Burford Capital Limited ("Burford" or "Burford Capital"), the leading global finance and asset management firm focused on law, today announces the planned private offering of $400 million aggregate principal amount of senior notes due 2031 (the "Notes") by its indirect, wholly owned subsidiary, Burford Capital Global Finance LLC, subject to market and other conditions. The Notes will be guaranteed on a senior unsecured basis by Burford Capital as well as Burford Capital Finance LLC and Burford Capital PLC, both indirect, wholly owned subsidiaries of Burford Capital (such guarantees, together with the Notes, the "Securities"). Burford Capital intends to use the net proceeds from the offering of the Securities for general corporate purposes, including the potential repayment or retirement of existing indebtedness. The Securities have not been, and will not be, registered under the US Securities Act of 1933, as amended (the "Securities Act"), or the laws of any other jurisdiction and may not be offered or sold within the United States or to, or for the account or benefit of, US persons absent registration or an applicable exemption from registration under the Securities Act or any applicable state securities laws. The Securities will be offered only to persons reasonably believed to be "Qualified Institutional Buyers" within the meaning of Rule 144A under the Securities Act or non-US persons outside the United States pursuant to Regulation S under the Securities Act, in each case, who are "Qualified Purchasers" as defined in Section (2)(a)(51)(A) under the US Investment Company Act of 1940, as amended.

One of the more important issues today concerning litigation in America is funding. Whether it be high verdicts, claim value drivers, or fraudulent claims, we are all affected. Vince Gerbino founding partner of Bruno, Gerbino, Soriano and Aitken, will moderate the webinar's distinguished panel that will provide insight into this important concern from a broad range of perspectives. We will hear from Dennis Kass regarding his experiences with verdicts and claim values. From Eric Schuller with his industry perspective. From Matt Lehman concerning regulatory efforts and finally from Kenneth Klein, a law professor and author with his consumer-based research perspective. Do not miss this very informative webinar, and please join us to learn and understand better the growing world of litigation funding and see the good, the bad, and the ugly side of it all. We look forward to seeing everyone on July 20, 2023, at 2 pm EST.

Burford Capital Limited ("Burford"), the leading global finance and asset management firm focused on law, today announces its unaudited financial results at and for the three months ended March 31, 2023 ("1Q23").1 Burford's report on Form 6-K for 1Q23, including unaudited condensed consolidated financial statements (the "1Q23 Quarterly Report"), is available on the Burford Capital website at http://investors.burfordcapital.com. Christopher Bogart, Chief Executive Officer of Burford Capital, commented: "We saw continued positive momentum in the first quarter of 2023 in the progression of our portfolio as court activity and legal processes further normalized in the aftermath of the Covid-19 pandemic. The breadth of the case activity pick-up was reflected in capital provision income, excluding our YPF-related assets, more than doubling to $185 million compared to 1Q22, comprising almost a sixfold increase in realized gains and 41% growth in unrealized gains. Fair value gains arising from the favorable summary judgment ruling in our YPF-related assets contributed to an extraordinary first quarter for total revenues, driving growth in capital provision income of 238% to reach nearly $500 million. As an indicator of ongoing portfolio activity, an additional 12 case milestones have occurred since our May 16 update when we had observed 28 milestones and expected 61 more through the remainder of the year." 1 All 1Q23 figures in this announcement are unaudited and presented on a consolidated basis in accordance with the generally accepted accounting principles in the United States ("US GAAP"), unless otherwise stated. Definitions, reconciliations and information additional to those set forth in this announcement are available on the Burford Capital website and in the 1Q23 Quarterly Report (as defined above). In addition, Burford applied its revised valuation methodology for capital provision assets to its unaudited condensed consolidated financial statements at March 31, 2023 and for the three months ended March 31, 2023 and 2022 included in this announcement. As Burford has not previously issued quarterly financial statements, its unaudited condensed consolidated financial statements for the three months ended March 31, 2022 are not technically restated. 1Q23 highlights New business Group-wide new business

• New commitments of $165 million, up 102% compared to 1Q22 (1Q22: $82 million)
• Deployments of $129 million, up 1% compared to 1Q22 (1Q22: $128 million)

Burford-only capital provision-direct assets, representing assets capable of generating highest profits for our equity shareholders

• New commitments of $101 million, up 130% compared to 1Q22 (1Q22: $44 million)
• Deployments of $67 million, up 29% compared to 1Q22 (1Q22: $52 million)

Portfolio and liquidity

• Group-wide portfolio grew to $6.6 billion at March 31, 2023 (December 31, 2022: $6.1 billion), due to significant fair value gains but also new deployments and undrawn commitments
• Broad pick-up in portfolio activity, with capital provision income, excluding the YPF-related assets, more than doubling to $185 million compared to 1Q22
  • 464% increase in realized gains and 41% increase in unrealized gains compared to 1Q22
• Fair value gains arising from the favorable summary judgment ruling in the YPF-related assets contributed to an extraordinary first quarter for total revenues
  • Burford-only carrying value of the YPF-related assets (both Petersen and Eton Park) increased to $1.0 billion at March 31, 2023 (December 31, 2022: $823 million)
• Cumulative ROIC since inception from Burford-only capital provision-direct assets of 89% (December 31, 2022: 88%) and IRR of 29% (December 31, 2022: 29%)
• Burford-only cash receipts of $97 million, up 66% compared to 1Q22 (1Q22: $59 million)
• Burford-only cash and cash equivalents and marketable securities of $183 million at March 31, 2023 (December 31, 2022: $210 million)
  • Due from settlement of capital provision assets decreased 14% to $99 million at March 31, 2023 (December 31, 2022: $115 million, of which 17% was collected in cash in 1Q23)

Income

• Total revenues increased 209% to $381 million (1Q22: $123 million), represented by a higher level of case activity and portfolio progression, including $192 million of fair value gains, net of third-party interests, in the YPF-related assets and $185 million of capital provision income excluding the YPF-related assets
• Burford-only capital provision-direct realizations of $64 million (1Q22: $21 million) and realized gains of $36 million (1Q22: $10 million), with a single matter generating a realized gain of $27 million
• Burford-only annualized capital provision-direct realized loss rate of 0.9% of average portfolio at cost in 1Q23 (2022: 1.0%)
• Operating income increased 252% to $327 million (1Q22: $93 million), with significant growth in capital provision income compared to 1Q22, partially offset by third-party interests in the YPF-related assets fair value adjustments and higher total operating expenses due to increases in non-cash accruals in light of the positive performance of Burford's share price, the increase in the carrying value of the YPF-related assets and the increase in the carrying value of a legacy asset recovery matter
• Net income attributable to Burford Capital Limited shareholders increased 361% to $259 million (1Q22: $56 million)

Net income per ordinary and diluted share of $1.17 (1Q22: $0.25)

