CFO’s and Litigation Finance: The Time is Ripe for Adoption

One of the holy grails of litigation funding has long been for funders to convince CFOs to view litigation through a commercial lens, and unlock the value of their legal assets. While straightforward and practical, the evolution of the CFO mindset on this issue has been slow to materialize. Many in the litigation funding community blame cultural norms—old habits are simply hard to break, which is especially true when things are going swimmingly. But with inflation upon us and a recession looming, the time is ripe for CFOs to reconsider their firm’s relationship to litigation funding.

Research from Burford Capital in June of 2021 found that 75% of companies with over $1 billion in annual revenues reported unenforced judgments worth $20-$100 million in FY 2020, while at the same time, just 24% said they apply quantitative financial modelling to make decisions about litigation, as they do in other areas of the business. That research is now a couple of years old, but it underscores both the need for litigation funding, and the challenge that funders face when trying to convince CFOs to think differently about litigation.

Change may finally be afoot. A recent global survey of CFOs conducted by Everest Group found improving cash flow continues to be a priority for a large majority of CFOs. As one respondent noted: “As the business environment continues to throw up shocks prompted by geopolitical uncertainty and sector disruption, CFOs should ensure that, as well as technological evolution, change management becomes a culture rather than a one-off exercise.”

Indeed, macroeconomic constraints are forcing CFOs to re-prioritize. Gartner recently identified the Top-10 priorities for CFOs in 2023, based on Deloitte’s Autumn 2022 European CFO survey. The Top-5 among those are:

  • Coping with complex systems
  • Protecting margins and balance sheets
  • Acquiring and retaining talent
  • Raising capital
  • Finding focus

The second point stands out in relation to litigation funding—“protecting margins and balance sheets” is exactly the pitch that funders have been making to the CFO community for years now.

PricewaterhouseCoopers conducted its own survey, and highlights the main topics on the CFOs agenda for 2023:

  • Navigate economic uncertainty
  • Enable growth
  • Take action on ESG
  • Accelerate transformation
  • Cultivate finance talent
  • Build trust and purpose

Responses such as ‘navigate economic uncertainty’ and ‘accelerate transformation’ should be music to every litigation funder’s ears.

It’s clear based on the above data that litigation funding maintains a product/market fit, in that it addresses some of the core pain points CFOs are currently facing. That said, many CFOs still need to be brought to the table as to how their firms can benefit from the use of litigation funding.

Advantages of Unlocking Capital Buried in Legal Claims

Susanna Taylor, Head of Investments at Litigation Capital Management, highlights what she considers to be four core benefits of litigation funding for CFOs:

  1. Protecting the value of the business from the cost impact of litigation
  • “If the same case was financed by a third-party funder, then the business will not carry these legal expenses […] The operating profit in each year will be higher and the accounts will be a more accurate reflection of actual business performance.”
  • “Further, once the claim is successful, the company will be able to include the proceeds as profit which has been generated at zero cost.”
  1. Protecting the business from significant litigation risk
  • “The funder carries 100% of the financial risk involved in pursuing the claim and if the claim is unsuccessful, the funder will receive nothing. […] Litigation finance can include the offer of an indemnity against adverse costs and an agreement to meet an order for security for costs.”
  • “Using third-party litigation finance also removes uncertainty in forecasting legal spend, which can be highly variable and difficult to predict.”
  1. Insulating the business from unexpected claims
  • “Litigation brought against a company is an unwelcome consequence of doing business. These claims are almost always unexpected, unbudgeted and require action.”
  • “Importantly it offers the corporate client the opportunity to offset the costs and risks involved in defending claims, as well as allowing the business to apply its capital into growth operations rather than on uncertain litigation.”
  1. Unlocking the value that resides in claims
  • “Litigation finance allows companies to recognize the value in a piece of litigation at a time which suits them best.”
  • “These funds provided to the company can ‘plug the gap’ in expected EBITDA at no cost to the company.”

In an article for Global Banking and Finance Review, Ellora McPherson, Managing Director & Chief Investment Officer of Harbour Litigation Funding, points to the need for CFOs to consider alternative solutions in order generate value, which is especially true during today’s tumultuous economic climate.

According to McPherson: “The macroeconomic lifecycle has no bearing on the outcome of disputes and litigation as an asset class itself it has little correlation to the wider market. This means that litigation funders have the capital to pursue meritorious claims at difficult times even when the businesses with the claims do not.”

Commercial disputes are often worth tens or hundreds of millions of dollars. These legal claims are simply too valuable as assets not to be leveraged during times of economic upheaval. “It is now no longer a question of whether CFOs can afford to advance these claims,” says McPherson, “but whether they can afford to ignore these assets on their books any longer.”

