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Covid-19 and Defendant Collectability Risk

April 15, 2020

Covid-19 and Defendant Collectability Risk

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
  • Covid-19 will likely lead to the biggest financial crisis since the Great Depression
  • The crisis has affected the solvency and viability of corporations and sovereigns
  • Litigation managers need to re-assess collectability risk, immediately and regularly, of each defendant in their portfolio
INVESTOR INSIGHTS
  • Diligencing litigation managers should involve a deep understanding of how they assess defendant collectability risk
  • Defendant collectability risk is an ongoing risk that changes over time, therefore managers need a continuous risk assessment methodology
  • Investors looking to invest in litigation finance secondaries to take advantage of the current dislocation should avoid single case risk and look to portfolio acquisitions, but must assess collectability risk across the portfolio being acquired
As Covid-19 has taken the planet and the legal community by surprise, I think there are some lessons learned from private equity that can be applied to litigation finance.  In short, focus on cash – its collection, generation, distribution and availability. So, how does this relate to Litigation Finance? This novel Coronavirus-driven healthcare crisis which has spiralled into a broad-based economic crisis, the likes of which the modern global economy hasn’t seen since the Great Depression, has had the effect of taking otherwise viable, profitable and cashflow positive businesses and stopping them in their tracks.  Overnight, certain businesses and industries have performed a complete one-eighty, whereby they went from solvent to being on the precipice of insolvency.  For many litigation finance firms, their immediate reaction has and should be to undertake an immediate and urgent review of the defendants involved in each and every case in which their portfolios have an investment, in order to re-assess collectability risk, one of the key areas of litigation finance underwriting. When an economy, especially a consumer driven economy like the US, effectively shuts down overnight, there are few industries and companies that will be spared from a diminution in their value and blockage from access to capital.  Former “recession-resistant” and “necessity” businesses have just experienced a new reality, which is that necessity is determined by context.  The current context states that the only necessity is feeding, hand washing, shelter and healthcare, and this has had a massive impact on the economy. While this too shall pass, the economic impacts will likely linger for a number of months and years.  The hope for a “V” shaped recovery has been dashed, as the crisis has extended beyond initial duration estimates.  My personal opinion is that it will at best look like a “U” shaped recovery with the possibility of a double “W”, meaning there will likely be some ups and downs along the way, should the dreaded “C-19” rear its ugly head again going into the next flu season, or should it fail to be contained due to premature ‘return to daily activity’ policy.  My hope is that the massive amounts of stimulus that are being pumped into the global economy actually make their way to the most hard-hit regions of the economy, namely ‘Mainstreet’, and thereby mitigate the damage that would otherwise be experienced for many small and medium-sized businesses on which most economies rely. While we tend to focus on home first, litigation funders should also be mindful that the economy is global.  As bad as developed countries think they may have it, fund managers who participate in the international arbitration market, which by definition, involve developing countries and corporations therein, need to be mindful that those defendants in developing countries will likely be even more greatly affected. Yes, even sovereigns. Those managers that are focused on patent litigation involving start-up technology companies should also ensure the plaintiff is solvent through the end of the litigation, not to mention the collectability risk of the defendant, which may have been negatively impacted. All of this is to say, that it is in the best interests of litigation finance managers to undertake a re-assessment of collectability risk of each and every defendant in their portfolio, and to do so on a regular basis for the foreseeable future.  Managers will need to assess (i) the degree to which the defendant’s industry has been impacted, (ii) the strength of each defendant’s business and balance sheet, (iii) the ability for the defendant (business or sovereign) to access sufficient capital to maintain solvency, (iv) the degree to which the value of such business has declined, (v) a study of the defendants’ behaviour during the last economic crisis, as it relates to litigation ongoing at that time, if any, (vi) determine the extent to which other parties have security and seniority ahead of the plaintiff’s claims and (vii) assess the defendants’ ability to raise capital outside of financing (i.e. asset sales, equity raises, etc.). Once a determination has been made as to the relative collectability risk, managers will then need to determine next steps with respect to protecting themselves from those cases where the defendant collectability risk has materially changed.  This may involve the withdrawal of any further financing provisions (to the extent the financing was milestone-based), partnering with other parties to share the increased risk of the case, or selling all or a portion of a case or a portfolio (although the manager would be selling into a weak secondary market with relatively few participants, which will be reflected in the valuation, if they can secure bids).  While the options may not be great, they may be better than investing ‘good money after bad’. Investor Insights For investors that are invested in the sector or considering making an investment in the litigation finance market, now is a good time to diligence how and the extent to which managers were on top of their portfolio in assessing collectability risk.  For those investors interested in secondary market opportunities, caveat emptor.  The risk profile for a single case secondary is much higher given the high level of uncertainty in today’s market so a portfolio of secondaries may be a better risk-adjusted avenue to pursue but the portfolio’s diversification benefits would not negate the need to reassess the collectability risk of each defendant in the portfolio.  Edward Truant is the founder of Slingshot Capital Inc., and an investor in the consumer and commercial litigation finance industry.
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A Framework for Measuring Tech ROI in Litigation Finance

