AxiaFunder is a new and innovative investment platform that focuses on litigation funding as an asset class. Founded by Cormac Leech, the UK startup caters to sophisticated investors.
UK Investor Magazine explains that as an asset class, the main strength of litigation funding is its lack of correlation to the larger market. For the most part, the need for litigation is not dependent on any specific economic conditions.
The following are some key takeaways from the podcast episode with Leech:
Q: Are there [investment] solutions for people who are looking into funding?
CL: Absolutely, there are. Litigation funding is a relatively new asset class. As an industry it’s really only been active in the UK for around 15 years or so. It’s certainly grown strongly over the last five or ten years.
Most of the providers of litigation funding are operating on a traditional model where they have a permanent pool of capital…they’re really only catering to private equity firms, which means lots of sophisticated investors cannot get access to the asset class.
Q: How are cases vetted?
CL: So far, we’ve funded 12 cases based on having looked at over 300 cases. We have a very high rejection rate in terms of the number of cases we accept.
We talk through the process of how we vet cases. The first thing we look at are the legal merits of the case. The way we think about legal merits—there are two parts: we want to make sure that the claimants have the high moral ground. It has to be a case where you look at the story of the case, the claimants and the defendants, and there’s a clear indication that the defendants treated the claimants badly. You know it when you see it. The second question is to make sure the legal technical merits stack up.
Other aspects include whether the defendant has money, and the ability and willingness to pay if there’s a settlement or judgement. There’s no sense winning the case if the defendant doesn’t have any money. We also look at the case economics to make sure that the value of the claim is big enough compared to what it’s going to cost to litigate.
There needs to be a solution for adverse costs risk.
Q: Litigation funding is classed as an alternative asset class. One of the attractions typically is the low correlation with traditional assets such as stocks and bonds. How is that seen in the real world?
CL: It’s interesting in terms of investor’s perceptions. It’s a very unusual period right now because equities have had a very strong run recently, and residential properties have had a strong run. Virtually every asset class has been increasing in value. Forward looking investors will probably realize that there’s limited upside for equities, and arguably limited upsides for property, at least on a real, inflation-adjusted basis. These asset classes have already had a tremendous run. I think smarter investors will be looking around for alternatives.
It does make sense for investors to make some allocation into litigation funding—2% up to 5% of their portfolio. It is non-correlated, and the returns are very substantial.