How CFOs Should Approach Funders

If CFOs are to be swayed by the high-level arguments posed by funders as to the advantages of legal finance, they must first get comfortable with frontline interactions—what exactly should CFOs expect from a litigation funding partnership? What should they be on the lookout for, and what sets one funder apart from another?

The lowest-hanging fruit answer here is cost of capital, but that is obvious. Beyond mere capital requirements, lies a plethora of differentiators which CFOs must account for when approaching and selecting the most appropriate funder for their legal claim (or portfolio of claims):

  • Flexibility. CFOs should select a litigation funder who will be their partner, not just their capital provider. Similar to an agreement with a lender, CFOs don’t want a funder who will balk the moment a curveball is thrown, especially if that curveball comes from somewhere out of your control (as is often the case with legal claims). Funder flexibility and adaptability is an important trait when considering the long-term relationship at stake.
  • Funder Capitalization. Per the aforementioned point, legal claims often take longer than anticipated, or tumble down rabbit holes no one saw coming. Does your funder have enough liquidity to backstop unforeseen circumstances? What is their policy during such a contingency? These are critical questions to ask.
  • Legal Sector Expertise. This is important for two reasons: firstly, so the funder understands the bespoke challenges posed by a given sector and doesn’t get cold feet should the case run up against those issues along the way, and secondly, so the funder can help consult on case strategy, should the claimant and law firm request (most funders are ex-lawyers, after all).
  • Enforcement. Winning a case is one thing, but collecting on the reward is quite another. Does the funder have a track record of enforcing victories—either via a third-party or in-house enforcement team?
  • Reputation. CFOs should consult with past clients to get a sense of how the funder interacts with both the client and the law firm. This is a triangular relationship, and it’s important that all sides work together towards a successful outcome.

Ultimately, Litigation Finance offers an opportunity to monetize what would otherwise remain an illiquid asset, and deploy that capital into a core business activity, thus increasing the enterprise value. That is an invaluable tool for any CFO looking to unlock value without having to resort to traditional capitalization methods, such as approaching lenders or equity partners.

The CFO Roadmap

Even companies with ample cash to cover attorney fees and expenses can benefit from the instant liquidity provided by litigation funders. Why wait years to unlock the value of a legal claim, when that capital can be put to work immediately?

What’s more, the prevalence of litigation funding permits corporations to pursue litigation that they would otherwise leave on the table, and also to reject low-ball settlement offers which they might otherwise accept due to concerns over duration risk and case expense.

For CFOs who want to understand if their firm is a strong candidate for litigation funding, there are several steps they can take:

  • Review the company’s litigation history. Have prior legal costs or outcomes influenced management’s thinking about pursuing potential legal matters? Perhaps it is time for a reevaluation of the firm’s approach to litigation.
  • Consult with internal legal staff to identify any matters that may have been deferred for one reason or another, and assess whether those prospective claims might represent strong candidates for litigation funding.
  • Speak with litigation funders or advisory firms to determine a full cost/benefit analysis, including estimates, milestones, duration risk, IRR/ROI potential, and more.
  • Understand the internal resource commitment your team is making, should you take on additional litigation with the help of a funder.

CFOs who follow the above roadmap stand to benefit by repositioning their legal department from a cost center to a profit center. This simple shift in mindset will help strengthen the balance sheet by producing higher net income, lower expenses, and an advancement of business strategies—all without the onerous conditions of a traditional loan.

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Computer Weekly Provides In-Depth History of Post Office Horizon Inquiry

By Harry Moran |

The Post Office Horizon IT scandal represented not only one of the most significant cases of institutional malpractice and miscarriage of justice in British history, but also catapulted the use of litigation funding into the public spotlight.

An article in Computer Weekly provides an in-depth summary of the statutory public inquiry into the Post Office Horizon IT scandal, giving readers a detailed account of all the key revelations that emerged across the last three years of the inquiry’s work. The feature breaks down these revelations on a chronological basis, starting in May 2022 with ‘phase one’ of the inquiry’s hearings and going all the way through to ‘phase seven’ in September 2024.

The feature explains how each of these seven phases gathered evidence on different aspects of the scandal, beginning in 2022 with phase one hearing testimonies from the victims, and the phase two investigation into the Horizon IT system itself.

Phase three saw the examination of the Horizon system over the subsequent year, whilst phase four switched focus to assess the activities of lawyers and investigators who participated in the subpostmasters’ prosecutions. Finally, the feature guides us through the inquiry’s work this year, with phases five and six putting the behaviour of directors, politicians and civil servants in the spotlight, before concluding with phase seven that took a broader look at the Post Office’s present and future.

Within the feature, readers can find links to individual articles that provide deep dives into each of these individual phases, cataloguing the most important pieces of evidence unearthed by the inquiry’s hearings. 

