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3490 ArticlesKey Highlights from LFJ’s “Investor Insights into Litigation Funding” Digital Event
This past Thursday, LFJ hosted a digital conference that featured insights from various institutional investors active in the litigation funding sector. The panel - moderated by Ed Truant (ET) of Slingshot Capital - consisted of Jonathan Rix (JR), Senior Associate at UK-based PE firm Partners Capital, Kendra Corbett (KC), Principal on the Investment team of independent asset manager Cloverlay, and David Demeter (DD), Investment Director of Davidson College's $1Bn endowment fund.
The event also featured a keynote address from Charles Agee, founder of Westfleet Advisors, a litigation funding advisory firm. Charles discussed the key findings of his 2020 Litigation Finance Market Report--the most holistic industry survey on the market.
Below are some key highlights from the event. First, some notable lines from Charles Agee's keynote address:
“Where is Litigation Finance now compared to where it could be, relative to its potential?”
- The big picture is $2.5 billion in new capital commitments during the 12 months we analyzed. That’s on the US side of the commercial market. That $2.5 billion is committed to about 300 individual deals (cases and portfolio). The top 45 funding firms collectively have $11 billion in assets under management.
- Our data ends just before the pandemic, so we have to think that’s a factor. That said, we measured a 6% annual growth rate in terms of new capital. But realistically, the real growth rate is much higher.
- Portfolio vs single case breakdown is steady. 60% portfolio and 40% single case deals seem about right.
- The key driver of addressable market is how much investment-grade litigation is out there. Even a strong case might not be suitable for investors. It’s not clear though, how to measure the amount of investment-grade litigation available. But quantifying that makes more sense than just looking at total dollar amounts.
- “Big Law shuns Lit Fin” news stories are not an accurate representation of the industry. Big Law (largest 200 firms by revenue) potential is difficult to quantify.
- Funders close about 5% or less of the deals that come in (though they may get funding elsewhere). The failure to close rate is very high, but it’s not clear whether that’s where it should be. We can’t know yet whether that’s optimal.
- Innovation could best occur by bringing in new blood to the industry. In addition to former litigators, those with asset management backgrounds should be encouraged to join the Lit Fin industry. This would bring in more diverse perspectives, which could open growth opportunities for the industry.
- I’m bullish on the industry, conceptually. But there is a lot of room for innovation, growth, and improvement.
And some key highlights from the panel discussion:
ET: What do you look for in a management team, both in terms of skills and composition?
KC: Origination and claim underwriting expertise, and asset management skills. In the early stages of diligence, we look at how replicable their approach might be in the future, their prior track record. Ideally, a team would have a combination of skills beyond legal expertise, since fund management is very different. Investment management expertise, understanding the likelihood of losing capital.
JR: There’s no one-size-fits-all team. But what we look for are partnership and ethics.
ET: What are some of your more significant insights from investing in this asset class? Both positive and negative.
KC: Not everyone considers the passive nature of funding, that you’re not able to have any control over the litigation itself. We try to find strategies that allow for more active control.
DD: I couldn’t agree more. We need to see structural ways of addressing deployment risk in order to invest. Not all the managers have significant experience. Many firms that started in the last few years have people who come out of commercial litigation and not from a finance background. It’s important to build trust with institutional investors.
ET: Charles touched on transparency and its importance from an investor’s perspective, and the lack of standardization. Would you echo that?
DD: I haven’t had a lot of issues with that. I do see reports where gross returns are emphasized and net returns are a footnote. That’s just unacceptable. The transparency we’re asking for isn’t hard. What I’d like to see is a willingness to share public information, public filings, and judgments. It’s already out there, there’s no reason not to give it to investors.
JR.: There’s definitely a lack of standardization in the industry.
ET: How are your deployment rates in your current portfolio? What advice do you have in terms of increasing deployment?
KC: Deployment rates have lagged. As far as the impact on net returns, we try to find innovative ways to structure cases to meet minimum return budgets.
JR.: In terms of advice I’d give—sizing the fund is important. If your goal is quality and effective deployment rather than quantity...ultimately your business depends on investment performance. As a manager, you can be creative. You may find more interesting capital solutions that allow you to, maybe, overcommit the fund. Managers should be flexible in terms of fees on committed capital.
ET: What’s your advice to first time managers with respect to fundraising?
JR.: Fundraising is always a tough gig. Choose partners very carefully, because litigation funding is nuanced and complicated. You make your life harder by partnering with people who don’t understand those complexities.
