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Commercial Litigation Finance Covid Survey Results

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
  • Survey suggests the litigation finance industry has experienced an increase in demand due to the Covid-related financial crisis
  • Law firm portfolio financings are a particular active sector of the market
  • Defendant collectability risk is top of mind for most respondents
  • Covid-19 related cases are predominant in the contract and insurance case types
INVESTOR INSIGHTS
  • 2020 should be a good vintage for new litigation finance opportunities
  • Generally, there is a feeling that the current economic crisis will put some pressure on IRRs or MOICs of existing portfolios
  • Additional diligence on unrealized portions of litigation finance portfolios is warranted in the current environment when assessing fund manager performance
Slingshot Capital and Litigation Finance Journal recently undertook a survey of commercial litigation finance participants to obtain a deeper understanding of the extent to which demand for financing had changed as a result of the current Covid-related financial crisis. Editor’s note– the following contribution appears with illustrative graphs and charts here Demand for Litigation Finance during Economic Crises It has been thought that crises breed litigation, and while that appears to be the case in the current crisis, that may not have been the case in the Great Financial Crisis of 2008/9, as pointed out by Eric Blinderman in an article he contributed to Law360 in 2019, also referenced in a recent article in Litigation Finance Journal.  The reason for the ultimate lack of litigation, Eric argued, was fear. In the current environment it appears as though people are less fearful (of litigation, that is) as the number of Covid-specific cases is clearly on the rise, and I suspect that will continue for the foreseeable future as the crisis increases its impact on businesses and forces business owners to react in ways previously thought unthinkable, but in the current context are deemed necessary. When the data is analyzed with respect to case type, it is evident that the volume of cases is focused on contract and insurance claims, which should come as no surprise. Issues of Force Majeure and breaches of contract are likely the majority of the volume of contract claims.  Business owners have been placed in an unprecedented position in that they are likely being forced to breach contracts to save their businesses.  While business owners and executives may regret their actions and would not have acted in a similar way under normal circumstances, they are no doubt acting in the best interests of the business to avoid insolvency and will deal with the repercussions (litigation) once they have ‘righted the ship’.  The insurance sector has also been particularly negatively impacted, and much of this likely stems from denial of payouts under policies, with business interruption insurance being particularly active. In fact, the UK insurer, Hiscox, is being sued in a class action-style litigation in the UK with Harbour Litigation Funding providing the litigation finance to pursue the case.  Accordingly, litigation finance has and will continue to be a beneficiary of this activity. Covid Survey Results Let’s now take a look at the Covid Survey results to see how the broader commercial litigation finance industry has been impacted by the Covid-induced financial crisis. The survey was distributed globally.  Of the respondents, the vast majority were funders with dedicated litigation finance funds. Overall, the industry has been positively impacted by the financial effects of Covid-19 with 64% of respondents experiencing an increase in origination activity. In some cases, the increase in origination activity has been dramatic, with originations in excess of 25% being experienced by approximately half of respondents. The largest impact in terms of the type of activity is equally split between law firm portfolio financings and single case financings.  However, since portfolio financings are inherently larger, it stands to reason that a much larger dollar volume of financing will be required for these financing types. In terms of the source of originations, it appears to be a combination of existing relationships, mainly from law firms, and new relationships, mainly from law firms and directly from plaintiffs. It is encouraging to see new relationships continuing to be formed at this stage of the evolution of the industry. A natural consequence of demand for litigation finance is a demand for capital commitments by the litigation funders.  Accordingly, it appears that the demand impact of Covid will have the effect of accelerating plans for new fundraisings, with about half of respondents indicating their fundraising plans have been accelerated.  Accordingly, investors in search of good risk-adjusted and non-correlated returns should expect to see more opportunities in the marketplace.  As always, diversification is critical to successful and prudent investing in the litigation finance marketplace. As it relates to the impact that the current financial crisis will have on the expected return profile, almost 50% of respondents suggested it is too early to tell.  However, for those who did have some visibility or were confident in making an estimate, it appears that the expectation is that their existing portfolios may be negatively impacted, which is consistent with what I would have expected given the extent of this economic crisis. I was personally forecasting that durations would be longer, simply due to the effect that court closures would have on existing cases, where the timing of settlement discussions are ultimately impacted by the timing of the court process.  In this light, I would expect to see portfolios maintain longer durations which may equate to lower internal rates of return, but this depends on the escalator clauses within their funding agreements, which may see funders obtain larger multiples of invested capital if the delay breaks through timing thresholds.  I would also expect that the threat of collectability risk might put pressure on plaintiffs to accept lower settlement amounts, and defendants will use liquidity concerns to their advantage by low-balling settlement offers. However, this phenomenon could be situation-specific, and more prevalent in certain industries.  As previously stated, one of the reasons I would have expected return expectations to be increasingly negative is due to defendant collectability risk.  In this vein, it seems that most managers are focused on the impact this risk will have on their portfolios, with most managers indicating that collection risk has increased, which is expected given the impact the crisis has had on certain industries, and the impact it has had on corporate liquidity.  Looking forward, managers are focusing on credit risk more than they have in the past, and this is mirrored in their focus on the industries in which their defendants operate.  Interestingly, despite the significant impact the crisis has had on the demand for legal services, few managers are concerned about the impact on the solvency of the plaintiff law firm.  This may be explained by the fact that the law firm can be substituted by the plaintiff should it run into solvency issues, and so managers may view this as an acceptable risk. The Bonus Question  And now the moment you’ve all been waiting for…. When asked whether Covid-induced isolation has caused respondents to think about the benefits of boarding school, the majority confirmed that their children are angels and that they would like to spend as much time with them as possible.  Although, there were a few who noted an interest in boarding schools, and one did attempt to sell his child to the highest bidder. This brings to a close the results of our second commercial litigation finance survey.  Slingshot Capital and Litigation Finance Journal would like to thank those that participated in the survey for their time and feedback. Our next survey will cover fundraising initiatives by fund managers in the commercial litigation finance sector. We anticipate making the fundraising survey an annual survey, so we can track fundraising activities over time. If you would like to participate in future surveys, please contact Ed Truant here to register your interest.