Community Spotlights

Community Spotlight: Dr. Detlef A. Huber, Managing Director, AURIGON LRC

By John Freund |

Detlef is a German attorney, former executive of a Swiss reinsurance company and as head of former Carpentum Capital Ltd. one of the pioneers of litigation funding in Latin America. Through his activities as executive in the insurance claims area and litigation funder he gained a wealth of experience in arbitrations/litigations in various businesses. He is certified arbitrator of ARIAS US and ARIAS UK (AIDA Reinsurance and Insurance Arbitration Society) and listed on the arbitrators panel of DIS (German Arbitration Institute).

He studied law in Germany and Spain, obtained a Master in European Law (Autónoma Madrid) and doctorate in insurance law (University of Hamburg).

Detlef speaks German, Spanish, English fluently and some Portuguese.

Company Name and Description:  AURIGON LRC (Litigation Risk Consulting) is at home in two worlds: dispute funding and insurance. They set up the first European litigation fund dedicated to Latin America many years ago and operate as consultants in the re/insurance sector since over a decade.

Both worlds are increasingly overlapping with insurers offering ever more litigation risk transfer products and funders recurring to insurance in order to hedge their risks. Complexity is increasing for what is already a complex product.

Aurigon acts as intermediary in the dispute finance sector and offers consultancy on relevant insurance matters.

Company Website: www.aurigon-lrc.ch

Year Founded: 2011, since 2024 offering litigation risk consulting  

Headquarters: Alte Steinhauserstr. 1, 6330 Cham/Zug Switzerland

Area of Focus:  Litigation funding related to Latin America and re/insurance disputes

Member Quote: “It´s the economy, stupid. Not my words but fits our business well. Dont focus on merits, focus on maths.”

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Manolete Partners Releases Half-Year Results for the Six Months Ended 30 September 2024

By Harry Moran |

Manolete (AIM:MANO), the leading UK-listed insolvency litigation financing company, today announces its unaudited results for the six months ended 30 September 2024. 

Steven Cooklin, Chief Executive Officer, commented: 

“These are a strong set of results, particularly in terms of organic cash generation. In this six-month period, gross cash collected rose 63% to a new record at £14.3m. That strong organic cash generation comfortably covered all cash operating costs, as well as all cash costs of financing the ongoing portfolio of 413 live cases, enabling Manolete to reduce net debt by £1.25m to £11.9m as at 30 September 2024. 

As a consequence of Manolete completing a record number of 137 case completions, realised revenues rose by 60% to a further record high of £15m. That is a strong indicator of further, and similarly high levels, of near-term future cash generation. A record pipeline of 437 new case investment opportunities were received in this latest six month trading period, underpinning the further strong growth prospects for the business. 

The record £14.3.m gross cash was collected from 253 separate completed cases, highlighting the highly granular and diversified profile of Manolete’s income stream. 

Manolete has generated a Compound Average Growth Rate of 39% in gross cash receipts over the last five H1 trading periods: from H1 FY20 up to and including the current H1 FY25. The resilience of the Manolete business model, even after the extraordinary pressures presented by the extended Covid period, is now clear to see. 

This generated net cash income of £7.6m in H1 FY25 (after payment of all legal costs and all payments made to the numerous insolvent estates on those completed cases), an increase of 66% over the comparative six-month period for the prior year. Net cash income not only exceeded by £4.5m all the cash overheads required to run the Company, it also exceeded all the costs of running Manolete’s ongoing 413 cases, including the 126 new case investments made in H1 FY25. 

The Company recorded its highest ever realised revenues for H1 FY25 of £15.0m, exceeding H1 FY24 by 60%. On average, Manolete receives all the cash owed to it by the defendants of completed cases within approximately 12 months of the cases being legally completed. This impressive 60% rise in realised revenues therefore provides good near-term visibility for a continuation of Manolete’s strong, and well-established, track record of organic, operational cash generation. 

New case investment opportunities arise daily from our wide-ranging, proprietary, UK referral network of insolvency practitioner firms and specialist insolvency and restructuring solicitor practices. We are delighted to report that the referrals for H1 FY25 reached a new H1 company record of 437. A 27% higher volume than in H1 FY24, which was itself a new record for the Company this time last year. That points to a very healthy pipeline as we move forward into the second half of the trading year.” 

