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Commercial Litigation Finance Covid Survey Results

The following article is part of an ongoing column titled ‘Investor Insights.’ 

Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance. 

EXECUTIVE SUMARY

  • Survey suggests the litigation finance industry has experienced an increase in demand due to the Covid-related financial crisis
  • Law firm portfolio financings are a particular active sector of the market
  • Defendant collectability risk is top of mind for most respondents
  • Covid-19 related cases are predominant in the contract and insurance case types

INVESTOR INSIGHTS

  • 2020 should be a good vintage for new litigation finance opportunities
  • Generally, there is a feeling that the current economic crisis will put some pressure on IRRs or MOICs of existing portfolios
  • Additional diligence on unrealized portions of litigation finance portfolios is warranted in the current environment when assessing fund manager performance

Slingshot Capital and Litigation Finance Journal recently undertook a survey of commercial litigation finance participants to obtain a deeper understanding of the extent to which demand for financing had changed as a result of the current Covid-related financial crisis.

Editor’s note– the following contribution appears with illustrative graphs and charts here. 

Demand for Litigation Finance during Economic Crises

It has been thought that crises breed litigation, and while that appears to be the case in the current crisis, that may not have been the case in the Great Financial Crisis of 2008/9, as pointed out by Eric Blinderman in an article he contributed to Law360 in 2019, also referenced in a recent article in Litigation Finance Journal.  The reason for the ultimate lack of litigation, Eric argued, was fear.

In the current environment it appears as though people are less fearful (of litigation, that is) as the number of Covid-specific cases is clearly on the rise, and I suspect that will continue for the foreseeable future as the crisis increases its impact on businesses and forces business owners to react in ways previously thought unthinkable, but in the current context are deemed necessary. When the data is analyzed with respect to case type, it is evident that the volume of cases is focused on contract and insurance claims, which should come as no surprise.

Issues of Force Majeure and breaches of contract are likely the majority of the volume of contract claims.  Business owners have been placed in an unprecedented position in that they are likely being forced to breach contracts to save their businesses.  While business owners and executives may regret their actions and would not have acted in a similar way under normal circumstances, they are no doubt acting in the best interests of the business to avoid insolvency and will deal with the repercussions (litigation) once they have ‘righted the ship’.  The insurance sector has also been particularly negatively impacted, and much of this likely stems from denial of payouts under policies, with business interruption insurance being particularly active. In fact, the UK insurer, Hiscox, is being sued in a class action-style litigation in the UK with Harbour Litigation Funding providing the litigation finance to pursue the case.  Accordingly, litigation finance has and will continue to be a beneficiary of this activity.

Covid Survey Results

Let’s now take a look at the Covid Survey results to see how the broader commercial litigation finance industry has been impacted by the Covid-induced financial crisis.

The survey was distributed globally.  Of the respondents, the vast majority were funders with dedicated litigation finance funds.

Overall, the industry has been positively impacted by the financial effects of Covid-19 with 64% of respondents experiencing an increase in origination activity.

In some cases, the increase in origination activity has been dramatic, with originations in excess of 25% being experienced by approximately half of respondents.

The largest impact in terms of the type of activity is equally split between law firm portfolio financings and single case financings.  However, since portfolio financings are inherently larger, it stands to reason that a much larger dollar volume of financing will be required for these financing types.

In terms of the source of originations, it appears to be a combination of existing relationships, mainly from law firms, and new relationships, mainly from law firms and directly from plaintiffs. It is encouraging to see new relationships continuing to be formed at this stage of the evolution of the industry.

A natural consequence of demand for litigation finance is a demand for capital commitments by the litigation funders.  Accordingly, it appears that the demand impact of Covid will have the effect of accelerating plans for new fundraisings, with about half of respondents indicating their fundraising plans have been accelerated.  Accordingly, investors in search of good risk-adjusted and non-correlated returns should expect to see more opportunities in the marketplace.  As always, diversification is critical to successful and prudent investing in the litigation finance marketplace.

As it relates to the impact that the current financial crisis will have on the expected return profile, almost 50% of respondents suggested it is too early to tell.  However, for those who did have some visibility or were confident in making an estimate, it appears that the expectation is that their existing portfolios may be negatively impacted, which is consistent with what I would have expected given the extent of this economic crisis.