The European Litigation Funding Association (ELFA) is very pleased to announce that Stonward, a litigation funder focusing on Spain and Latin America, has joined ELFA, as the association now builds towards becoming the collective voice of the European Litigation Funding Industry. Guido Demarco, Director and Head of Legal Assets of Stonward, explained why it was important for the funder to become part of ELFA: “we are thrilled to announce our membership in the European Litigation Funding Association (ELFA), marking a significant milestone in our journey as a litigation funder based in Spain. Joining ELFA aligns perfectly with our commitment to excellence and the pursuit of justice within the legal industry.” Demarco added, “as a member of ELFA, we are eager to collaborate with like-minded professionals and industry leaders from across Europe. By uniting our strengths and expertise, we aim to drive positive change, foster transparency, and promote the highest standards of ethical litigation funding practices. Through our membership, we seek to contribute to the development of the litigation funding ecosystem in Spain and the broader European market, while raising awareness about this legal tool among legal experts and company managers. We believe that by working closely with ELFA, we can actively shape the future of litigation funding, advocate for its recognition as a valuable tool for access to justice, and support the growth of fair and effective dispute resolution mechanisms.” Deminor Partner and ELFA Board Member, Charles Demoulin, highlighted how pleased he and the other founding members of ELFA were, to welcome Stonward to ELFA: “My co-founders and I established ELFA established to serve as the European voice of the commercial litigation funding industry and we are immensely proud to start now welcoming on board funders from around Europe who are also keen to play a part in shaping the direction of the industry. We are extremely pleased to announce that Guido Demarco and Stonward are full members of ELFA and look forward with enthusiasm to their future contributions.” ELFA was founded by three leading litigation funders with a European footprint including Deminor, Nivalion AG, and Omni Bridgeway Limited. ELFA's current directors are Charles Demoulin (Chief Investment Officer, Deminor); Marcel Wegmüller (Co-Founder and Co-CEO, Nivalion AG); and Wieger Wielinga (Managing Director EMEA Omni Bridgeway), who will serve as ELFA's inaugural Chairman. The intention of the association is to be inclusive for all professional litigation funders of larger or smaller size. Demarco further explained what he and Stonward are keen to achieve by being members of ELFA: “our core focus remains on the Spanish market, however, we recognize the importance of collaboration and exchange of knowledge at a European level. By participating in ELFA's initiatives, events, and working groups, we intend to stay at the forefront of industry trends, legislative changes, and emerging best practices. This will enable us to better serve our clients, enhance our risk management capabilities, and further strengthen our commitment to providing tailored and innovative funding solutions. We are excited about the opportunities that lie ahead and the doors that our membership in ELFA open for all of us. Together with other fellow members, we are committed to advancing the field of litigation funding, fostering a culture of integrity, and ensuring access to justice for all.”  About ELFA: ELFA was founded by three leading litigation funders with a European footprint including Deminor, Nivalion AG, and Omni Bridgeway Limited. ELFA's current directors are Charles Demoulin (Chief Investment Officer, Deminor); Marcel Wegmüller (Co-Founder and Co-CEO, Nivalion AG); and Wieger Wielinga (Managing Director EMEA Omni Bridgeway), who will serve as ELFA's inaugural Chairman. The intention of the association is to be inclusive for all professional litigation funders of larger or smaller size. About Stonward: Stonward began operations in 2020, offering bespoke solutions to access legal finance, providing clients with access to capital for commercial litigation and arbitration, focusing on Spain and Latin America. Stonward advises clients to find the angle to their legal assets so that they can capitalize on strengths, offering tailored solutions to access legal finance. Stonward manages a portfolio of claims related to commercial cases, intellectual property, restructuring and insolvency, and antitrust infringements, including the truck cartel. In addition to Guido Demarco, Director and Head of Legal Assets, other key members of Stonward include, Armando Betancor, Blas González, and Chris Garvey, [members of the Board of Investments], and Rodrigo Olivares-Caminal, and Eduardo Frutos, who are Corporate Advisors to the company.

Executive Summary

• Consumer legal funding is a much more consistent and predictable asset class
• Headline risks, while real in the earlier days of the industry’s evolution, are now consistent with more mature consumer finance asset classes
• Consumer legal funding has a strong ESG component through the social benefits provided to the segment of society that relies on it the most

Slingshot Insights:

• On a risk-adjusted basis, factoring in volatility and predictability of returns, the pre-settlement advance industry outperforms the commercial legal finance industry
• Duration predictability, return rates and loss rates are the main factors for out-performance
• Investors would be mistaken to overlook the consumer legal finance market in assessing various non-correlated investment asset classes
• As with any asset class, manager selection is critical to investment success

