This past Tuesday, Litigation Finance Journal hosted a panel discussion and Q&A with a global swathe of litigation funding experts. The subject was key trends facing the industry in 2022, and the panel did not disappoint by delivering in-depth responses across a broad array of subjects.
The event was moderated by Peter Petyt (PP), Co-Founder of 4 Rivers Services. Panelists included Tets Ishikawa (TI), Managing Director of Lionfish in the UK, Stuart Price (SP), Co-Founder of CASL in Australia, and Molly Pease (MP), Managing Director of Curiam Capital in the US.
Below are some key takeaways from the discussion:
PP: Stuart, I’d like to get your view on this: Is there an ideal portfolio that a funder might invest in, in terms of the numbers of cases, the types of cases, the size of cases?
SP: I think that’s an interesting question, Peter. I come at it from a first principles perspective and it’s portfolio theory 101, so we’ve got to salute a problem within the law firm that they’re looking to solve, and we’re trying to tailor a solution for them. I think ultimately portfolio theory says you need diversification...you need to have the ability that you can spread the risk across multiple cases, so really depending on the nature of what the problem is, you may structure a portfolio to be thematic...and when I say thematic, it might have an insolvency or flavor or class action securities flavor because that’s a problem that you’re trying to solve. But really, the art and design and pinning together of portfolio funding is probably understanding what the problem is, and I think starting from that you need to have the diversity across a number of cases. I’d look and see on a portfolio, you certainly shouldn’t have more than ten percent in one case. I think logically that follows that you have to have at least ten cases then, that concentration and manage properly. But I think that defining the ideal portfolio is a very difficult component because you’ve got to start at first principles. I think the duration is important to consider, long and short, and dated assets, jurisdiction and common issues that may arise when you get a contagion risk in particular cases. You’ve got to consider the return profile and ideally you want to mix those factors all together and ensure that you’ve got the diversification, ensure that you’ve got an appropriate funding source to actually meet what the client ultimately is wanting, and put that all together and deliver something that’s tailored, I really push back against us as litigation funders defining what the product law firms or corporates want. We should listen to what their problems are, and tailor something to their requirements.
PP: Molly, obviously Curiam has been around for a while now, and I’m assuming you’re seeing an increase in uptake on portfolio funding from law firms, more inquiries, more interesting opportunities being presented to you?
MP: Yes, it’s definitely become more prominent than it was four years ago when we started. I really think there is not an ideal portfolio. I think it’s so dependent on the circumstances and there are so many different ways to do it, that can all work out well for all the parties involved. You could have a portfolio that is a collection of cases all for one claimant, and maybe they have one case that’s very very strong and very likely to succeed, and has significant enough damages to be able to cover a number of other cases, or are maybe a little bit more of a long shot or have more binary risk or whatever it is. So they may see some benefit in being able to pursue all of the cases, and maybe have the handful of cases that aren’t as strong free ride a little bit off the really strong case. So that could be an instance where you have a small portfolio, but it might make a lot of sense in that context, versus the other end of the spectrum where you could have a law firm trying to pool together a number of different cases for different clients across different practice areas that really have quite a bit of diversification. And that’s probably a little bit more work to figure out the appropriate pricing on that. But I think it’s certainly doable, and I think at every point in between there are portfolios that make sense. So I agree with Stuart, that you just have to understand the situation, what the law firm and the clients are trying to accomplish. I think there’s almost a portfolio that makes sense of all different types. So it’s very broad and I think there’s a lot to consider.
PP: Yes, I can see that there isn’t necessarily an ideal portfolio, you need to look at each one as a separate entity. Tets, I was wondering what your views were, being someone from the investment banking background on pricing for portfolio funding? Clearly, if you can get it right, the costs of capital for portfolio funding structure should be significantly better than just looking at single case funding. Shouldn’t it?
TI: Absolutely. I mean I started in fixed income but I was actually doing credit portfolios and that’s just heavily involved in a lot of the early days of the credit indexes, which are now part of the standard credit benchmarks. When we were constructing those portfolios, we were saying basically a combination of both the principles of 101, of keeping it diverse but also at the same time having to be relevant to the actual market that you want, which in this case is the client base. In terms of pricing, of course diversification is always going to work, but I don’t think diversification necessarily means looking through different types of cases. What you have to also factor in, is also the alignment of interest and the areas of expertise that the law firm has. So you can have a firm that’s specialized in one type of law, the diversification comes just from the cases themselves because each case is so sufficiently different that the fact that they’re in the same area of law doesn’t necessarily mean that they’re correlated. And that in itself brings down pricing. But what does also help bring down pricing at least on an academic level, and whether this translates to another market is another matter, but on an academic level when you have diversification and you have strong skills which back it up and an alignment of interest by the people running the claims, then absolutely pricing should be reduced to reflect those risk mitigants.
PP: What we want in the market are well-funded, well-capitalized, well-run funds. And certainly, there’s been some issues recently. In the UK, Affinity went into administration, Augusta had to shed half of its staff, move to other premises, restructure its lending agreement with lenders. Vannin got subsumed into Fortress, so clearly there were some business model issues, probably has something to do with working capital during the time it takes for cases to resolve. Stuart, I don’t know what your view is on this, but I would have thought there’s a need for consolidation at some point, amongst the funder market, what’s your view?
SP: Consolidation in the traditional sense of funders or businesses—I think is probably not likely. I think you’ll have a bit of exits from the industry. You will have groups of people leaving one funder and joining or establishing another funder. So I think you will have an aggregation and consolidation, but not in the traditional sense of a mergers and acquisitions approach. I don’t think that necessarily is the nature of this market—unless you’re getting together two very large funders or two very established funders, and taking a global view on the market.
PP: We’ll see. I think you’re right that there will be movement between funders, there’ll be split-off groups and I think there might be some traditional, good old fashioned M&A at some point. But it’s an evolving market so we’ll see.
Let's move onto blockchain crowdfunding platforms—do you as panelists see this as being an interesting way of raising money for you funds?
TI: We don’t actually manage money, so we don’t really think about raising capital. As a business model, I think it’s a slightly different business model to be raising money. So I don’t have a particular view on that. Having said that, I don’t really understand blockchain. That’s not to say ‘therefore it’s bad.’ Just that I don’t have the intellectual capacity or the ability to understand it as things stand. But yeah, it’s certainly been very successful in other markets at raising capital. And if it means raising cheaper capital and it means raising and passing some of that benefit onto the end users of litigation, then I don’t think that can be anything but a good thing.
LFJ will be hosting more panel discussions with audience Q&As throughout the year. Please stay tuned for information on future events.