I was personally forecasting that durations would be longer, simply due to the effect that court closures would have on existing cases, where the timing of settlement discussions are ultimately impacted by the timing of the court process.  In this light, I would expect to see portfolios maintain longer durations which may equate to lower internal rates of return, but this depends on the escalator clauses within their funding agreements, which may see funders obtain larger multiples of invested capital if the delay breaks through timing thresholds.  I would also expect that the threat of collectability risk might put pressure on plaintiffs to accept lower settlement amounts, and defendants will use liquidity concerns to their advantage by low-balling settlement offers. However, this phenomenon could be situation-specific, and more prevalent in certain industries. 

As previously stated, one of the reasons I would have expected return expectations to be increasingly negative is due to defendant collectability risk.  In this vein, it seems that most managers are focused on the impact this risk will have on their portfolios, with most managers indicating that collection risk has increased, which is expected given the impact the crisis has had on certain industries, and the impact it has had on corporate liquidity. 

Looking forward, managers are focusing on credit risk more than they have in the past, and this is mirrored in their focus on the industries in which their defendants operate.  Interestingly, despite the significant impact the crisis has had on the demand for legal services, few managers are concerned about the impact on the solvency of the plaintiff law firm.  This may be explained by the fact that the law firm can be substituted by the plaintiff should it run into solvency issues, and so managers may view this as an acceptable risk.

The Bonus Question

 And now the moment you’ve all been waiting for….

When asked whether Covid-induced isolation has caused respondents to think about the benefits of boarding school, the majority confirmed that their children are angels and that they would like to spend as much time with them as possible.  Although, there were a few who noted an interest in boarding schools, and one did attempt to sell his child to the highest bidder.

This brings to a close the results of our second commercial litigation finance survey.  Slingshot Capital and Litigation Finance Journal would like to thank those that participated in the survey for their time and feedback.

Our next survey will cover fundraising initiatives by fund managers in the commercial litigation finance sector. We anticipate making the fundraising survey an annual survey, so we can track fundraising activities over time.

If you would like to participate in future surveys, please contact Ed Truant here to register your interest.

Commercial

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Case Developments Commercial

CAT Rules in Favour of BT in Harbour-Funded Claim Valued at £1.3bn

By Harry Moran |

As LFJ reported yesterday, funders and law firms alike are looking to the Competition Appeal Tribunal (CAT) as one of the most influential factors for the future of the UK litigation market in 2025 and beyond. A judgment released by the CAT yesterday that found in favour of Britain’s largest telecommunications business may provide a warning to industry leaders of the uncertainty around funding these high value collective proceedings.

An article in The Global Legal Post provides an overview of the judgment handed down by the CAT in Justin Le Patourel v BT Group PLC, as the Tribunal dismissed the claim against the telecoms company following the trial in March of this year. The opt-out claim valued at around £1.3 billion, was first brought before the Tribunal in 2021 and sought compensation for BT customers who had allegedly been overcharged for landline services from October 2015.

In the executive summary of the judgment, the CAT found “that just because a price is excessive does not mean that it was also unfair”, with the Tribunal concluding that “there was no abuse of dominant position” by BT.

The proceedings which were led by class representative Justin Le Patourel, founder of Collective Action on Land Lines (CALL), were financed with Harbour Litigation Funding. When the application for a Collective Proceedings Order (CPO) was granted in 2021, Harbour highlighted the claim as having originally been worth up to £600 million with the potential for customers to receive up to £500 if the case had been successful.

In a statement, Le Patourel said that he was “disappointed that it [the CAT] did not agree that these prices were unfair”, but said that they would now consider “whether the next step will be an appeal to the Court of Appeal to challenge this verdict”. The claimants have been represented by Mishcon de Reya in the case.

Commenting on the impact of the judgment, Tim West, disputes partner at Ashurst, said that it could have a “dampening effect, at least in the short term, on the availability of capital to fund the more novel or unusual claims in the CAT moving forward”. Similarly, Mohsin Patel, director and co-founder of Factor Risk Management, described the outcome as “a bitter pill to swallow” for both the claimants and for the law firm and funder who backed the case.

The CAT’s full judgment and executive summary can be accessed on the Tribunal’s website.

Commercial Fundraising

Sandfield Capital Secures £600m Facility to Expand Funding Operations

By Harry Moran |

Sandfield Capital, a Liverpool-based litigation funder, has reached an agreement for a £600 million facility with Perspective Investments. The investment, which is conditional on the identification of suitable claims that can be funded, has been secured to allow Sandfield Capital to strategically expand its operations and the number of claims it can fund. 

An article in Insider Media covers the the fourth capital raise in the last 12 months for Sandfield Capital, with LFJ having previously covered the most recent £10.5 million funding facility that was secured last month. Since its founding in 2020, Sandfield Capital has already expanded from its original office in Liverpool with a footprint established in London as well. 