In part 1 of this article, I provided some background on the consumer litigation finance market, with a focus on the pre-settlement advances sub-sector which is the largest segment of the consumer legal finance market.  Part I also discussed how the market has regulated, evolved and bifurcated. In the second part of this two part series, I discuss the underlying economics of the pre-settlement advance subsegment, the status of regulation and some thoughts on how the market continues to evolve and why institutional investors are increasingly getting involved. Underlying Economics One of the first research reports that attracted me to the PSA market was a 2018 study that was undertaken by Professors Ronen Avraham and Anthony Sebok entitled “An Empirical Investigation of Third Party Consumer Litigant Funding”.  It was the first large scale empirical study of consumer legal funding in the United States which analyzed over 100,000 funding requests over a 12-year period provided by one of the largest consumer legal funders in the US.  While the analysis was inherently skewed because it came from a single funder, the large size of the data set is likely representative of the broader market, and hence many of the insights highlighted by the authors are likely true of the broader market to one degree or another, with certain insights being specific to the funder and its approach. Without going into the details of the report (see highlights below), suffice it to say the report demystified much of the industry and debunked many of the criticisms that were levelled at the industry by naysayers and those with an economic incentive to ensure the industry was not successful. Perhaps “lying” is a bit harsh, but there were certainly many distortions being promulgated about the industry that were neither present in the data nor a reflection of the specific funder’s business. Source: https://www.americanlegalfin.com/alfaresources/ On the plus side, the research discovered that while loss rates were relatively high at 12% (again, possibly a consequence of the risk & return threshold of this particular funder) there were numerous instances of the funder taking “hair cuts” (i.e. reducing their accepted returns to below contracted levels) for the benefit of the consumer.  In other words, the funders ‘have a heart’ and will proactively reduce their return expectations to leave the injured party in a position that is more equitable than if they stuck to their contracted terms.  On the negative side, the net return profile was 44% per annum, which suggests that even after losses and “hair cuts” this is an expensive form of financing. Keep in mind, this study was over a 12-year period prior to 2018, and the rates today are likely not as high as they were in the beginning of the industry due to competition and regulation. A second explanation for the relatively high rates is that depending on the funder’s risk profile, the funder may be willing to take on more risk (i.e. accept more losses) than another funder in return for a higher rate of interest. Whereas another funder may be more conservative and have stricter underwriting standards, accepting fewer cases and lower loss rates, but also charging lower rates of return. Also keep in mind that given how litigious a society the US has become, we must appreciate that inherent in the personal injury system is a higher level of frivolous claims than you might fund in other jurisdictions which could also explain a higher loss rate. For me, this report legitimized (i) the need for, and societal benefits of, this form of financing, (ii) the size of the total addressable market, and (iii) that the competitors in this market (while likely earning an oversized return in the early days of the industry) were flexible with consumers and willing to forego returns to make the outcome fair for all interested parties. In other words, it appeared the market was functioning similar to other consumer-facing finance markets. Benefits of Diversification, Loss Rates & Durational Certainty As I looked at the PSA market, I looked at it through the lens of both the private equity market and the commercial legal finance (CLF) market, and there a few notable differences that make this a more attractive market than commercial legal finance.  First, the portfolios inherent in many funders’ businesses are highly diversified.  With an average financing size of $3,000, there are hundreds to thousands of claims in any given portfolio.  With diversification comes stability, and with the inherent low overall loss rates comes a predictability of returns – all music to the ears of an investor. The one significant problem that appears to be persistent in the commercial legal finance market is the prevalence of overly concentrated portfolios and high concentration limits within fund documents. The consequence of high concentration is high volatility, and that is exactly what is present in most CLF portfolios, hence the increasing need to apply expensive insurance.  The other issue for most CLF investments is uncertainty about duration. The personal injury legal market is fairly predictable from a timing perspective, and because the financing is interest rate based (as opposed to tied to a fixed multiple of capital), time is not your enemy (with some exceptions) from an investor’s perspective. CLF on the other hand is very unpredictable from a duration perspective, varying from months to several years. As many commercial funding contracts cap returns to a multiple of drawn capital, time is initially your friend but ultimately your enemy. The unpredictable nature is the bane of the existence for publicly listed commercial legal finance firms, as their shareholders want predictable case outcomes generating predictable returns and cashflows, but the portfolios are inherently unpredictable, and so many times the public shareholders are disappointed. Accordingly, their inherent cashflow volatility prevents their stock prices from reflecting true value (said another way, their stock prices reflect the true value of their businesses after adjusting for the unpredictability of their cashflows). The PSA market, on the other hand, is very predictable, which is why it has been able to obtain risk ratings and thereby attract conservative institutional capital at a relatively low cost of capital.  As an investor, I would take a stable 10-15% return all day along in the face of a volatile return profile in the CLF market that can vary from -10% to +30%. They may (emphasis on “may”) both average out to the same return over the long run, one just allows you to sleep much better at night. Similarly, from a business owner’s perspective, stable and predictable returns will always be more highly valued than volatile returns, and so as a business owner, you are significantly better off aiming for predictability for a given return profile.  In addition, this will allow business owners to create equity value that they can later monetize through the sale of their business, which is something CLF managers will have difficulty doing due to the volatility of their portfolios. Regulation Another aspect of an industry’s underlying economics is the consistency of the regulatory regime and the potential impact changes in regulations could have on the industry and its economics. On this item, there was less certainty at the time I made my first investment, but as time has progressed, it is clear that more and more states are considering or implementing new regulations for the PSA industry. Legal doctrines of champerty and maintenance are generally being set aside, but not always. Some states view PSA as loans, and hence subject to usury limitations, whereas other states have determined they are not loans because they are non-recourse other than to the outcome of the case, which precludes them from the definition of loans. Some states, like West Virginia, have placed onerous interest rate limitations which have essentially decimated the industry, whereas others have put in place more reasonable limitations.  Some states have come out against PSA and others believe it is a necessary part of a functioning economy and supportive of individual rights (Minnesota is still ruling on whether funding is a loan). The Consumer Finance Protection Bureau (CFPB) has been monitoring the PSA market since 2011, but it is not quite clear whether they have the authority to regulate the industry and attempts by the CFPB to do so have been rebuffed for the most part – the key distinction seems to be whether these are recourse loans or non-recourse advances. The first is a loan product arguably under the purview of the CFPB, and the second is not contemplated under the CFPB’s mandate. It appears to date the CFBP has only pursued post-settlement lenders and structured settlement providers, which are a different part of the consumer market. Today, regulatory risk remains in the market as most states have not contemplated or implemented regulations, but no different than the payday loan market, done properly and without undue influence from interested parties but in the context of the market’s economic reality and keeping consumer rights in mind, a regulated marketplace brings stability to the market and standards that are ultimately beneficial for consumer and market participants who rely on stability. A ’Feel Good’ Asset Class Beyond the hard numbers, the risk profile and the cash-on-cash returns, lies the “feel good” nature of this asset class, which is what attracted me to the commercial legal finance market.  For all of the headline risk and the early profiteering that happens in every industry, PSA is a necessity in the market and becomes increasingly important as our societies become further economically stratified and the middle class continues to thin. Despite its costs, and there are good economic reasons for its cost (within reason), it provides a strong societal benefit to allow those whose lives have been turned upside down as a result of an accident that has had health (mental & physical), financial and personal costs that most of us cannot imagine. The industry represents a ‘ray of hope’ for someone who may have lost hope due to their circumstances.  I would posit that the industry itself is not predatory (although I will admit there are profiteers), but in fact is a tool to be used against the predatory insurance companies who are not being held accountable by state regulators because it is impossible for the regulators to respond to every single personal injury claim.  If nothing else, insurance is designed to help the injured and the remediation should be swift and commensurate with the financial damage.  Having to wait 3-4 years for a settlement outcome and pay out of pocket for hospital bills is anything but swift or commensurate, and is merely a tactic by insurance companies to benefit from the time value of money (i.e. a dollar today is worth less in a year’s time).  Investors can take comfort in the fact that funders do not pursue frivolous claims because the risk/reward of doing so upsets the predictability of the industry’s cashflows. Then there are Environmental, Social & Governance (ESG) considerations….  In a world full of ‘ESG washing’, legal finance is perhaps one of the most ESG compliant asset classes that exist.  The underlying nature of the claim is rooted in justice, and pre-settlement advances allow for justice to prevail by leveling the playing field between the impecunious injured party and the wealthy insurer with time, money and lawyers at their disposal. The social benefits of litigation are clearly in good alignment with investing in those activities that have a positive impact on society, even if imperfect.  As strong as the ESG characteristics are in the commercial legal finance markets, they are even stronger in the PSA market because the impact is measurable and directly impacts an individual’s life.  All one has to do is review some of the industry testimonials to understand the impact this form of financing can have on one’s life, and there are tens of thousands of examples of this impact occurring on a yearly basis. As investors consider the headline risk, they should also give weight to the ESG benefits of the asset class. PSA Today While many facets of the PSA market look similar today to what they were at inception, underneath the exterior is a tale of two worlds. From a competitive perspective, there is a segment of the market that has clearly positioned themselves as market leaders and have achieved a level of scale and efficiency that has allowed them to tap into the most conservative and sophisticated levels of capital, in part due to an overall low risk profile and in part due to being strong operators. From a regulatory perspective, this industry will likely be regulated at the state level and that regulation is well underway. I would expect by the end of this decade a majority of states will have some form of regulation or guidance in place and by the end of next decade most, if not all, will. From a competitive perspective, we are now seeing some level of consolidation as some of the larger players are starting to acquire competitors either to bulk up their own operations or to expand into adjacent markets like medical receivables/liens.  Regulatory standards will force all market participants to behave appropriately and will generally raise the standards in the market for the benefit of funders and consumers. From a funding perspective, we will continue to see larger funders tap the securitization market for relatively inexpensive financing, or to align themselves with captive sources of financing from institutional investors.  In other words, as much as the industry has changed in the last two decades, we should expect to see a similar level of change going forward, but we should never lose sight of the end consumer and the benefits it brings to their lives. After all, someone needs to counter the vast resources of the insurance companies, which left unchecked, will silently inflict damage upon individuals and their families. Slingshot Insights  I have often wondered why institutional investors quickly dismissed the consumer legal finance asset class solely due to headline and regulatory risk.  I came to the conclusion that the benefits of diversification are significant in legal finance, and so this factor alone makes consumer legal finance very attractive.  Digging beneath the surface you will find an industry that is predicated on social justice (hence, strong ESG characteristics), and while there has and continues to be some bad actors in the industry, there has been a clear bifurcation in the market with the ‘best-in-class’ performers having achieved a level of sophistication and size that has garnered interest from institutional capital as evidenced by the large number of securitizations that have taken place over the last few years (7 by US Claims alone).  This market has yet to experience significant consolidation, and recent interest rate increases have likely had a negative impact on smaller funders’ earnings and cashflow, which may present an impetus to accelerate consolidation in the sector. As always, I welcome your comments and counter-points to those raised in this article.  Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial legal finance industry.  Slingshot Capital inc. is involved in the origination and design of unique opportunities in legal finance markets, globally, investing with and alongside institutional investors. Disclosure: An entity controlled by the author is an investor in the consumer legal finance sector.