Litigation Finance Brings Hope to Those Hurt by COVID-19 Fallout

COVID-19 does more than sicken people. It’s brought with it a recession that may take years to mitigate. Businesses across the board are enduring hiring and wage freezes, furloughs, layoffs, and even outright closures. Even the legal community is not safe from the financial ravages of the pandemic. Bloomberg Law details how Litigation Finance can actually help prop up the legal industry, allowing it to do what it’s meant to do—increase access to justice for ordinary citizens. The challenges of remote working, court delays, and lack of liquid capital are already taking a toll on law firms. It is not an understatement to claim that Litigation Finance can keep the legal field afloat. Investing in meritorious cases can help small firms stay afloat, and lets larger firms take on more cases that may take longer to resolve. Short term funding that is case or portfolio-specific helps free up working capital for firms until cases are resolved. Consider Heller Ehrman, a firm that employed over 700 attorneys, closed after the 2008 bankruptcy of Lehman Brothers left them without working capital. A shame, and one that could have been mitigated by third-party funding at the right time. While it may seem reasonable for more established firms to take out standard bank loans, this is unlikely to happen on a large scale. Banks are often reticent to lend in the midst of a recession. Compiled with ongoing court delays and a dearth of in-person meetings—it’s a recipe for stress and financial instability. As with the financial unrest of 2001 and 2008, it will be far more difficult than usual to secure a bank loan. With all that in mind, lit fin is an ideal way for firms to free up capital and relieve financial pressure. The non-recourse nature of third-party funding makes it an excellent choice for firms and cash-strapped clients alike.