Anna-Maria Quinke Joins Omni Bridgeway German Cartel Team
Omni Bridgeway is poised to grow its services for German clients. With that in mind, the firm has added Anna-Maria Quinke to its team. Quinke is an anti-trust litigation specialist who will now serve as Senior Legal Counsel as well as an Investment Manager. Omni Bridgeway details that before joining the firm, Quinke spent more than a decade at Clifford Chance. She is adept at domestic, international, and multi-jurisdictional litigation. Omni Bridgeway’s Senior Investment Manager, Dina Komor, explains that Quinke’s expertise compliments the wider EMEA team. Quinke hold degrees from EBS Business School in Germany, and Durham University in England.
Sandfield Capital launches to re-imagine the future of legal finance
New investment fund Sandfield Capital has launched this week to tackle an increasingly challenging area of litigation that remains poorly served by the market. Steven D’Ambrosio, a former Finance Director at Close Brothers Premium Finance, has conceived and built a number of highly-successful ventures in the financial and legal sectors and remains extremely passionate about creating and tailoring funding solutions. Now, with Sandfield Capital, he hopes to enable real change in the sector for the good of those struggling to engage with legal services. Thousands of disputes cases in the UK fail to progress because of the increasingly high level of financial commitment required from day one. With average initial legal fees and disbursements coming in at around £15,000, most of us don’t have the readily-available capital available to pursue a claim. As Lord Justice Briggs pointed out in the Civil Courts Structure Review, “The single, most pervasive and intractable weakness of our civil courts is that they simply do not provide reasonable access to justice for any but the most wealthy individuals.” Whilst the explosive growth in litigation funding over the past five years has created support for cases that simply wouldn’t have seen the light of day, the litigation funding community tends to focus on higher value corporate commercial claims exceeding £2m in value and requiring at least £1m in funding. For the majority of claims that fall below that threshold there are few options for claimants. Sandfield Capital provides an easy-to-access platform that enables individuals to commence a dispute through innovative loans that cover disbursements such as court, expert and counsel fees. If the litigation is ultimately unsuccessful, the individual is fully insured against liability, safeguarding any negative financial impact. In the case of a win, the cost is simply factored into settlement. The initial focus of the fund will be on funding disbursements on cases for civil litigation, eventually moving towards partnering with more law firms to then fund their clients’ cases. D'Ambrosio comments: “At the heart of our business is a clear purpose - we believe in making justice accessible for all, regardless of financial circumstances. This is especially important right now, as we all emerge from C-19 and into an extremely uncertain economy. We also want to work with like-minded lawyers and progressive funders who want to join us in our mission to change the legal universe for good.” The firm will concentrate on offering straightforward, innovative products that support disbursement costs for a diverse range of litigations, ranging from financial mis-selling to GDPR breach. The team behind Sandfield Capital has over 100 years’ combined experience in dealing with the financial services sector, both directly and fighting for justice as a result of mis-sold products. D'Ambrosio continues: “This is about providing help to people who would have almost certainly been denied it. Our fully insured products and services will allow more people to take a stand when they have been wronged, knowing they are protected from financial repercussions. We take a special pride in being able to empower people of all backgrounds to access the justice system.”
Is Consumer Legal Funding a loan? Why does it matter?
