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Commercial Litigation Finance Covid Survey Results

May 27, 2020

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.

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Merricks Urges UK Court to Reject Innsworth’s Challenge Over £200M Mastercard Settlement Distribution

By John Freund |

The class representative in the Merricks v Mastercard collective claim has urged a London court to reject litigation funder Innsworth Advisors' judicial review of the £200 million settlement distribution, in what observers describe as the first substantive test of a Competition Appeal Tribunal settlement decision.

As reported by Law360, Walter Merricks's legal team told the High Court on Wednesday that Innsworth has already received an adequate return from the CAT-approved settlement and that its challenge should be dismissed. Innsworth argued earlier in the week that the distribution scheme is "illogical" and "flawed," contending that the tribunal failed to properly assess the funder's recovery.

The CAT had divided the settlement into three pots. Pot 1, totalling £100 million, is ring-fenced for class members. Pot 2, approximately £45 million, covers Innsworth's litigation costs. Pot 3, approximately £55 million, allocates roughly £23 million to Innsworth as the profit element of its return, bringing its total recovery to around £68 million. Innsworth contends that this amounts to only a 0.5x return on more than £45 million invested, and disputes the methodology used to set the figure.

The case has drawn close attention from the UK funding sector. A judicial review of a CAT-sanctioned distribution could establish important parameters around how courts assess funder returns in collective proceedings, particularly at a moment when the tribunal has signaled heightened scrutiny of certification and take-up in entrepreneurial class actions.

Commercial

Germany’s Federal Court of Justice Imposes New Limits on Funders and Claim Aggregators in $590M Trucks Cartel Ruling

By John Freund |

The Bundesgerichtshof (BGH), Germany's Federal Court of Justice, has issued a closely watched judgment in the long-running Trucks Cartel litigation that upholds the use of collective claims vehicles in principle but sets significant guardrails around third-party litigation funding and claim aggregation.

As reported by Leaders League, the May 12, 2026 ruling addressed claims arising from the European Commission's 2016 cartel decision, brought on behalf of more than 3,000 entities across 21 jurisdictions and seeking approximately US$590 million. The BGH confirmed that cartel damages claims may be collectively aggregated and enforced by registered claims collection entities, reinforcing collective redress mechanisms in German private antitrust litigation.

The court imposed two material limits. First, third-party funders cannot exercise control that compromises the claims vehicle's obligation to act exclusively in the interests of the assignors, a conflict-of-interest standard that goes to funder governance rights. Second, claims aggregation cannot obstruct effective judicial review; excessive volume or complexity that renders proper assessment "impracticable" may violate the German Legal Services Act and result in dismissal for procedural abuse.

The BGH overturned the appellate decision and remanded the matter, directing the lower court to examine whether the funding structure created incompatible conflicts and, if the assignments survive, to divide claims within six months. The decision is expected to shape the architecture of funded collective antitrust actions across Europe, particularly in jurisdictions modelling Germany's claims-collection framework.

Commercial

Michigan House Passes Third-Party Litigation Funding Bill 60–45, Sending Measure to Democratic Senate

By John Freund |

The Michigan House of Representatives has approved House Bill 5281, a Republican-sponsored measure that would impose registration, disclosure, and contracting restrictions on third-party litigation funders operating in the state, advancing the bill to a Senate where Democrats hold a narrow majority.

As reported by The Center Square, the bill cleared the chamber on a 60–45 vote, with four Democrats joining Republicans in support: Tulio Liberati, Peter Herzberg, Angela Witwer, and Will Snyder. Sponsor Rep. Mike Harris framed the legislation in floor remarks by asking, "Who does it benefit to allow outside investors to influence decisions in Michigan courtrooms?"

The bill requires litigation funders to register with the Department of Insurance and Financial Services, pay a $10,000 application fee, and file annual reports on funding activity. It mandates a ten-day consumer cancellation window for funded contracts, prohibits kickbacks and referral fees, prohibits funder influence on case strategy, bans funding by foreign adversaries, and imposes caps on funder spending and recoveries from awards.

Backers cited industry analyses suggesting third-party litigation funding raises household costs through higher prices and lost tax revenue. The measure now heads to a Senate where Democrats hold an 20–18 majority and where the bill's path is uncertain. The House passage adds Michigan to the list of states considered most active on third-party funding regulation, alongside parallel efforts under way in Colorado, Florida, and Pennsylvania.