Parabellum Capital Preps for Lawsuit Boom with $450MM War Chest

It’s no secret that lawyers and firms anticipate a slew of new cases as a result of COVID-19. The Litigation Finance industry in particular is preparing for a future full of contract breaches, insolvency, and failed insurance payouts. This leads some to suspect that betting on court cases will be popular among investors in the coming months. Bloomberg Law details that litigation funding by third parties has grown dramatically since the 2008 financial crisis, and continues to expand. Parabellum Capital, which specializes in Litigation Finance, has raised over $450 million in new capital with which to fund cases. This comes from under 100 investors, though the final numbers will not be released for several weeks. Parabellum anticipates that number to exceed $450 million. Howard Shams, CEO of Parabellum, explains that the company expects many meritorious claims, some very significant, that would benefit from third-party litigation funding. Other firms no doubt agree. A 2019 survey of funders reports that almost $10 billion in capital has been raised by lit fin firms for US litigation. From mid 2018-mid 2019, funders invested over $2 billion in cases.   Shams went on to say that hedge funds were a source of stress for them, which may not be a good fit for the lit fin game. While Litigation Finance is an investment, its main goal is to increase access to justice. Returns are merely an additional benefit. Shams explains that hedge funds invading the lit fin landscape would be less than ideal.

Australian Regulation of Litigation Funders

AIM-listed Litigation Capital Management Limited (LCM), a leading international provider of disputes financing solutions, notes the announcement on 22 May 2020 by the Federal Treasurer of Australia, Josh Frydenberg, that litigation funders operating in Australia will be subject to new regulation requiring them to obtain and maintain an Australian Financial Services Licence (AFSL). LCM believes it is the only litigation financier in Australia that currently holds and maintains an AFSL. Currently the supply of litigation finance is exempt from the requirement to hold an AFSL and such exemption is likely to be removed by August 2020. This places LCM in an advantageous position against its peers operating in Australia. As part of the new regulatory process, LCM has been asked by the Australian Federal Government to assist in a parliamentary inquiry into whether any further regulation of litigation finance is required in the context of class actions, the findings and recommendations of which will be made public. LCM has anticipated for some time that class actions in Australia would be the subject of further regulation and expressed its support for such an initiative while assisting in two prior inquiries, one by the Australian Federal Government and one by a State Government. LCM actively manages its portfolio of investments with its objective of spreading investment risk to ensure that no industry sector or type of claim dominates its portfolio. Specifically, LCM limits the number of class actions that it is prepared to invest in depending upon the size of its overall portfolio. LCM remains firmly focused on the provision of disputes financing solutions in the areas of insolvency, commercial disputes, arbitration and corporate portfolio funding. Patrick Moloney, CEO of LCM, comments: “LCM anticipated changes to regulation and as a result already holds an Australian Financial Services Licence. LCM fully supports the move to increase regulation in our industry. Regulation of litigation funding insofar as it concerns class actions is something that is not only welcomed by LCM but could provide it with a strategic advantage as the cost and compliance issues are likely to create further barriers to entry and restrict the numbers of financiers that can fund class actions.” In April, LCM appointed Mary Gangemi as its new Chief Financial Officer and James Foster as an Investment Manager, both based in London. Their appointments follow the March close of a new US$150m third-party fund backed by significant global blue-chip investors. The fund marks LCM’s return to managing third-party funds, following its building of a permanent source of balance sheet capital through the equity markets. Contact:\ Angela Bilbow Global Head of Communications abilbow@lcmfinace.com +44 (0)20 3955 5271 About LCM Litigation Capital Management (LCM) is a leading international provider of litigation financing solutions. This includes single-case and portfolios across; class actions, commercial claims, claims arising out of insolvency and international arbitration. LCM has an unparalleled track record, driven by effective project selection and robust risk management. Headquartered in Sydney, with offices in London, Singapore, Brisbane and Melbourne, LCM listed on AIM in December 2018, trading under the ticker LIT.
The LFJ Podcast
Hosted By Christopher DeLise |
In this episode, we spoke with Christopher DeLise, Founder & CEO of Delta Capital Partners. Delta was founded in 2011, and Chris explains both his company and the industry have evolved over that time. He also goes into detail about 'the Delta difference,' and highlights some unique product launches that are expected to rollout soon. [podcast_episode episode="5574" content="title,player,details"]