“The emergence of legal insurance products has been a game changer in allowing both clients and law firms to lock in judgments, ring fence potentially deleterious outcomes, and provide for certainty where uncertainty used to be the rule.” - Ross Weiner, Legal Director at Certum Group  Uncertainties abound in today's complex legal landscape, leaving individuals and businesses vulnerable to the high costs associated with legal disputes. A pair of innovative solutions–litigation funding and litigation insurance–have emerged as powerful tools that, when utilized in tandem, can offer peace of mind to those involved in legal proceedings. In this article, we delve into the benefits inherent in synergizing these two forms of financial assistance, exploring the various types of litigation insurance, the individuals and entities that benefit from these products, and the numerous advantages they bring to the table.  Types of Litigation Insurance Products Below are popular forms of litigation insurance: 

• After-the-Event (ATE) Insurance: ATE insurance policies are designed to protect litigants against the opposing side’s costs and expenses, should the claimants fail to win their case. It is typically purchased by plaintiffs, though some insurers do issue ATE insurance to defendants. These policies typically cover adverse costs, including the opponent's legal fees and disbursements. ATE insurance is purchased after the event which prompts the claim, but before the legal proceeding initiates (the closer to the start of the proceeding, typically the more expensive ATE insurance becomes). As ATE insurance protects against an adverse costs award, it is not applicable in the United States, which does not have a cost-shifting regime in place (except in extremely rare circumstances). 
• Before-the-Event (BTE) Insurance: BTE insurance, also known as legal expense insurance, offers coverage for potential legal costs before a dispute arises. This product provides coverage for legal expenses in various scenarios, such as personal injury claims or contract disputes. 
• Judgement Preservation Insurance (JPI): JPI is exactly as it sounds–insurance that protects a claim or group of claims which have already received judgements. JPI is very straightforward, and essentially meant to be a math problem: If your judgment is X, and you receive Y, the insurer will cover the difference or a portion thereof. As such, documentation is minimal, with fraudulent activity being the primary exclusion inserted into the agreement.  According to Stephen Kyriacou, Jr., Managing Director and Senior Lawyer at Aon: “Judgment preservation insurance can be used for more than simply mitigating appellate risk. Judgment holders have used it to accelerate the recognition of judgment-related gains in their earnings, to monetize judgments while appeals are still pending, and even to convert more expensive unsecured debt into less expensive debt secured by the policy, since the policy effectively guarantees a minimum recovery so long as there is no collection or enforcement risk associated with the judgment.”
• Litigation Funding Insurance: Litigation funding insurance is a specialized form of coverage designed to protect litigation funders, who provide financial support to claimants in exchange for a share of the proceeds, if the case is successful. This insurance safeguards funders against the risk of losing their investment in the event of an unsuccessful outcome. It provides critical protection against adverse cost orders and helps to minimize the financial risks associated with funding litigation. Stephen Kyriacou explains: “It has been a years-long challenge persuading certain insurers to consider insuring litigation finance-related risks, but we’ve seen recently that insurers have become much more willing to consider high-quality risks from funders when all parties work together to creatively structure coverage and properly align interests and incentives. As more insurers continue to come around to the idea of insuring funders over the coming years, the litigation and contingent risk insurance market will continue to grow, and even more value-creating solutions will become available to litigation finance firms.”
• Portfolio Insurance: Portfolio insurance, also known as litigation risk portfolio insurance, is a comprehensive solution that covers multiple litigation cases within a portfolio. This type of insurance allows law firms, corporations, or litigation finance companies to spread the risk across a range of cases, reducing their exposure to any individual matter. Portfolio insurance offers cost predictability and stability, enabling stakeholders to manage their litigation risks more effectively and allocate resources strategically.

There have been other ancillary uses of insurance, such as when one firm looks to purchase the docket of another firm’s cases, or to insure a portfolio of IPs that have an associated value. As the Insurance and Litigation Funding industries continue to become intertwined, expect more bespoke products to emerge.   Users of Litigation Insurance Products There are three typical users of litigation insurance products: 

• Individual Litigants: Individuals involved in legal disputes, such as personal injury claims or family law matters, can benefit from litigation insurance products. ATE and BTE insurance provide financial protection, enabling individuals who seek justice without the fear of exorbitant legal expenses.
• Businesses and Corporations: Litigation can pose significant financial risks for businesses and corporations, diverting resources from core operations. Litigation insurance products help shield companies from the potentially crippling costs associated with commercial disputes, professional negligence claims, or intellectual property conflicts.
• Law Firms: Law firms can also benefit from litigation insurance products. By offering these products to their clients, law firms enhance their value proposition, differentiate themselves in the market, and provide an additional layer of protection to their clients.

Benefits of Litigation Insurance Products The benefits of utilizing litigation insurance are clear-cut: 

• Cost Mitigation: Litigation insurance products alleviate the financial burden associated with legal disputes. They cover legal costs, including solicitor fees, expert witness expenses, court fees, and opponent's costs, reducing the financial risks for litigants and providing access to justice for those who might not have the means otherwise.
• Risk Management: Litigation is inherently uncertain, with outcomes dependent on various factors. Litigation insurance acts as a risk management tool, providing litigants with the confidence to pursue their case knowing that their financial interests are protected. It enables litigants to make informed decisions based on the merits of their case rather than financial constraints. 
• Enhanced Negotiation Power: Litigation insurance empowers litigants during settlement negotiations. With insurance coverage in place, litigants can approach negotiations from a position of strength, knowing that they have the financial resources to endure protracted litigation. This can lead to more favorable settlement outcomes and increased bargaining power.
• Access to Justice: Perhaps one of the most significant benefits of litigation insurance is its role in ensuring access to justice for individuals and businesses. By removing financial barriers, these products level the playing field and enable litigants to pursue their legal rights, even against well-funded opponents.

Litigation funders understand the ‘access to justice’ problem quite well. Litigation insurance further contributes to the democratization of our legal system by ensuring that even if the claim is unsuccessful, claimants are protected from the potentially crippling costs of litigation. This assurance encourages claimants who may be otherwise deterred by the financial risks associated with litigation to pursue their claims with confidence. Consequently, the collective impact of litigation funding and insurance is an increased participation of claimants, a broader range of cases being pursued, and a more inclusive legal system. As Rebecca Berrebi, Founder and CEO of Avenue 33 points out, "The increased availability of insurance has enhanced the options available to claimants and law firms when it comes to protecting the downside of litigation. Only time will tell whether or not the litigation-focused products offerings will remain cost-effective additives to litigation finance." Litigation Funding & Litigation Insurance Litigation insurance products have emerged as valuable tools in the legal landscape, offering financial protection and peace of mind to those navigating the complexities of litigation. Whether individuals seeking justice, businesses guarding against commercial risks, or law firms enhancing their service offerings, litigation insurance provides a range of benefits.  Similarly, litigation funding affords plaintiffs the opportunity to see their case to fruition, when there might otherwise be no avenue for remuneration. By combining litigation funding and litigation insurance, claimants gain access to a tailored financial solution that meets their specific needs. Each claim has unique financial requirements, and the flexibility of these tools allows claimants to structure a financial package that aligns with their case's dynamics. This synergy offers claimants the freedom to allocate capital as required, covering legal costs, expert fees, and other case-related expenses while safeguarding against the risk of adverse costs. As the demand for these products continues to grow, they will mature into an integral part of the litigation landscape, empowering litigants and transforming the dynamics of legal proceedings for years to come. According to Boris Ziser, Partner and Co-Head of Finance and Derivatives at Schulte Roth and Zabel: “The growth of insurance products for the litigation funding space can be a real game changer, impacting not only the cost of capital, but expanding the universe of investors able to add this sector to their portfolios.” By integrating these two solutions, claimants can significantly enhance their prospects for success while reducing financial risks. This harmonious approach not only levels the playing field between claimants and well-resourced opponents, but also promotes a fairer and more accessible legal system.

