The following article was contributed by Peter Petyt, CEO of 4 Rivers Services, a third-party funding advisory and legal project management firm.   Peter is undertaking part-time doctoral research at the University of Westminster in London to explore how law firms can ensure that they are suitable for portfolio funding and how can funders best evaluate which law firms to support. In his thesis, he will be examining the different ethical and regulatory challenges in various jurisdictions and analyzing the characteristics of legal case types which make them suitable or unsuitable for inclusion in a funded portfolio. The research will complement the existing 4 Rivers know-how which has been developed to help law firms and claimants secure third-party funding. Below is a Q&A with Peter on his doctoral research findings: What led you to carry out this research? Third-party funding is becoming increasingly important, so I was particularly keen to create some thought leadership which would demonstrate how law firms can take benefit from portfolio finance and what criteria are necessary. This form of finance could be genuinely transformational for many firms. How do clients benefit from law firms which have this sort of financing behind them? The fees and expenses of running disputes can be substantial, so clients often require the law firm to offer fee arrangements which are success-based. However, law firms are naturally cautious about risking their own time and third-party costs if payment for these depends on an uncertain outcome, and they must ensure that they have adequate operating capital to survive. What is the essence of portfolio funding? Portfolio funding is a form of finance which is provided for, and secured against, a bundle of cases which are cross-collateralised.  The cross-collateralization diversifies and reduces the funder’s risk, enabling the funder to reduce its overall cost of capital, especially when compared to single-case financing. A law firm can use portfolio finance to provide it with working capital whilst the cases are in progress; to pay disbursements of a case (including court and arbitration fees, experts, e-disclosure etc); and potentially to fund other initiatives such as acquisitions, recruitment, marketing, and IT. Unlike bank finance or shareholder equity, portfolio finance is aligned with the successes and failures of cases. It is therefore an attractive non-recourse and non-dilutive source of capital. What are the traditional sources of law firm finance? Often, law firms simply use bank finance and other sources of debt finance which can be expensive and may not be attainable at all to plaintiff law firms. Banks do not accept unrealised contingency fees as collateral for credit, requiring instead more conventional security such as property and personal guarantees from the partners of the firm to counterbalance economic or financial risks or uncertainties.  Are public listings of law firms an alternative? Since 2012, UK law firms have been permitted to list and raise capital on a public stock exchange. A public listing provides cash which can enable a law firm to effectively back its own judgment when taking cases on a contingent or partially contingent basis. However, there has not been a flotation of a law firm on a UK market since 2019 and indeed the market appears to be generally less receptive at present. Additionally, the process of taking a firm to market is not straightforward and, post-listing, partners earn less per year. However, they do have equity ownership of a publicly quoted business which can have substantial capital value over time and can be more easily monetized than a share of a traditional partnership. What about external equity investment in law firms? This is permissible in the UK, as well as in US states Arizona and Utah, so it may well become a trend in the future. However, there must be a concern that if a funder becomes an equity investor in a law firm, it will impact on a law firm’s independence. This important issue was illustrated when Burford purchased a minority 32% stake in PCB Litigation and provided capital to fund a portfolio of litigation cases. Equity participation brings with it a degree of control and influence over operations and strategy, and the question is therefore whether a firm in a highly regulated industry such as legal services should be allowed to take investment from a party which has a direct influence in the financing of its cases. What are “pacts” or “best friends” relationships? These are where the law firm “partners” with a preferred funder which finances the law firm fees and expenses on single cases. One example was the Willkie Farr & Gallagher law firm partnership with Longford Capital in 2021, where a “facility” of US$50 million was made available. There was also Harbour’s venture