Community Justice Fund Established by Therium Access & Partners

Therium is a household name in the world of Litigation Finance, and with good reason. As a prominent funder, they’ve expanded access to justice for countless ordinary citizens. Now, Therium has teamed up with five foundations to establish the Community Justice Fund. Its purpose is to provide grants in support of social welfare during and after the Coronavirus pandemic. As Therium explains on their website, these grants will offer access to specialized legal advice and long term support where needed. The idea is for the grants to be flexible and expedient so that the money goes to the people and causes most in need.  A total of six foundations are providing financial grants, along with additional support for social welfare agencies to help those impacted by the pandemic. Participating groups include: Therium Access, Access to Justice Foundation, Paul Hamlyn Foundation, Indigo Trust, Legal Education Foundation and AB Charitable Trust. Other groups will also be making contributions, including Law Society, Linklaters, London Legal Support Trust, and Allen & Overy. This type of giving is more vital now than ever, as ongoing cuts to social safety nets have decimated the social justice sector. Extra pressure from business closures, insurance or landlord disputes, furloughed employees, and other results of Coronavirus could stress these protections to the breaking point. There has already been a massive uptick in requests for legal advice or representation. Hopefully, some of these grants will find their way to organizations whose tech is still ill-equipped to mitigate Coronavirus precautions. Lacking internet access or updated computers can prevent teleconferencing or meetings via Zoom. Because these grants are flexible, money can be used to upgrade equipment, cover adaptive services, or cover costs of working remotely.

Litigation Finance to Maintain Momentum During and Post-COVID-19

Everything we know about the business world is changing, in no small part due to the Coronavirus. Retail outlets, restaurants, bars, theaters, and even insurance companies are feeling the crunch caused by stay-at-home orders, supply shortages, and staffing woes. Yet through it all, Litigation Finance is enjoying a surge of opportunity. Bloomberg Law reports that while the impact on the legal community will be long-lasting, there are steps firms can take to mitigate how much COVID-19 impinges on them. Right now, we’re seeing industries across the board become more risk-averse. IPOs are on hold, mergers and acquisitions are practically non-existent. At the same time, third-party litigation funding is more necessary than ever. When clients or even firms are in financial peril, a contract with an experienced funder is an excellent way to mitigate risk and keep balance sheets tight. The concept that litigation funding increases access to the pursuit of justice is more evident than ever.  It’s expected that specific areas of law will be extra active post-COVID. Insurance coverage conflicts, breach of contract, and insolvency will all likely increase. Portfolio funding will probably grow as well, along with claims monetization. As per usual, those with more capital on hand will likely do better in a post-COVID world. But given that litigation funding returns are not correlated with the rest of the market, smaller funding entities may see increased opportunities to expand as capital flows into this attractive asset class. 

COVID Case-Funding Displays Importance of Uncorrelated Investments

Tail Risk is a term used to describe a situation that’s unlikely to happen, but would have a profound impact should it take place. The current COVID-19 pandemic certainly qualifies. The disruption caused by the Coronavirus outbreak is affecting markets around the globe, yet despite the upheaval - or perhaps because of it - Litigation Finance is thriving. The Star details that the world of Litigation Finance is still a solid investment—especially since it’s not correlated to other market factors. Third-party funding is not a new strategy, though it has resurged in recent years. The US market is especially active since laws regarding funding obligations are welcoming towards responsible funders. In 2013, roughly 7% of firms used third-party funding. Four years later that percentage jumped to 36%. Still, the market is wide open for funders who want to invest in single cases or portfolios.   Litigation Finance, however, requires experience and expertise to determine the viability of a given case—experience that hedge fund managers and VC firms sorely lack. That's why many are partnering with savvy funders who are adept at weighing potential risks and returns, including the length of cases and the probability of a reward.  In the world of Litigation Finance, effective risk management—the kind that comes with years of experience--is vital. 
The LFJ Podcast
Hosted By Counsel Financial |
Our guests today are Paul Cody and Todd Kushman from law firm funder Counsel Financial. Paul and Todd discuss what sets Counsel Financial's business model apart from that of traditional funders, how they partner with funders in various capacities, the types of financial products the company offers, and how both their company and the industry at large has evolved in the 20 years since Counsel Financial was first founded. [podcast_episode episode="5536" content="title,player,details"]