
Gross v. Net Return Dispersion in Commercial Litigation Finance
The following is an article contributed by Ed Truant, founder of Slingshot Capital, Executive Summary
Slingshot Insights:
Slingshot Insights Commercial litigation finance is one of the more difficult private equity asset classes in which to perform well, consistently. The reason for this difficulty lies in a great degree of subjectivity in the issues in dispute, the people that dispute and resolve them, and the judiciary that decides the case, if necessary. The loss ratio coupled with the relatively fixed nature of damages and the need for a fair sharing of proceeds across multiple parties also presents issues in terms of maximizing returns for investors that ultimately places a ceiling on returns (relative to other asset classes). The average single case size is USD$4.3 million according to Westfleet Advisors’ most recent survey, and so this means that it is also a difficult asset class to scale as there are relatively few cases requiring large amounts of financing which in turn means that the manager requires more people to originate and underwrite cases as compared to other private equity asset classes which also means managers need full management fees to fund their operations. All of this results in an asset class that will inherently have a higher-than-average gross to net return spread, especially in the earlier years of the fund’s life. Managers would be well advised to not only report their returns based on a conservative cash-on-cash basis, but also look to alternative approaches (including ASC 820) to provide investors with a view as to the likely fund returns if even by illustrating a matrix with several potential return outcomes. After all, investing is nothing if not uncertain. I also firmly believe that the litigation finance industry really needs to start charging appropriately for its capital, specifically the portion of their undrawn capital that has been committed and set aside for potential deployment – there is a cost to having this capital on the sidelines and it should be factored into the terms of the funding agreement. Similarly, quick realizations require a minimum return on capital that should be factored into the terms of their litigation funding agreements. 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.
- Gross v. Net return dispersion needs to be considered by investors & fund managers
- While present in many private equity classes, managers that can limit dispersion can attract more capital for a given return profile
- Wide dispersion prevents many institutional investors from considering investing in the asset class

- Fund performance reporting can help address the appearance of wide dispersion in gross to net returns
- The valuation of litigation assets is very difficult due to a combination of idiosyncratic case risk and binary outcome risk
- Fund managers need to ensure that they are obtaining returns on their undrawn capital to reflect the opportunity cost of undrawn capital