with Mishcon de Reya, which was publicized as a “strategic partnership”; and a “strategic alliance” between Litigation Capital, DLA Piper and Aldersgate Funding to provide DLA clients access to £150m for funding large-scale litigation and arbitration. The “pact” structure is not a genuine portfolio structure, as the finance provided is for the client’s account, not for the law firm’s account. There is no cross-collateralzsation of claims and therefore the obvious benefits of diversification are lost. There is also no evidence that such pacts offer a better financial deal for a client than if the client were to conduct a competitive process either directly or through an advisor/broker, and indeed the negative impact of a pact/best friend funder declining to fund a case could have a negative impact on that case being attractive to other funders. Furthermore, whilst speed of execution is cited as a benefit of the pact structure, there is no evidence to support this. What portfolio funding deals have been announced in the market? UK litigation law firm, Provenio, has a £50 million fund in partnership with Therium to finance high value business litigation and arbitration claims. Provenio had been launched in 2019 by a team of senior litigation lawyers from DLA Piper to advise exclusively on high-value, national and international commercial disputes. Then, in March 2021, international firm PGMBM announced a £45 million “funding partnership” with North Wall Capital to support the funding of cases related to diesel emissions scandals, breaches of personal data and risks associated with drugs and medical devices, as well as environmental litigation.  This was followed in 2022 by a further investment of £100 million by North Wall, targeted at litigation arising from ESG issues, which is “in the form of a loan secured against the revenues from winning or settling cases brought by PGMBM”. This structure- a cross-collateralized loan which is repaid from the proceeds of cases- is typical of a law firm portfolio funding facility. Harbour provided financing for an acquisition of a division of a law firm in July 2023 in the UK, where Rothley Law acquired the private client team and business book of Shoosmiths; and Harbour was also the financier behind the acquisition of the UK law firm Hawkins Hutton by Bamboo Law in August 2023, as well as providing Slater and Gordon (S&G) with a £33m facility in one of the largest deals publicly announced during that year^.  The S & G facility is for expansion into high-value PI work as the UK fixed cost regime reduces profit margins on lower value claims, with the firm focusing instead on severe and life-changing injury cases, including catastrophic loss work, as well as consumer law developments. How does portfolio funding differ from single-case funding? A single dispute carries a risk which is binary, which is why TPF for single cases requires a high rate of return. Portfolio funding, however, is provided for a bundle of cases, so that the funder can offer a non-recourse credit-like solution which creates liquidity and leverages a law firm’s investment of its own time. The bundle can involve a group of specific cases, or it can include existing and future cases, including a large group of low-stakes cases, or a smaller group of high-stakes cases. Sizes of portfolios vary among funders but in general a minimum of three cases and a minimum investment size of $3 million are standard. Other specific uses include helping a new law firm launch, monetizing unpaid WIP, acquiring a new line of business, mergers and acquisitions, and geographic expansion. The funding can be used to increase revenues by opening new business locations and divisions in strategic markets, as well as hiring new individuals or groups of fee earners with client followings. Additionally, the capital might be used for remuneration to existing staff to secure their continued employment. It also seems likely that the funder will offer added value services to law firms to which they are providing portfolio financing, including mock trials, moot courts, and strategic advice. The research is showing that portfolio funding enables the law firm to secure funding more quickly, on pre-arranged terms, and, depending on the structure, the ability to benefit from the overall success of the portfolio. How does 4 Rivers use the know-how which is being created by this research to benefit its law firm clients? This know-how, combined with my own many years of experience in assisting corporations with securing capital from venture capitalists, private equity houses, family offices and banks, is vital in allowing us to advise our law firm clients on how to structure a portfolio so that it is investment ready and to optimise the chances of securing funding. In effect, a unique methodology has been developed.

