and spurred widespread advertising by plaintiff firms seeking new clients. Government scrutiny has heightened amid reports of questionable recruitment practices and potential fraud in some claims, and the county’s district attorney has launched an investigation into parts of the settlement process.

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JurisTrade’s Koutoulas Maps Litigation Finance to Capital Markets

By John Freund |

Litigation finance is entering a new strategic chapter as innovators seek to bridge legal funding with broader capital markets and institutional investment. At the forefront of this evolution is James Koutoulas, co-founder of JurisTrade, who draws on his unique blend of hedge fund management and securities law experience to rethink how legal claims can be structured as investable assets for large pools of capital.

An article in Lehigh Valley Business explains that JurisTrade has built the first institutional marketplace for litigation finance, where legal claims are converted into structured financial products like insured bonds, litigation index funds, and private credit vehicles—mechanisms designed to attract pension funds, hedge funds, and other institutional investors traditionally absent from the space. Koutoulas, noted for leading pro bono recovery of $6.7 billion for MF Global customers, argues that litigation finance can offer compelling risk-adjusted returns—sometimes in excess of traditional private credit yields—especially when backed by insurance or securitization features that mitigate downside risk.

The piece also highlights how managed service organizations (MSOs) could reshape law firm economics by outsourcing non-core functions—bringing a level of operational efficiency and capital-raising sophistication more typical of private equity into legal practice. Koutoulas emphasizes the impact of regulatory changes in jurisdictions like Arizona and Washington, D.C., where alternative business structures now allow non-lawyers to hold ownership stakes in law firms, further blurring lines between legal services and traditional business models. He also connects the boom in LegalTech to broader FinTech dynamics, pointing to venture capital interest and technological innovations as catalysts in transforming how legal assets are financed.

Koutoulas recognizes transparency and risk management as ongoing industry challenges, advocating for disclosure standards to protect both claimants and investors.

Commercial Regulatory Issues

France Issues Decree Regulating Third-Party Funded Collective Actions

By John Freund |

France has taken a significant step in codifying oversight of third-party financed collective actions with the issuance of Decree No. 2025-1191 on December 10, 2025.

An article in Legifrance outlines the new rules, which establish the procedure for approving entities and associations authorized to lead both domestic and cross-border collective actions—referred to in French as “actions de groupe.” The decree brings long-anticipated regulatory clarity following the April 2025 passage of the DDADUE 5 law, which modernized France’s collective redress framework in line with EU Directive 2020/1828.

The decree grants authority to the Director General of Competition, Consumer Affairs and Fraud Control (DGCCRF) to process applications for approval. Final approval is issued by ministerial order and is valid for five years, subject to renewal.

Approved organizations must meet specific governance and financial transparency criteria. A central provision of the new rules is a requirement for qualifying entities to publicly disclose any third-party funding arrangements on their websites. This includes naming the financiers and specifying the amounts received, with the goal of safeguarding the independence of collective actions and protecting the rights of represented parties.

Paul de Servigny, Head of litigation funding at French headquartered IVO Capital said: “As part of the transposition of the EU’s Representative Actions Directive, the French government announced a decree that sets out the disclosure requirements for the litigation funding industry, paving the way for greater access to justice for consumers in France by providing much welcomed clarity to litigation funders, claimants and law firms.

"This is good news for French consumers seeking justice and we look forward to working with government, the courts, claimants and their representatives and putting this decree into practice by supporting meritorious cases whilst ensuring that the interests of consumers are protected.”

By codifying these requirements, the French government aims to bolster public trust in group litigation and ensure funders do not exert improper influence on the course or outcome of legal actions.