On Wednesday, June 7th, IMN hosted its 5th annual Financing, Structuring and Investing in Litigation Finance conference. LFJ attended the event and covered various panel discussions on topics ranging from key trends and developments, ESG initiatives and insurance products. Below are some key takeaways from the event. The first panel of the day focused on broader trends and developments impacting the Litigation Finance industry. The panel consisted of Douglas Gruener, Partner at Levenfeld Pearlstein, Reid Zeising, CEO and Founder of Gain (formerly Cherokee Funding & Gain Servicing), William Weisman, Director of Commercial Litigation at Parabellum Capital, Charles Schmerler, Senior Managing Director and Head of Litigation Finance at Pretium Partners, and David Gallagher, Co-Head of Litigation Investing at the D.E. Shaw Group. The panel was moderated by Andrew Langhoff, Founder and Principal of Red Bridges Advisors. One of the most interesting back-and-forths came on the issue of secondaries, as Doug Gruener noted that 'There were a large number of investments made five to seven years ago, so the opportunity is ripe both on the demand side and supply side." Andrew Langhoff, the moderator, responded that there are major hurdles involved in facilitating a secondaries market, such as questions around pricing, execution and management of the claims, to which other panelists agreed. However, Charles Schmerler pointed out that this industry is like any other capital markets industry, and to the extend that a secondaries market can provide liquidity and be a useful resource, he would be surprised if five years from now we're not all reminiscing about how we once questioned the efficacy of a secondaries market in Litigation Finance. Perhaps the most timely panel of the day was on insurance, and its impact on the Litigation Finance market. The panel consisted of Brandon Deme, Co-Founder and Director at Factor Risk Management, Sarah Lieber, Managing Director and Co-Head of the Litigation Finance Group at Stifel, Megan Easley, Vice President of Contingent Risk Solutions at CAC Specialty, and Jason Bertoldi, Head of Contingent Risk Solutions at Willis Tower Watson. The panel was moderated by Stephen Davidson, Managing Director and Head of Litigation and Contingent Risk at Aon. Brandon Deme pointed to the rapid growth of the industry: “The insurance market is expanding. We’ve got insurers that can go up to $25MM in one single investment. When you put that together with the six to seven insurers who are active in the space, you can insure over $100MM. And that wasn’t possible just a few years ago.” One interesting point of discussion was on how to engender more cooperation between insurers and litigation funders, given that the two parties are at odds on issues relating to disclosure and regulatory requirements. Jason Bertoldi of Willis Tower Watson noted that almost every carrier who offers this product will have some sort of interaction with funders, either directly or indirectly. And while there is opposition to litigation funding from insurers around frivolous litigation and ethical concerns, there are similarly concerns amongst insurers around adverse selection and information asymmetry. So the insurance industry has to get more comfortable with litigation finance, and vice versa. The panel on ESG consisted of Viren Mascarenhas, Partner at Milbank, Nikos Asimakopoulos, Director of Disputes at Alaco, and Rebecca Berrebi, Founder and CEO of Avenue 33, LLC. The panel was moderated by Collin Cox, Partner at Gibson Dunn. This discussion touched on the opportunities afforded to funders by ESG efforts, as well as the challenges this emerging sector presents, such as diligence problems and confusion around how multinational ESG initiatives might impact state and local laws. Examples were provided around whistleblower claims, international arbitration efforts, supply chain issues in foreign jurisdictions. Other panels included discussions on the economics of the Litigation Finance market, strategies for mass torts investments, regulatory issues, and a small group meeting on women in Litigation Finance. Overall, IMN's 5th annual Litigation Finance event highlights the growth and maturation of a nascent industry, and the range of interested parties in attendance (from funders to law firms to insurance providers to asset allocators) underscores the sector's long-term sustainability.

Delta Capital Partners Management, a global private equity firm specializing in litigation and legal finance, is pleased to announce that Brian O’Mara has joined the company as its Chief Underwriting Officer.  In this role, O’Mara will be responsible for overseeing underwriting and due diligence and managing Delta’s investment portfolios. O’Mara joins Delta from Robbins Geller Rudman & Dowd LLP, one of the world’s most prominent complex litigation law firms.  At Robbins Geller, O’Mara was a litigation partner and focused his practice on complex shareholder and antitrust disputes.  O’Mara has been twice recognized by the American Antitrust Institute’s Antitrust Enforcement Awards for the category of Outstanding Antitrust Litigation Achievement in Private Law Practice, has been named a Super Lawyer by Super Lawyers Magazine for the past six consecutive years, has been named a Leading Plaintiff Financial Lawyer by Lawdragon.  With two decades of experience counseling clients on complex litigation matters, O’Mara brings a wealth of expertise to Delta. “At Delta, we are committed to attracting and retaining top talent with the ability to drive the best outcomes for our clients and investors.  Brian’s extensive experience and deep knowledge of the litigation landscape will be invaluable as we continue to grow and expand our global investment portfolio,” said Christopher DeLise, Delta’s CEO and CIO.  “We are thrilled to have Brian join our team and expand Delta to the West Coast.” “I am very excited to join Delta and help the firm continue to drive innovation in the litigation finance industry,” said O’Mara.  “I look forward to working with the team to evaluate high-quality investment opportunities for our clients and assist claimholders, law firms, and other parties seeking legal finance solutions around the world achieve their dispute resolution goals.  I could not be happier to advance my career with the Delta team and contribute to the firm’s continued growth and success in the years ahead,” commented O’Mara. About Delta Delta Capital Partners Management LLC is a US-based, global private equity firm specializing exclusively in litigation and legal finance, judgment and award enforcement, and asset recovery.  Delta creates bespoke financing solutions for professional service firms, businesses, governments, financial institutions, investment firms, and individual claimants to enable them to investigate claims, pursue litigation or arbitration, recover assets, enforce judgments or awards, and more effectively manage their risks, cash flow, and capital expenditures.

Are ESG initiatives and regulations creating more tension between companies and their suppliers? Are we seeing an uptick in disputes that are arising out of ESG initiative and regulations? What impacts and pressures are ESG matters having on companies, funders, attorneys and governments? These topics and more were covered on IMN’s panel discussion “ESG Initiatives: Challenges and Opportunities.” Panelists included Viren Mascarenhas, Partner at Milbank, Nikos Asimakopoulos, Director of Disputes at Alaco, and Rebecca Berrebi, Founder and CEO of Avenue 33, LLC. The panel was moderated by Collin Cox, Partner at Gibson Dunn. Rebecca Berrebi began the discussion by noting that ESG is a huge space. Even with firms concerned about ‘green-washing,’ and not classifying every type of investment as ESG, the space is still enormous. One area she sees a strong ESG connection with is whistleblower claims—she has seen bundles of SEC whistleblower claims get underwritten by funders, despite the fact that the case type is a bit of a black box with limited visibility into the details of the case. Yet funders are pursuing these types of claims, which have a strong ESG component. Collin Cox noted how particular these types of cases are, which must make the diligence extremely difficult. Berrebi concurred, explaining she has seen cases where the whistleblower is actively involved, which of course is a huge help, but otherwise there is a large diligence hurdle to overcome. The flipside is that these are not expensive cases, and when bundled, can become a worthwhile investment. Viren Mascarenhas highlighted the arbitration space. On the commercial front, he noted that he is getting calls from corporate partners, and there is concern about how to address the human rights principles of the U.N., which are becoming more popular with the public-private partnerships on offer. On the investor-state front, issues are arising in investor treaties which have carve-outs, or provisions where parties must comply with national laws and with U.N. principles. These are examples where an ESG focus is having an impact. Nikos Asimakopoulos spoke to obscure issues such as claims against foreign supply chain operators. He has a claim in an African state, where the claimant must demonstrate that the government behaved improperly. This is very difficult, of course. You must go to the specific locale and investigate the exact regulations in place at a local level, because this is what is driving the decision making. Zooming out, the theme of this panel seemed to be how ESG clearly affords opportunities to litigation funders, but is not a panacea. The emerging sector also presents diligence challenges and confusion around how multinational ESG initiatives might impact state and local laws. So right now we appear to be in a gray area where there is much uncertainty around the intersection of ESG and litigation funding.