The following is the first of a two-part series, contributed by Ed Truant, founder of Slingshot Capital, Executive Summary

• Duration risk is one of the top risks in litigation finance
• Duration is impossible to determine, even for litigation experts
• Risk management tools are available and investors should make themselves aware of the tools and their costs prior to making their first investment
• Diversification is critical in litigation finance

Slingshot Insights:

• Duration management begins prior to making an investment by determining which areas of litigation finance have attractive duration risks
• Avoidance can be more powerful than management when it comes to duration in litigation finance
• There is likely a correlation between duration risk and binary risk (i.e. the longer a case proceeds, the higher the likelihood of binary risk associated with a judicial/arbitral outcome)

When you are speaking to an institutional investor about litigation, it doesn’t take long until the concept of “duration risk” enters the discussion.  Everyone seems to have a story about that one piece of patent litigation or commercial dispute that went on for over a decade that seems to have marked them for life even though they weren’t in any way involved. Yet, it’s a real risk.  Thankfully, it’s not a real risk for a well-constructed portfolio of different case types in different jurisdictions, which is one of the reasons that prompted me to raise a commercial litigation finance fund-of-funds in 2016 – it will ultimately serve as a very good proxy or index for how the industry performs. The whole concept of duration risk is critically important for investors in legal finance to understand, including ways in which duration risk can be managed in this specialized asset class. Private alternative asset classes, such as litigation finance, always need to deal with duration as part of their fundraising pitch to investors as the investments are inherently illiquid investments.  This means that in order for investors to obtain their liquidity, their needs to be a mechanism to allow for that to happen.  Within most private equity sub-classes (venture capital, growth equity, leveraged buy-out, real estate, etc.) the exit is typically a sale of the business.  An argument is often made that there is always a clearing price for any private company and the path to liquidity is generally through an investment bank or intermediary that canvasses the market to search for the best price for that asset at any given point in time.  However, with litigation finance, the pool of capital providers is relatively small, the complexity is very high and the nascency of the market means that beyond the settlement of the case (either through negotiation or a court/arbitral decision) there are not many options. But that is changing… Duration Risk Let’s start by defining duration risk for purposes of litigation finance investing, as the risk that the time horizon of a given investment is different than that which was originally underwritten without a commensurate increase in economics. Most Litigation Funding Agreements (or “LFA”s) have provisions to deal with duration risk such that the negotiated economics increase as time progresses, but often this ultimately gets capped as the claimant is concerned that the funder can end up with the lion’s share of the settlement amount.  Similarly, the funder does not want to put itself in a position where the claimant is not participating in the economic outcome of the claim, otherwise the claimant is wasting their time and effort (and stress). The two opposing forces work to keep each other “in check”. And while the LFA is typically structured to mitigate this risk, there is the potential that the case simply takes much longer than originally thought and investors want to get their money back to redeploy into another, perhaps slightly more liquid, investment.  And this is where many investors, individual and institutional, who poured into the space since 2015 find themselves today. Now, the duration risk inherent in commercial litigation is not to suggest they will rival Myra Clark Gaines (the longest-running civil lawsuit in the US at 57 years), but the difference between 5 years and 10 years can make a meaningful difference to an investor’s return profile if the economic benefits are not commensurate with the timeline extension.  While many funders quote an average hold period of 30+- months, one needs to be careful of the use of averages in litigation finance.  Many of those averages have been derived from the average length of settled cases only, which inherently ignore the duration of the unsettled cases, which is obviously not reflective of reality. Since there are very few fully realized funds in existence globally, it is difficult to determine an actual industry average for litigation finance but I would confidently say that the average will in fact be greater than the 30-month time period often quoted.  The other thing to consider is that any average should be weighted based on dollars invested to ensure that the early settlements, which by definition would likely have fewer invested dollars, do not contribute disproportionately to the average.  The reality is that funders rely on the relatively early case wins to produce strong IRRs (albeit lower MOICs) in order to offset the IRR drag of those cases that are not successful and that exceed the average duration. If we look at a case where the LFA calls for 3X multiple (200% return on investment) during the 3-year period and a 5X multiple (400% return on investment) thereafter, then the IRRs would look as follows for different durations:

Original Investment	Proceeds Received	Duration	Internal Rate of Return
100	300	3	44%
100	500	5	38%
100	500	8	22%
100	500	10	20%

