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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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Commercial Regulatory Issues

AALF Chairman: UK Should Avoid Repeating “Australia’s Flirtation with Overbearing Regulation”

By Harry Moran |

With the UK funding industry awaiting the outcome of the Civil Justice Council’s review of third-party litigation funding, most of the commentary about what direction the government should take has come from those professionals practicing inside the UK. However, in an example of transnational solidarity between funding markets, the head of Australia’s industry association has spoken out to encourage the UK government to act to protect its legal funding sector.

In an opinion piece for The Law Society Gazette, John Walker, chairman of the Association of Litigation Funders of Australia (AALF), presents a strong argument that the UK government must avoid following Australia’s past mistake of overregulating the legal funding industry. With the prospect of the CJC’s review soon reaching its conclusion, Walker argues that the government’s “priority must be addressing the uncertainty created by the PACCAR decision”, rather than acceding to the demands of “the powerful, well-resourced and disingenuous minority perspective of the US Chamber of Commerce.”

Walker points to the recent history of legal funding in Australia, where the strength of these critics’ views led to the previous governments introducing strict regulations that created an environment where “access to justice for claimants was denied, corporate wrongdoers were protected, and claims started to dry up.” As Walker explains, the true lesson from Australia was the reversal of these regulations by the new government in 2022, which has seen funding rebound and drive a wave of class actions representing Australians seeking justice once more.

Taking aim at the opponents of the litigation funding industry, Walker highlighted the “myths pedalled” by groups like Civil Fair Justice as being “built on falsehoods that risk clouding reality and choking off access to justice.” Putting the often-repeated claim of funders supporting frivolous claims in the crosshairs, Walker notes “in reality, funders in the UK fund as few as 3% of the cases they're approached about.”

Commercial Legal Innovation

Qanlex Rebrands as Loopa Finance

By Harry Moran |

Litigation funding startups are a common occurrence, especially in recent years. However, the rebranding of an established funder is less common, yet worth keeping an eye on.

In a new blog post, the litigation funder formerly known as Qanlex announced that it is rebranding and will now operate under the name: Loopa Finance. The funder emphasised that it is still “the same team, the same values, and the same focus”, but with a new name that represents  the adoption of a “a clearer, more modern, and more memorable identity.”

The blog post goes on to provide a fuller explanation of the new name: “Loopa refers to our way of working: examining each opportunity with a magnifying glass and creating virtuous loops of funding, access to justice, and efficient conflict resolution.” The announcement also clarifies that the rebranding “does not imply any structural, corporate, or operational modifications.”

Loopa was founded as Qanlex in 2020, offering litigation finance services for cases in Latin America before expanding its funding solutions to commercial claims and arbitrations in continental Europe. As LFJ reported in January of this year, the funder revealed that it was refining its Latin America strategy using new technologies and focusing on specific sectors within individual jurisdictions in the region. Examples of this sector focus include energy cases in Ecuador, real estate development matters in Costa Rica, and oil and energy cases in Colombia. 

More information about Loopa Finance can be found on its website. 

Case Developments Commercial

Echo Law and LLS File Class Action Against Toyota Finance in Australia

By Harry Moran |

Class actions in Australia continue to be viewed as desirable opportunities for litigation funders, with the first half of 2025 already seeing a number of funded claims brought on behalf of consumers wronged by the state or large corporations. 

A joint media release from Echo Law and Litigation Lending Services (LLS) announced that they are pursuing a new class action against Toyota Finance in Australia, this time over the sale of “junk” add-on insurance to consumers. The claim, which has been brought before the Supreme Court of Victoria, alleges that Toyota Finance and insurer Aioi Nissay Dowa Insurance Company Australia (ADICA), engaged in “unjust, unfair, misleading and unconscionable” conduct that breached the Corporations ACT, ASIC Act, and National Consumer Credit Protection Act 2009.

The class action has been filed on behalf of any consumers who took out a car loan with Toyota Finance and were sold a Toyota branded add-on insurance policy between 1 January 2010 and 5 October 2021. The allegedly “junk” insurance policies covered by the class action include Toyota Payment Protection Insurance, Toyota Finance Gap Insurance, and Toyota Extended Warranty Insurance.

Alex Blennerhassett, Principal Lawyer at Echo Law, said that “this class action is about holding Toyota Finance and ADICA to account for knowingly selling junk insurance to everyday Australians, even though these policies offered no value.” In a separate post on LinkedIn, Emma Colantonio, Chief Investment Officer at LLS, said that the class action is “a strong example of litigation funding enabling access to justice and supporting consumers in holding major financial players to account.”

This class action is separate to the Flex Commissions claim which was filed by Echo Law against Toyota Finance in February 2024. That class focuses on allegations that car dealers secretly inflated the interest rate on consumers’ car loans, resulting in additional interest fees. The Supreme Court has ruled that these separate class actions can be managed together, and Ms Blennerhassett said that they expected “there to be a significant number of persons who are group members in both proceedings”. 

LLS is providing funding for both class actions brought against Toyota Finance. More information on both class actions can be found on Echo Law’s website.