The following article was contributed by Eric Schuller, President of the Alliance for Responsible Consumer Legal Funding (ARC). The classification of Consumer Legal Funding as a loan is more than mere semantics. Consumer Legal Funding is the purchase of an asset; that being a portion of the proceeds of the consumer’s legal claim. This form of investment allows the consumer to access much needed support in order to obtain the financial assistance they need while their claim is making its way through the system. You may ask yourself, so why does this matter? In her publication “Harmonizing Third-Party Litigation Funding Regulations,” Professor Victoria Shannon Sahani clarified why Consumer Legal Funding is not a loan:
What is interesting to note is that no state where the legislature has carefully examined the product has classified it as a loan. In fact, states have gone so far as to declare that Consumer Legal Funding is unequivocally not a loan. In 2020, Utah passed HB 312 that specifically states that the product does not meet the definition of a loan or credit. In Indiana for example: A statute was passed regulating the industry which specifically states: “Notwithstanding section 202(i) of this chapter and section 502(6) of this chapter, a CPAP[1] transaction is not a consumer loan.” The statute further articulates: “This article may not be construed to cause any CPAP transaction that complies with this article to be considered a loan or to be otherwise subject to any other provisions of Indiana law governing loans.” The Nebraska state legislature has declared: “Nonrecourse civil litigation funding means a transaction in which a civil litigation funding company purchases and a consumer assigns the contingent right to receive an amount of the potential proceeds of the consumer’s legal claim to the civil litigation funding company out of the proceeds of any realized settlement, judgement, award, or verdict the consumer may receive in the legal claim.” In Vermont: “Consumer litigation funding means a nonrecourse transaction in which a company purchases and a consumer assigns to the company a contingent right to receive an amount of the potential net proceeds of a settlement or judgement obtained from the consumer’s legal claim. “ In other words, Consumer Legal Funding is specifically classified as a purchase, not a loan. And it’s not just the state legislatures that have weighed in on this, the courts have as well. In 2018, the Georgia Supreme Court affirmed the Georgia Court of Appeals ruling, that the product is not subject to the Industrial Loan Act. The Appeals Court stated: “Unlike loans, the funding agreements do not always require repayment. Any repayment, under the funding agreement is contingent upon the direction and time frame of the Plaintiffs’ personal injury litigation, which may be resolved through a myriad of possible outcomes, such as settlement, dismissal, summary judgment, or trial.” Even dating back to 2005, when the New York Attorney General’s office came to an agreement with the industry, it stated in its press release: “The cash advances provided by these firms are not considered “loans” under New York State law because there is no absolute obligation by a consumer to repay them.” So, this leads me back to my opening question: Why does it matter? Classification matters, because once you mischaracterize the product by calling it a loan, you limit consumers’ availability to access it by subjecting Consumer Legal Funding to state laws that regulate loans. According to MarketWatch, in January of 2021, as many as 74% of Americans are living paycheck to paycheck. When their income stream is interrupted (typically due to an accident), they desperately need some economic assistance to help them through the lengthy and extensive process of filing their legal claim. So we ask State Legislators, when you are deciding how best to regulate this important financial product, to do what is best for your constituents by providing them access to economic assistance during their time of need, and ensuring that they are fully informed as to the terms and conditions of the transaction, by having their attorney review it with them in order to confirm that it is properly classified as a purchase. Blanket statements labelling Consumer Legal Funding as loans only serve to hurt those in need of its assistance, especially at a time when they need it. Eric Schuller
President
Alliance for Responsible Consumer Legal Funding [1] CPAP Civil Proceeding Advance Payment
- First, there is no absolute obligation for the funded client to repay the litigation funder. If the client is the claimant, the client must only repay the funder if the client wins the case. If the client is the defendant, the premium payments end as soon as the case settles, and if the defendant loses, the funder will not receive a success fee or bonus.
- Second, litigation funding is non-recourse, meaning that if the client loses the case, the funder cannot pursue the client’s other assets unrelated to the litigation to gain satisfaction.
- Third, the funder is taking on more risk than a traditional collateral-based lender; therefore, the funder is seeking a much higher rate of return than a traditional lender. This is not a unique concept. For example, an unsecured credit card typically carries more risk than a secured loan, so regulations tolerate much higher interest rates on unsecured credit cards than allowed even on subprime mortgages, which are backed by collateral. Similarly, as mentioned above, funders structure their agreements to avoid classification as loans in order to avoid the caps that usury laws place on interest rates for mortgages and credit cards.
- Fourth, distancing funding even further from a loan, funders are taking on even more risk than unsecured credit cards because the credit card agreement is a bilateral transaction, while funding is a multilateral transaction.
| Characteristics | Loan | Consumer Legal Funding |
| Personal repayment obligation | YES | NO |
| Monthly or periodic payments | YES | NO |
| Risk of collection, garnishment, bankruptcy. | YES | NO |
Building a New Law Firm in the Time of COVID
Hosted by Jim Batson, the latest episode of Omni Bridgeway’s podcast features Ariana Tadler, founder of Tadler Law. Baston runs Omni's New York office and serves as Senior Investment Manager. Tadler is an accomplished class action litigator and a global authority on e-Discovery. She is a founding member of Meta-e Discovery, which does consulting and data hosting. Tadler describes her time in law school, working for a variety of lawyers, judges, and firms. Her work on securities fraud cases led Tadler to focus on clients who had been wronged but lacked the ability to pursue legal action. This led her to focus on who was underrepresented or underprivileged. Legal systems are for everyone’s benefit. Increasingly though, Tadler found that the impecunious were often left out in the cold. Tadler has strong opinions on value and how it is applied to legal work. She recognizes that a firm has to make money to stay afloat. At the same time, monetary value is not the only, or even the most vital, measure of a person or their work. At Tadler Law, the team is well paid, but their value is recognized in other ways too. Obviously, COVID has been a major driver in remote working tech and e-Discovery. Tadler finds that she checks in with her team more often now, and to a more thorough degree. COVID fatigue impacts team members and clients alike, which may necessitate more downtime than usual. Zoom hearings have been unexpectedly beneficial since they cut down on travel time and the associated expenses. While courts do have higher expectations than before in terms of submitting information, Zoom depositions and other remote meetings have streamlined processes that often take much longer. Creativity abounds, thanks to COVID. Tadler Law is a female-founded, female-led organization. Tadler explains that this brings a unique perspective to the legal work. Empathy, which is a necessary facet of engaging with clients, is emphasized. The firm wants to ensure that it's being as inclusive as it can be, supporting both women and people of color.