The first two data points illustrate that where the cap on the proceeds move in lock-step with timing, it has little effect on IRRs. However, the last three data points illustrate the punitive impact that duration has on internal rates of return. When duration moves from 5 to 10 years for a fixed outcome the internal rate of return decreases by approximately half. In addition to the duration necessary to get to a decision (after the potential for an appeal), you may then get caught up in additional enforcement and collection timelines which could add years and additional investment to the original investment proposition.  A good example of this is the “Petersen” & “Eton Park” claims that Burford invested in involving a claimant that is fighting Argentina & YPF over the privatization of energy assets without due compensation. The Implications of Time on the Value of Litigation  In a prior article written about the value of litigation, I describe how a piece of pre-settlement litigation starts off at the risky end of the spectrum due to a lack of information about the various parties’ positions, it then starts to de-risk as each side goes through discovery (approaching the optimal zone of resolution) and then the it starts to re-risk as each side becomes entrenched in their positions and pushes on to a third party decision.  This then leads to a bifurcation in value because the more the outcome of a case is dependent on the outcome of a disinterested third party (a judge, jury or arbitral panel) the more binary the outcome becomes as displayed in the chart below. This of course begs the question, if the timeline of a lawsuit extends beyond its original timeline, what does this say about the value of the case itself? Is it that the case is seen as a win by both sides and therefore each side ‘digs in’ to ensure the other side loses (hence a more binary outcome), or is this just a reflection of healthy sparring between parties to delay the inevitable and increase the friction costs to force the claimant to drop its case? Sadly, because every case has its idiosyncrasies and different personalities involved, we will never know the answer.  But what we do know is that any case that does get decided by a third party results in a binary outcome and as an investor “binary” doesn’t make for a good night’s sleep. I have written about this issue in an article about secondary investing, and in that article I make the argument that secondaries, if not valued properly, likely have a higher risk profile then the rest of the portfolio in which they reside because they are moving into the re-risk zone which inherently has a higher level of binary risk attached thereto.  I think this is important for investors to understand because it suggests that if you are concerned about duration in a litigation finance investment, it is probably (although not always) in your best interest to get out earlier than later.  Of course, the counter-argument is that the longer the case has elapsed the more you know about its merits and how the other side has conducted itself during the case and so your case may in fact be less risky than when it started. However, in these cases you are going to be asking the secondary investor for a premium to reflect that fact and that means you need to convince them of the merits, the likely duration and any credit/collection risks, which is a difficult task by any measure. We must also not lose sight of the fact that the longer a case proceeds, depending on the size and financial capacity of the defendant, the risk of collection may increase due to the financial condition of the defendant especially those with multiple lawsuits or those whose fortunes (profits and cashflow) are tied to more cyclical industries.  What looked like a good credit risk five years ago when the case commenced may look very different coming out of a recession or a commodity cycle.  Similarly, if the plaintiff is not of sound financial condition, the risk that the plaintiff runs out of money or interest in pursuing the case is also a risk that you are implicitly assuming. Given that the secondary industry is in its infancy and there is very little in terms of empirical results on secondaries, it remains to be seen how secondary portfolios will perform but if I were an investor in the sector I would go in with ‘eyes wide open’ and a deep value mindset.  The reality of most litigation finance is that the economic benefits tend to be somewhat capped, and so whatever premium is paid on a secondary, it means it reduces the overall economics available to the secondary investor. Dissimilar to private equity where a secondary investor can still benefit from growth in the value of the underlying company it acquires, the same does not generally hold for litigation finance investments and in fact the risk is to the downside with most LFAs. In the second article of this two-part series, we will look at the various ways in which investors can manage duration risk, both before they start investing and after they have invested. Slingshot Insights Duration management in litigation finance is almost as critical as manager selection and case selection.  I believe duration management starts prior to making any investments by pairing your investment strategy and its inherent duration expectations with the duration characteristics of your investments.  From there, you should ensure your portfolio is diversified and you should be actively assessing duration and liquidity throughout your hold period.  You should also assess the various tools available to you both on entry and along the hold period to determine your optimum exit point. As always, I welcome your comments and counterpoints to those raised in this article.  Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.  Slingshot Capital inc. is involved in the origination and design of unique opportunities in legal finance markets, globally, advising and investing with and alongside institutional investors.