This article was contributed by Ankita Mehta, Founder, Lexity.ai - a platform that helps litigation funds automate deal execution and prove ROI.

How do litigation funders truly quantify the return on investment from adopting new technologies? It’s the defining question for any CEO, CTO or internal champion. The potential is compelling: for context, according to litigation funders using Lexity’s AI-powered workflows, ROI figures of up to 285% have been reported.

The challenge is that the cost of doing nothing is invisible. Manual processes, analyst burnout, and missed deals rarely appear on a balance sheet — but they quietly erode yield every quarter.

You can’t manage what you can’t measure. This article introduces a pragmatic framework for quantifying the true value of adopting technology solutions, replacing ‘low-value’ manual tasks and processes with AI and freeing up human capital to focus on ‘high-value’ activities that drive bottom line results  .

A Pragmatic Framework for Measuring AI ROI

A proper ROI calculation goes beyond simple time savings. It captures two distinct categories:

  1. Direct Cost Savings – what you save
  2. Increased Value Generation – what you gain

The ‘Cost’ Side (What You Save)

This is the most straightforward calculation, focused on eliminating “grunt work” and mitigating errors.

Metric 1: Direct Time Savings — Eliminating Manual Bottlenecks 

Start by auditing a single, high-cost bottleneck. For many funds, this is the Preliminary Case Assessment, a process that often takes two to three days of an expert analyst's time.

The calculation here is straightforward. By multiplying the hours saved per case by the analyst's blended cost and the number of cases reviewed, a fund can reveal a significant hard-dollar saving each month.

Consider a fund reviewing 20 cases per month. If a 2-day manual assessment can be cut to 4 hours using an AI-powered workflow, the fund reallocates hundreds of analyst-hours every month. That time is now moved from low-value data entry to high-value judgment and risk analysis.

Metric 2: Cost of Inconsistent Risk — Reducing Subjectivity 

This metric is more complex but just as critical. How much time is spent fixing inconsistent or error-prone reviews? More importantly, what is the financial impact of a bad deal slipping through screening, or a good deal being rejected because of a rushed, subjective review?

Lexity’s workflows standardise evaluation criteria and accelerate document/data extraction, converting subjective evaluations into consistent, auditable outputs. This reduces rework costs and helps mitigate hidden costs of human error in portfolio selection.

The ‘Benefit’ Side (What You Gain)

This is where the true strategic upside lies. It’s not just about saving time—it’s about reinvesting that time into higher-value activities that grow the fund.

Metric 3: Increased Deal Capacity — Scaling Without Headcount Growth

What if your team could analyze more deals with the same staff? Time saved from automation becomes time reallocated to new higher value opportunities, dramatically increasing the value of human contributions.

One of the funds working with Lexity have reported a 2x to 3x increase in deal review capacity without a corresponding increase in overhead. 

Metric 4: Cost of Capital Drag — Reducing Duration Risk 

Every month a case extends beyond its expected closing, that capital is locked up. It is "dead" capital that could have been redeployed into new, IRR-generating opportunities.

By reducing evaluation bottlenecks and creating more accurate baseline timelines from inception, a disciplined workflow accelerates the entire pipeline. 