Financial highlights: 

  • Total revenues increased by 28% to £14.4m from H1 FY24 (£11.2m) as a result of the outstanding delivery of realised revenues generated in the six months to 30th September 2024.
    • Realised revenues achieved a record level of £15.0m in H1 FY25, a notable increase of 60% on H1 FY24 (£9.4m). This provides good visibility of near-term further strong cash generation, as on average Manolete collects all cash on settled cases within approximately 12 months of the legal settlement of those cases
    • Unrealised revenue in H1 FY25 was £(633k) compared to £1.8m for the comparative H1 FY24. This was due to: (1) the record number of 137 case completions in H1 FY25, which resulted in a beneficial movement from Unrealised revenues to Realised revenues; and (2) the current lower average fair value of new case investments made relative to the higher fair value of the completed cases. The latter point also explains the main reason for the marginally lower gross profit reported of £4.4m in this period, H1 FY25, compared to £5.0m in H1 FY24. 
  • EBIT for H1 FY25 was £0.7m compared to H1 FY24 of £1.6m. As well as the reduced Gross profit contribution explained above, staff costs increased by £165k to £2.3m and based on the standard formula used by the Company to calculate Expected Credit Losses, (“ECL”), generated a charge of £140k (H1 3 FY24: £nil) due to trade debtors rising to £26.8m as at 30 September 2024, compared to £21.7m as at 30 September 2023. The trade debtor increase was driven by the outstanding record level of £15.0m Realised revenues achieved in H1 FY25.
  • Loss Before Tax was (£0.2m) compared to a Profit Before Tax of £0.9m in H1 FY24, due to the above factors together with a lower corporation tax charge being largely offset by higher interest costs. 
  • Basic earnings per share (0.5) pence (H1 FY24: 1.4 pence).
  • Gross cash generated from completed cases increased 63% to £14.3m in the 6 months to 30 September 2024 (H1 FY24: £8.7m). 5-year H1 CAGR: 39%.
  • Cash income from completed cases after payments of all legal costs and payments to Insolvent Estates rose by 66% to £7.6m (H1 FY24: £4.6m). 5-year H1 CAGR: 46%.
  • Net cashflow after all operating costs but before new case investments rose by 193% to £4.5m (H1 FY24: £1.5m). 5-year H1 CAGR: 126%.
  • Net assets as at 30 September 2024 were £40.5m (H1 FY24: £39.8m). Net debt was reduced to £11.9m and comprises borrowings of £12.5m, offset by cash balances of £0.6m. (Net debt as 31 March 2024 was £12.3m.)
  • £5m of the £17.5m HSBC Revolving Credit Facility remains available for use, as at 30 September 2024. That figure does not take into account the Company’s available cash balances referred to above.

Operational highlights:

  • Ongoing delivery of record realised returns: 137 case completions in H1 FY25 representing a 18% increase (116 case realisations in H1 FY24), generating gross settlement proceeds receivable of £13.9m for H1 FY25, which is 51% higher than the H1 FY24 figure of £9.2m. This very strong increase in case settlements provides visibility for further high levels of cash income, as it takes the Company, on average, around 12 months to collect in all cash from previously completed cases.
  • The average realised revenue per completed case (“ARRCC”) for H1 FY25 was £109k, compared to the ARRCC of £81k for H1 FY24. That 35% increase in ARRCC is an important and an encouraging Key Performance Indicator for the Company. Before the onset and impact of the Covid pandemic in 2020, the Company was achieving an ARRCC of approximately £200k. Progress back to that ARRCC level, together with the Company maintaining its recent high case acquisition and case completion volumes, would lead to a material transformation of Company profitability.
  • The 137 cases completed in H1 FY25 had an average case duration of 15.7 months. This was higher than the average case duration of 11.5 months for the 118 cases completed in H1 FY24, because in H1 FY25 Manolete was able to complete a relatively higher number of older cases, as evidenced by the Vintages Table below.
  • Average case duration across Manolete’s full lifetime portfolio of 1,064 completed cases, as at 30 September 2024 was 13.3 months (H1 FY24: 12.7 months).
  • Excluding the Barclays Bounce Back Loan (“BBL”) pilot cases, new case investments remained at historically elevated levels of 126 for H1 FY25 (H1 FY24: 146 new case investments).
  • New case enquiries (again excluding just two Barclays BBL pilot cases from the H1 FY24 figure) achieved another new Company record of 437 in H1 FY25, 27% higher than the H1 FY24 figure of 343. This excellent KPI is a strong indicator of future business performance and activity levels.
  • Stable portfolio of live cases: 413 in progress as at 30 September 2024 (417 as at 30 September 2023) which includes 35 live BBLs.
  • Excluding the Truck Cartel cases, all vintages up to and including the 2019 vintage have now been fully, and legally completed. Only one case remains ongoing in the 2020 vintage. 72% of the Company’s live cases have been signed in the last 18 months.
  • The Truck Cartel cases continue to progress well. As previously reported, settlement discussions, to varying degrees of progress, continue with a number of Defendant manufacturers. Further updates will be provided as concrete outcomes emerge.
  • The Company awaits the appointment of the new Labour Government’s Covid Corruption Commissioner and hopes that appointment will set the clear direction of any further potential material involvement for Manolete in the Government’s BBL recovery programme.
  • The Board proposes no interim dividend for H1 FY25 (H1 FY24: £nil).

The full report of Manolete’s half-year results can be read here.

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