Litigation funding specialists Apex Litigation Finance have announced the upcoming appointment of Timothy Fallowfield as interim Chairman. Tim will commence the new position in January 2024, assuming overall responsibility for guiding Apex through its next growth stage. Tim brings a wealth of experience to the table, having honed his skills on both the buy and sell sides of the financial spectrum. His diverse background includes managing risk at Black River Asset Management and latterly for Noble Resources HK, where he managed a medium-sized absolute return Macro fund with AUM of $480mm. On the sell side, Tim has lent his expertise to financial powerhouses such as Chase, UBS, and ING, gaining valuable insights into the dynamics of financial markets. With an impressive track record spanning 35 years, Tim has consistently demonstrated his proficiency in managing risk and generating consistent returns for investors. Having built a fund business from the front to the back office, this extensive experience positions him as a seasoned professional capable of navigating the complexities of the financial landscape. Apex will look to leverage off his risk management background to build a robust investment process. Tim says: “There were three elements that attracted me to Apex: our CEO, the opportunity to generate uncorrelated returns and the focus on the small claims, which allows Apex to build a diversified investment portfolio. We do this while helping those who may perhaps not usually have access to legal recourse. With Crestline’s participation, we will look to expand our investments significantly.” In leveraging Tim's skill set, Apex is well-positioned to benefit from his proven ability to establish and manage funds successfully. Tim's strategic approach and in-depth industry knowledge make him an invaluable asset to the Apex team as they chart a course for success in the ever-evolving world of litigation finance. Apex CEO Maurice Power says: “Having recently secured investment capital from Crestline Investors Inc., Apex is expanding to position itself as the litigation funder of choice for small to mid-size commercial claims in the UK. Being able to bring in someone with Tim’s drive and experience to guide us through this period will hugely benefit the Apex team. We welcome Tim’s appointment and look forward to the exciting times ahead.” About Apex Litigation Funding: Apex Litigation Finance Limited brings together experts from the legal and finance sectors to provide third-party litigation funding to litigants (corporates, liquidators, and individuals) who are unable to pursue a claim due to the prohibitive cost of litigation. Although the claim may have merits, uncertainty over the total costs and the potential risk of being ordered to pay the defendant’s cost, should they lose the claim, prohibits access to justice for many claimants. Our process is augmented by artificial intelligence systems to assess risk. As a professional litigation funder, Apex will make available funds to pay legal and other costs associated with a claim in return for an agreed share of any successful return. If there is no recovery or the claim is lost, there is nothing to repay.

Michael Volpe brings a decade of nonprofit fundraising experience to his role as Executive Director. His passion for making a positive impact on the world is evident in his history of success in securing funding and developing innovative fundraising strategies. Mike is committed to leveraging his experience and expertise to expand the Milestone Foundation’s fundraising efforts and amplify its mission of providing life-changing support to those who need it most.   Company Name and Description:  The Milestone Foundation provides financial assistance to people pursuing a lawsuit while facing financial hardships. Being a nonprofit organization enables us to advance settlement funding to plaintiffs at low-cost and simple interest – a unique model in the plaintiff-funding industry. Since our founding, the Milestone Foundation has empowered more than 700 individuals & families totaling more than $5 million advanced to plaintiffs in need. Company Website: https://themilestonefoundation.org/ Year Founded:  2016 Headquarters:  Buffalo, NY Area of Focus:   Increased Awareness and Assistance for Litigation Funding Member Quote: "I am honored to be entrusted with leading The Milestone Foundation," said Volpe. "The Foundation's steadfast commitment to providing critical support to plaintiffs during their most challenging moments is inspiring. I'm eager to leverage my experience to amplify our impact and empower even more individuals to fight for justice."