Steven D'Ambrosio, chief executive of Sandfield Capital, celebrated the announced by saying:  “This new facility presents significant opportunities for Sandfield and is testament to our business model. Key to our strategy to deploy the facility is expanding our legal panel. There's no shortage of quality law firms specialising in this area and we are keen to develop further strong and symbiotic relationships. Perspective Investments see considerable opportunities and bring a wealth of experience in institutional investment with a strong track record.”

Arno Kitts, founder and chief investment officer of Perspective Investments, also provided the following statement:  “Sandfield Capital's business model includes a bespoke lending platform with the ability to integrate seamlessly with law firms' systems to ensure compliance with regulatory and underwriting standards.  This technology enables claims to be processed rapidly whilst all loans are fully insured so that if a claim is unsuccessful, the individual claimant has nothing to pay. This is an excellent investment proposition for Perspective Investments and we are looking forward to working with the management team who have a track record of continuously evolving the business to meet growing client needs.”

Announcements Case Developments Commercial

Australian Google Ad Tech Class Action Commenced on Behalf of Publishers

By Harry Moran |

A class action was filed on 16 December 2024 on behalf of QNews Pty Ltd and Sydney Times Media Pty Ltd against Google LLC, Google Pte Ltd and Google Australia Pty Ltd (Google). 

The class action has been commenced to recover compensation for Australian-domiciled website and app publishers who have suffered financial losses as a result of Google’s misuse of market power in the advertising technology sector. The alleged loss is that publishers would have had significantly higher revenues from selling advertising space, and would have kept greater profits, if not for Google’s misuse of market power. 

The class action is being prosecuted by Piper Alderman with funding from Woodsford, which means affected publishers will not pay costs to participate in this class action, nor will they have any financial risk in relation to Google’s costs. 

Anyone, or any business, who has owned a website or app and sold advertising space using Google’s ad tech tools can join the action as a group member by registering their details at www.googleadtechaction.com.au. Participation in the action as a group member will be confidential so Google will not become aware of the identity of group members. 

The class action is on behalf of all publishers who had websites or apps and sold advertising space using Google’s platforms targeted at Australian consumers, including: 

  1. Google Ad Manager (GAM);
  2. Doubleclick for Publishers (DFP);
  3. Google Ad Exchange (AdX); and
  4. Google AdSense or AdMob. 

for the period 16 December 2018 to 16 December 2024. 

Google’s conduct 

Google’s conduct in the ad tech market is under scrutiny in various jurisdictions around the world. In June 2021, the French competition authority concluded that Google had abused its dominant position in the ad tech market. Google did not contest the decision, accepted a fine of €220m and agreed to change its conduct. The UK Competition and Markets Authority, the European Commission, the US Department of Justice and the Canadian Competition Bureau have also commenced investigations into, or legal proceedings regarding, Google’s conduct in ad tech. There are also class actions being prosecuted against Google for its practices in the ad tech market in the UK, EU and Canada. 

In Australia, Google’s substantial market power and conduct has been the subject of regulatory investigation and scrutiny by the Australian Competition and Consumer Commission (ACCC) which released its report in August 2021. The ACCC found that “Google is the largest supplier of ad tech services across the entire ad tech supply chain: no other provider has the scale or reach across the ad tech supply chain that Google does.” It concluded that “Google’s vertical integration and dominance across the ad tech supply chain, and in related services, have allowed it to engage in leveraging and self-preferencing conduct, which has likely interfered with the competitive process". 

Quotes 

Greg Whyte, a partner at Piper Alderman, said: 

“This class action is of major importance to publishers, who have suffered as a result of Google’s practices in the ad tech monopoly that it has secured. As is the case in several other 2. jurisdictions around the world, Google will be required to respond to and defend its monopolistic practices which significantly affect competition in the Australian publishing market”. 

Charlie Morris, Chief Investment Officer at Woodsford said: “This class action follows numerous other class actions against Google in other jurisdictions regarding its infringement of competition laws in relation to AdTech. This action aims to hold Google to account for its misuse of market power and compensate website and app publishers for the consequences of Google’s misconduct. Working closely with economists, we have determined that Australian website and app publishers have been earning significantly less revenue and profits from advertising than they should have. We aim to right this wrong.” 

Class Action representation 

The team prosecuting the ad tech class action comprises: 

  • Law firm: Piper Alderman
  • Funder: Woodsford
  • Counsel team: Nicholas de Young KC, Simon Snow and Nicholas Walter