This figure can be quantified by considering the amount of capital locked up, the fund's cost of capital, and the length of the delay. This conceptual model turns a vague risk ("duration risk") into a hard number that a fund can actively manage and reduce.

An ROI Model Is Useless Without Adoption

Even the most elegant ROI model is meaningless if the team won't use the solution. This is how expensive technology becomes "shelf-ware."

Successful adoption is not about the technology; it's about the process. It starts by:

  1. Establish Clear Goals and Identify Key Stakeholders: Set measurable goals and a baseline. Identify stakeholders, especially the teams performing the manual tasks- they will be the first to validate efficiency gains.
  2. Targeting "Grunt Work," Not "Judgment": Ask “What repetitive task steals time from real analysis?” The goal is to augment your experts, not replace them.
  3. Starting with One Problem: Don't try to "implement AI." Solve one high-value bottleneck, like Preliminary Case Assessment. Prove the value, then expand. 
  4. Focusing on Process Fit: The right technology enhances your workflow; it doesn’t complicate it.

Conclusion: From Calculation to Confidence

A high ROI isn't a vague projection; it’s what happens when a disciplined process meets intelligent automation.

By starting to measure what truly matters—reallocated hours, deal capacity, and capital drag—fund managers can turn ROI from a spreadsheet abstraction into a tangible, strategic advantage.

By Ankita Mehta Founder, Lexity.ai — a platform that helps litigation funds automate deal execution and prove ROI.

Case Developments Commercial

Burford Capital’s $35 M Antitrust Funding Claim Deemed Unsecured

By John Freund |

In a recent ruling, Burford Capital suffered a significant setback when a U.S. bankruptcy court determined that its funding agreement was not secured status.

According to an article from JD Journal, Burford had backed antitrust claims brought by Harvest Sherwood, a food distributor that filed for bankruptcy in May 2025, via a 2022 financing agreement. The capital advance was tied to potential claims worth about US$1.1 billion in damages against meat‑industry defendants.

What mattered most for Burford’s recovery strategy was its effort to treat the agreement as a loan with first‑priority rights. The court, however, ruled the deal lacked essential elements required to create a lien, trust or other secured interest. Instead, the funding was classified as an unsecured claim, meaning Burford now joins the queue of general creditors rather than enjoying priority over secured lenders.

The decision carries major consequences. Unsecured claims typically face a much lower likelihood of full recovery, especially in estates loaded with secured debt. Here, key assets of the bankrupt estate consist of the antitrust actions themselves, and secured creditors such as JPM Chase continue to dominate the repayment waterfall. The ruling also casts a spotlight on how litigation‑funding agreements should be structured and negotiated when bankruptcy risk is present. Funders who assumed they could elevate their status via contractual design may now face greater caution and risk.

Commercial

Manolete Partners PLC Posts Flat H1 as UK Insolvency Funding Opportunity Grows

By John Freund |

The UK‑listed litigation funder Manolete Partners PLC has released its interim financial results for the half‑year ended 30 September 2025, revealing a stable but subdued performance amid an expanding insolvency funding opportunity.

According to the company announcement, total revenue fell to £12.7 million (down 12 % from £14.4 million a year earlier), while realised revenue slipped to £14.0 million (down 7 % from £15.0 million). Operating profit dropped sharply to £0.1 million, compared to £0.7 million in the prior period—though excluding fair value write‑downs tied to the company’s truck‑cartel portfolio, underlying profit stood at £2.0 million.

The business completed 146 cases during the period (up 7 % year‑on‑year) and signed 146 new case investments (up nearly 16 %). Live cases rose to 446 from 413 a year earlier, and the total estimated settlement value of new cases signed in the period was claimed to be 31 % ahead of the prior year. Cash receipts were flat at about £14.5 million, while net debt improved to £10.8 million (down from £11.9 million). The company’s cash balance nearly doubled to £1.1 million.

In its commentary, Manolete emphasises the buoyant UK insolvency backdrop — particularly the rise of Creditors’ Voluntary Liquidations and HMRC‑driven petitions — as a tailwind for growth. However, the board notes the first half was impacted by a lower‑than‑average settlement value and a “quiet summer”, though trading picked up in September and October. The firm remains confident of stronger average settlement values and a weighting of realised revenues toward the second half of the year.