The widespread adoption of insurance products within the litigation finance space has been one of the hot topics recently, as it opens the door to a range of opportunities for funders and LPs. IMN’s panel discussion on insurance explored how funders can use these products to lower their rates and hedge investments, the solutions available to de-risk and monetize litigation and arbitration, what is covered and how much coverage is needed, and more. The panel consisted of Brandon Deme, Co-Founder and Director at Factor Risk Management, Sarah Lieber, Managing Director and Co-Head of the Litigation Finance Group at Stifel, Megan Easley, Vice President of Contingent Risk Solutions at CAC Specialty, and Jason Bertoldi, Head of Contingent Risk Solutions at Willis Tower Watson. The panel was moderated by Stephen Davidson, Managing Director and Head of Litigation and Contingent Risk at Aon. The discussion began with the products on offer. Those include judgement preservation insurance (JPI), where a judgement has been reached and the client is looking to insure the core value of that judgement.  Insurers can also protect portfolios of judgements, or even pre-judgement, for example if there is a substantial amount of IP that is expected to generate value, that can also be insured. On the defense-side, clients can use products to insulate them from liability and ring-fence their exposure and damages. ATE is one of the earliest products available in the market—going on 20-25 years now. This applies to adverse costs regimes, which is a huge risk to third-party funders who have to assume that risk, given that they put up the capital. As a result, many funders are approaching insurers looking for ATE insurance.  Some less well-known reasons for procuring insurance include enabling one firm to purchase another firm’s docket, which makes the transaction more attractive to the purchasing party. There is also the opportunity to insure against the risk of a specific motion—in one example, Sarah Lieber of Stifel pointed to a case where the likelihood of a certain motion being adverse to the claimant was less than 1%, but the client wanted a ‘sleep well at night’ type of insurance. The insurer was thrilled to write it, obviously, and from the claimant’s perspective, it was a minimal capital output which protected against a low probability event that would have a devastating outcome if it came to fruition. The good news is that these policies are intended to be very straightforward. For example, JPI is supposed to be a math problem: at final adjudication of a case, you’re supposed to have X. If you don’t, insurance will cover a portion of the rest. Portfolio insurance will include a duration element, but it’s still relatively straightforward. This is not mortgage insurance—these agreements are 10 pages long. The policies are designed to be simple. Typically, the only exclusion is for fraud, as that is what insurers are most concerned about. Perhaps that is one reason they are so popular. Speaking on the London ATE market specifically, Brandon Deme, of Factor Risk Management noted, “The insurance market is expanding. We’ve got insurers that can go up to $25MM in one single investment. When you put that together with the six to seven insurers who are active in the space, you can insure over $100MM. And that wasn’t possible just a few years ago.” The discussion then turned to how we can engender more cooperation between insurers and litigation funders, given that the two parties are at odds on issues relating to disclosure and regulatory requirements. Jason Bertoldi of Willis Tower Watson noted that almost every carrier who offers this product will have some sort of interaction with funders, either directly or indirectly. And while there is opposition to litigation funding from insurers around frivolous litigation and ethical concerns, there are similarly concerns amongst insurers around adverse selection and information asymmetry. So the insurance industry has to get more comfortable with litigation finance, and vice versa. “The funders that we’ve worked with that have looked to insure their investments directly, they’ve been succeeded because by being very transparent in what they provide,” said Bertoldi. “And they’ve dedicated a lot of time to getting insurance done, making sure all litigation counsel is involved on the underwriting side. Doing that, and making sure all information is on a level playing field makes the process go a lot better.” Sarah Lieber took this opportunity to highlight the importance of treating an insurer as a valuable partner, rather than as a means of shifting risk. “We use insurance for financial structuring and accounting, more so than shifting risk,” Lieber noted, “because shifting risk—you’ll do that once, and you’ll never be a participant again in this market. Insurers aren’t stupid, if you give them a pile of crap, they’ll remember you for it.” Megan Easley CAC Specialty pointed out that capacity is a challenge on some risks right now.  The market caps out around $300-$400MM. And while it is very unlikely that there will be total loss risk, insurance in general is very conservative, so there is a gradual shift towards the idea of a total loss. Brandon Deme added that it’s about having the right capacity as well.  You want your insurer to pay the client if everything goes wrong. Some insurers go broke, so having the right capacity is key. One final point from Jason Bertoldi highlighted what he felt is the “most important, and perhaps most unexamined phenomenon happening in our industry,” which he believes is contingent risk. “A lot of carriers are dabbling in contingent risk, who aren’t super active in the space, and they are really trying to get involved,” Bertoldi explained. “Many carriers are hiring dedicated personnel to do contingent risk, because they have the appetite but not the expertise to handle that. That will change over the course of the year as new underwriters come into the space with a litigation background.” In the end, these are two markets—insurance and litigation finance—that must grow comfortable with one another. Insurers are looking for funders who want cheaper capital, or are looking to offload concentration risk, and must be assured that funders aren’t simply shifting the riskiest cases in their investment portfolio over to the insurance side of the equation. For more on insurance and litigation funding, register for our complimentary digital event: Litigation Finance and Legal Insurance. This hour-long, audio-only event will be held on Wednesday, June 14th at 11am ET, and will feature key stakeholders across the insurance space who will discuss the interplay of insurance and legal claims in greater detail. All registrants will receive a recording of the event as well.   *Editor's Note: A previous version of this article suggested that Brandon Deme's comment on the size of the Legal Insurance market was in relation to the US market, where there is over $750m in available insurance capacity across two to three dozen insurers.  Mr. Deme was speaking specifically to the London ATE market. That correction has been made. We regret the error. 