Fronterra Suppliers Called to Class Action Meeting
An upcoming meeting of Fronterra milk suppliers promises to provide information about the developing class action. Fronterra, a major milk processor, is accused of engaging in deceptive and misleading conduct by failing to price match another major milk processor—Murray Goulburn. Dairy News Australia explains that in May 2016, Fronterra took the astonishing step of retroactively revising pricing for the entire season. This necessitated that farmers pay back wages they had been paid by the company. Lawyers from Adley Burstyner have stated that they believe this ‘clawback’ to be in violation of the law. Registration in the class action is free. Litigation Lending Services is providing funds to pursue the action on a no-win-no-fee basis. In addition to this upcoming meeting in Traralgon, meetings are expected to be held in Western and Northern Victoria, and in Tasmania. So far, several hundred farmers impacted by the clawback have joined the action. One dairy farmer, Wendy Whelan, explained that Fronterra’s decision set her business back years. Another couple, Rachael and Hayden Finch, was forced to sell their farm as they were unable to take on the sudden and unexpected debt thrust on them by Fronterra after what had already been a difficult season. The dairy company denies any unlawful activity and has stated its intention to defend the case with vigor.
The International Expansion of Corporate Law
Global expansion has been a huge driver of growth in corporate law departments. Managing the array of requirements and regulations around the world presents specific challenges that GCs are meeting with aplomb. OA Online details an upcoming webinar that promises to discuss legal globalization, keeping up with legal trends and tech, and how to best allocate resources with an eye toward the future. Outsourcing has become a key strategy for legal teams dedicated to increasing efficiency while keeping costs down. This includes managed legal services, international compliance, and utilizing portfolio funding as a means to manage budgets. Wolters Kluwer has been a purveyor of legal services for over 125 years; it employs more than 19,000 people in over 40 countries. Services include incorporation, international compliance, and registered agent services. Its reach covers nearly 200 countries, as well as over ¾ of Fortune 500 companies.
COVID Woes Make Litigation Funding Even More Inviting
In the past year, COVID has wrought financial havoc, business interruption, and court delays. It has also led to spikes in specific types of litigation. With that in mind, Litigation Funding is enjoying a resurgence that appears to be here to stay. A legal firm that typically relies on fees from clients may find itself in dire financial straits. Even a firm that’s meeting its goals for billable hours may find that clients are less able to pay. Law.com explains that there are several common uses for Litigation Finance. The most well-known is funding plaintiff-side litigation in exchange for a share of any award stemming from winning judgments or settlements. This can apply to a single plaintiff or a class action. An increasingly common form of third-party legal funding is the funding of a firm’s portfolio. This diversifies the risks funders take, as legal funding is provided on a non-recourse basis. As Litigation Finance has expanded in acceptance and scope, the legal world has affirmed that its use is a net gain. Early on, some feared that widespread litigation funding would lead to spurious lawsuits that clog dockets. In reality, funders vet cases carefully and have no interest in funding litigation that lacks merit. The New York City Bar Association Working Group affirms this, saying that lawyers and clients would benefit from fewer restrictions and disclosures related to funding. Protecting confidentiality is sometimes seen as being at odds with funding-related disclosures. For example, details about cases shared with funders as they assess the prospect of funding claims. This can be addressed by invoking the work product doctrine to protect all parties before materials are shared. Ultimately, litigation funding can provide innovative solutions to money woes, or the means to try a case in spite of financial barriers. We can expect more from the Litigation Finance industry long after COVID is behind us.