How are inflation and rising rates impacting the litigation funding market? How can funders attract more institutional capital in today’s economic environment? What new products are emerging to disrupt the market? IMN’s 5^th Annual Financing, Structuring, and Investing in Litigation Finance event kicked off with an opening panel on “The State of the Market: Where is the Litigation Finance Market Headed?” The panel consisted of Douglas Gruener, Partner at Levenfeld Pearlstein, Reid Zeising, CEO and Founder of Gain (formerly Cherokee Funding & Gain Servicing), William Weisman, Director of Commercial Litigation at Parabellum Capital, Charles Schmerler, Senior Managing Director and Head of Litigation Finance at Pretium Partners, and David Gallagher, Co-Head of Litigation Investing at the D.E. Shaw Group. The panel was moderated by Andrew Langhoff, Founder and Principal of Red Bridges Advisors. There is a lot of experimentation happening in the Litigation Finance market, whether that be single-case financing, portfolio financing, secondaries investment, defense-side funding and other strategies. Regardless of one’s position in the market, it is evident that the Litigation Finance sector continues to grow, both in terms of demand for the industry’s products and in terms of adoption within the broader Legal industry. Interestingly, David Gallagher of D.E. Shaw noted that while both funder AUM and new commitments by funders continue to rise, the rate at which AUM is rising is slowing down while the rate at which new commitments are rising is speeding up. So, there are no longer ‘too many dollars chasing too few deals,’ as was the case for the past several years. William Weisman of Parabellum corroborated that narrative by noting that his phone and the phones of many other funders continue to ring with new deals. And while the majority of cases Parabellum sees are single case funding, there is increasingly demand for portfolio funding. Weisman also noted that there is opportunity in the smaller end of the market, which larger funders can’t focus on due to opportunity cost or LTV reasons. Doug Gruener added that average deal size has indeed trended upwards over the past few years, primarily due to a recent influx in mass tort investments. Nine-figure deals are not uncommon in today’s funding environment. Also, the cost of legal services goes up every year, especially in an inflationary environment, which of course necessitates larger and larger case investments. Charles Schmerler of Pretium noted that pricing is up, but that is relative to the previously muted pricing.  Funders are now able to underwrite in ways that are more sensible, in terms of what investors are looking for. Moderator Andrew Langhoff then asked if demand is up, AUM is up, pricing is up, why are funders having issues raising capital? David Gallagher responded that just because a handful of market participants are having trouble, that doesn’t imply systemic risk. In fact, it underlines the sustainability of the industry, given that specific operators can have problems and the rest of the industry still grows. Charles Schmerler added that in any economy, there will be idiosyncratic distress. This will impact the market. Things shake out, and for funders to succeed, they need to understand what sophisticated investors in the market are looking for. There can be a disconnect there—funders need to understand investors’ needs and exit strategies. The question then turned to duration risk—is this what is causing hesitation amongst LPs? Doug Gruener stated firmly that he’s found that duration risk is not the issue, rather it’s the broader state of the market that is causing some investors to sit on the sidelines, perhaps due to a ‘risk-off’ approach. Another factor that doesn’t help is the age of the industry—this is the 5^th annual IMN event, after all—so that FOMO that existed in year one simply doesn’t exist anymore. Reid Zeising of Gain did stress duration risk as an issue, however. “Lesson 101 in Finance,” he reminded, is that “asset and liability should match duration. If you extend your liability beyond your asset, that is the number one way to get in trouble.” Other parts of the discussion centered around regulation (“The Chamber of Commerce is the shill of the Insurance Industry,” according to Reid Zeising), secondaries (“There were a large number of investments made five to seven years ago, so the opportunity is ripe both on the demand side and supply side,” says Doug Gruener), and disclosure (“In the space of disclosure, if both sides could have a reasonable discussion, it might work. But we’re not in a space where both sides can have that discussion,” claims Charles Schmerler). Overall, the first panel at IMN covered a broad range of topics impacting the Litigation Finance sector in 2023. It was a robust and well-rounded discussion, and set the table for subsequent panels which dove deeper into the topics touched upon here.   *Editor's Note: An earlier version of this article incorrectly stated that David Gallagher noted that new commitments by funders are now falling. Mr. Gallagher in fact stated they are rising. We regret the error. 

Executive Summary

• Consumer legal funding is a much more consistent and predictable asset class
• Headline risks, while real in the earlier days of the industry’s evolution, are now consistent with more mature consumer finance asset classes
• Consumer legal funding has a strong ESG component through the social benefits provided to the segment of society that relies on it the most

Slingshot Insights:

• On a risk-adjusted basis, factoring in volatility and predictability of returns, the pre-settlement advance industry outperforms the commercial legal finance industry
• Duration predictability, return rates and loss rates are the main factors for out-performance
• Investors would be mistaken to overlook the consumer legal finance market in assessing various non-correlated investment asset classes
• As with any asset class, manager selection is critical to investment success

As an investor and institutional advisor in the legal finance market, I am always searching for the best risk-adjusted returns I can find, constantly weighing the pros and cons of each subsegment within the legal finance sector and comparing those to other investment markets (private equity, private credit, other liquid or private alternatives, public markets, etc.).  For the purpose of this article, I am mainly drawing comparisons between the commercial litigation finance market and the consumer legal funding market, but readers should be aware that there are a myriad of different sub-segments in both commercial and consumer legal finance markets, each of which have their own unique risk/reward characteristics. As such, the conclusions drawn herein may not be appropriate for other segments of the consumer or commercial legal funding markets and are mainly in relation to the US PSA market. One of my earliest investments in the legal finance market was in consumer legal funding, specifically the Pre-Settlement Advance (“PSA”) or Pre-Settlement Loan (“PSL”) market, the difference being predicated on whether the investment is non-recourse or recourse, respectively. The consumer legal funding market is actually broader than just the PSA market, as the graphic below depicts, but PSA continues to represent the lion’s share of the consumer segment.  The medical lien or receivable segment of consumer is closely associated with the PSA market as it is derived from the same accidents that give rise to many of the PSA claims, making both markets symbiotic, albeit very different in nature.  Many of the other consumer segments are much earlier-stage in their evolution and have not achieved nearly the same critical mass as PSA, nonetheless, it is important to keep an eye on these sectors. Topology of Consumer Legal Finance The reason I decided to invest in the PSA market was first and foremost because I found an operating business and management team that I thought had their ethical compass pointed to true north. Secondly, I was able to satisfy myself that the consumers and law firms who relied on this source of financing viewed the business as being a strong, well-respected operator, buttressed by the fact that the business was over five times the size of the next largest competitor, and had achieved its growth organically (i.e. no acquisitions). Their low loss rates (<2%) also signaled that management performed well as underwriters and active managers of the portfolio. Despite the strength of the specific manager in which I ultimately invested, one of my hesitations to investing in the market was derived from some negative articles about competitors, and rumours of a number of nefarious players that were charging exorbitant rates of interest.  In addition, many of the institutions with which I interface were constantly referencing the headline risk of the market. Accordingly, before I invested, I took a deeper dive into the industry with a focus on the following risk factors to satisfy myself that there was nothing significant that would impact the outcome of my investment and my ability to exit my position when the time was right. Headline Risk  One of the first risks that comes up as you speak to institutions, which generally shy away from consumer legal finance, is the concept of “headline risk”. Headline risk is simply the risk associated with the investors’ brand being tarnished as a result of their portfolio companies’ names being involved in negative press associated either with the industry or the portfolio companies’ customers or regulators.  Institutional investors hate headline risk because it may reflect badly on their own brand, and can cause their investors to call into question their judgment, and taken to the extreme, it could end their investor relationships along with the associated fee revenue. Accordingly, in their minds, nothing good comes from headline risk and so they avoid it like the plague. But every investment has some headline risk, so it becomes a question of severity. To understand the severity of headline risk in the PSA market, it is first important to understand how the market has evolved.  The PSA market really started in the 90s in reaction to a need in the marketplace for funding. The reality for many Americans (generally of a lower socio-economic status) at that time, and arguably today as well, is that if they are in a car accident (the typical scenario), they are left to their own devices to deal with the economic fallout and in collecting from insurance companies.  Insurance companies are generally not the best businesses to negotiate with due to their economic advantages.  In short, insurers have time, money and lawyers on their side. All of which the typical injured party does not have.  Without financial support, these injured parties were really at the mercy of the insurance industry. The thing about the insurance industry is that they have a strong economic motivation to deny claims and settle for as little as possible, which is the polar opposite to the underlying purpose of insurance.  To offset this strong economic motivation, insurers are also motivated by being compliant with their state regulators and they are ultimately reliant on recurring revenue through their brand and their reputations in the market. Unfortunately, not many consumers actually diligence their insurance companies when they buy insurance; they simply go for the ‘best price’. The consequence of selecting ‘best price’ is that this leaves the insurance company with less return with which to settle your claim, which ultimately damages the consumer’s ability to collect on their insurance.  So, without the ability to have proper legal representation and recognizing that the accident may have compromised the injured party’s livelihood (health, income, medical expenses, etc.), the injured party is left in a position to accept whatever the insurance company offered and move on with their lives regardless of how painful that was. Enter the funders…. Many of the funders became aware of this inherent inequity in the market through the legions of personal injury lawyers that operate in the US.  These lawyers have a front row seat to exactly what is happening in the personal injury market and the extent to which the injured party is taken advantage of by the insurer, or the extent to which the injured party is settling prematurely due to their economic circumstances.  The entire funder market really started with lawyers providing these loans to other lawyers’ clients, and then evolved into a business as entrepreneurs recognized the total addressable market and the opportunity set …. and this is when the problems started. In the early days of any industry, the opportunity looks so promising that it attracts those that are myopic in their perspective, and they want to make as much profit as they can in as little time as they can.  This is especially true for financial markets that interface with the consumer – payday loans, subprime auto, second and third mortgages, etc.  PSA is no different in that it is a financing solution that pertains to the consumer, although it has a distinct difference from most other financing solutions in that it is non-recourse in nature.  In the case of the PSA market, the consumer is typically in a difficult situation and traditional lenders will not provide financing because of the poor risk of the plaintiff (other than perhaps credit cards, if available), whether due to their past credit history or due to the economic consequences of the injury they sustained. Where you have a financing solution facing a consumer that usually has no other alternatives, you will tend to find abuse, and this is exactly what happened in the early days of the industry.  Many studies have been undertaken that showed effective internal rates of returns, between interest rates and fees, of 40-80% and sometimes even higher.  In essence, this was a consequence of a relatively small number of highly entrepreneurial funders that were trying to maximize their returns while providing a service to the market.  The problem with this is threefold: (i) it leaves a ‘bad taste in the mouths’ of consumers because they feel they are not being treated fairly and that they have been abused no worse than the abuse they are trying to avoid from the insurance companies, (ii)  these same consumers that feel they have been abused will run to their local newspapers (or online outlets) to ‘out’ the bad behaviour of the funder, and hence create the dreaded ‘headline risk’, and (iii) the same consumers may start to approach their elected representatives about their bad experiences which gives rise to regulatory risk. And this is exactly what happened. Here comes regulation … and the market starts to bifurcate…. Recognizing that the behaviour described above is not good for business and is not good for the reputation of the industry, certain individuals in the industry decided to organize and ultimately created two associations, (i) the Alliance for Responsible Consumer Legal Funding (ARC) and (ii) the American Legal Finance Association (ALFA).  The genesis of these associations was to protect the consumer from nefarious funders through education, to protect the industry through self-regulation and to protect the industry from the opposition (mainly the insurance companies who stood to lose from the solutions provided by the PSA).  Accordingly, over the course of the following years, lobby efforts were organized, educational materials were provided to the consumer, consumer testimonials were created, and standards were created for the benefit of the consumer and thereby for the benefit of the industry. The industry itself is not opposed to regulation, per se; in fact, regulation could be the best thing that ever happened to the industry, if implemented correctly. The industry needed a voice in the conversation to ensure regulation was not driven solely by insurance lobbyists, which are very active in the PSA regulatory conversation, but intended for the protection of consumers and for the protection of the industry – the two parties who stand to benefit the most from a healthy industry. In some cases this has worked out well and in some case regulation has served to effectively destroy the industry in specific states, because the regulations made it uneconomic to run businesses profitably and in a way that provides an appropriate risk adjusted return for investors. The hyperlinked article above relates to regulation passed in the state of West Virginia that capped the rates of interest at 18% (no compounding allowed), which are below typical credit card rates of interest.  Arkansas has similarly capped rates at 17%.  This was done under the guise of protecting the consumer, but the PSA market no longer exists in the state of West Virginia, and so I am left scratching my head as to how regulation has helped protect the consumer when it has destroyed the economics of the industry which represents the sole solution to the problem.  In fact, what it does is protect the insurance industry, and I’m willing to bet the insurance lobby was hard at work behind the scenes crafting the bill.  The article references that 10% of all funding investments result in a nil outcome for the funder as the cases are either dismissed or lost at trial. While 10% strikes me as being quite high (although the extensive study cited below references a 12% default rate for one funder), it may result from frivolous cases being brought in the first place, something funding underwriters strive to avoid because it impacts their returns. In addition, there is anecdotal evidence that funders get less than contracted amounts in 30-40% of cases, similar to what was found in the Avraham/Sebok study referenced below. Even at half the default rates, a 5% loss of principal (not including the associated lost accumulated interest) off of an 18% return profile results in a 13% gross return after losses, factor in a conservative 10% cost of capital (15% is not out of norms for smaller funders with less diversified portfolios) and the funder has 3% to both run their business and produce a profit for shareholders. Needless to say, the funding market did not find that attractive and left both the market and the consumer ‘high and dry’ which then allows the insurers to swoop in and keep abusing the consumer by delaying and denying payments. Not exactly what we pay our (handsomely, taxpayer compensated) elected representatives to do, is it? As the industry started to self-regulate and individual states started to proactively regulate, the early movers in the industry began to find that the easy money was slowly disappearing, and either exited the industry or had tarnished their own brands’ reputations. In essence, the industry bifurcated into what I will refer to as the “Professionals” and the “Entrepreneurs”, like many industries before it.  The Entrepreneurs went on with a ‘business as usual’ attitude and likely were unable to significantly scale their businesses due to reputational issues, but were still able to provide sufficient returns to merit continuing their businesses, along with the occasional headline. The Professionals embraced and pushed for self-regulation and a seat at the table where individual states were considering regulation. They further started to professionalize their own organizations by embracing industry standards from the associations, embracing best practices and policies to govern their own operations, and by increasing the level of transparency with consumers. Having built a reputable organization with a strong foundation, these businesses then started focusing on scaling to attract a lower cost of capital where they can then re-invest the incremental profits into their businesses and lower costs to the consumer, either as a result of the benefits of economies of scale, competition or regulation, and thereby become more competitive.  Today, some of the larger competitors in the industry have portfolios of hundreds of million of dollars of fundings outstanding, they are attracting private equity capital, and they are raising capital from the securitization markets, which are typically the domain of very conservative institutional investors. These efforts to become more institutional have served them well in terms of increasing their scale, and hence increasing their marginal profitability, lowering their cost of funds to benefit both their operating margins and the cost to the consumer.  In doing so, they have effectively broadened the investor base for their operating platforms and the value of their enterprises because they have shed the negative stigma associated with the early days of the industry. Today, these enterprises are highly sophisticated organizations that understand at a deep level how to effectively & efficiently originate, underwrite and finance their businesses to provide a competitive product in the face of a regulating industry. This positions them well long-term, while the Entrepreneurial operators become more marginalized, from a consumer perspective, a commercial perspective and a capital perspective. In part 2 of this article, I will discuss the underlying economics of the pre-settlement advance subsegment, the status of regulation and some thoughts on how the market continues to evolve and why institutional investors are increasingly getting involved. Slingshot Insights  I have often wondered why institutional investors quickly dismissed the consumer legal finance asset class solely due to headline and regulatory risk.  I came to the conclusion that the benefits of diversification are significant in legal finance, and so this factor alone makes consumer legal finance very attractive.  Digging beneath the surface you will find an industry that is predicated on social justice (hence, strong ESG characteristics), and while there has and continues to be some bad actors in the industry, there has been a clear bifurcation in the market with the ‘best-in-class’ performers having achieved a level of sophistication and size that has garnered interest from institutional capital as evidenced by the large number of securitizations that have taken place over the last few years (7 by US Claims alone).  This market has yet to experience significant consolidation, and recent interest rate increases have likely had a negative impact on smaller funders’ earnings and cashflow, which may present an impetus to accelerate consolidation in the sector. As always, I welcome your comments and counter-points to those raised in this article.  Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial legal finance industry.  Slingshot Capital inc. is involved in the origination and design of unique opportunities in legal finance markets, globally, investing with and alongside institutional investors. Disclosure: An entity controlled by the author is an investor in the consumer legal finance sector.