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 SUMMARY
- As the litigation finance industry matures, there will be more competition, more fragmentation and more specialization
- Competitive advantages will be necessary for managers to differentiate themselves in the marketplace and produce strong risk-adjusted returns
- Managers should institutionalize their “edge” to create equity value for themselves, and separate the value of their organizations from the principals running it
INVESTOR INSIGHTS
- Investors should be looking for managers that have some advantage, or “edge” vis-à-vis their competition; an informational advantage is one approach
- Funders should be open-minded about their diligence process, and experiment with non-conventional approaches to add value to the case
- Informational advantages may be particularly beneficial in collections and enforcements
In the capital markets industry, there is a concept referred to as “edge”, which can be defined as any legal form of information, insight or proprietary process or knowledge which an investor possesses that allows him or her to outperform peers and generate alpha. Investors look for managers with “edge” as a point of differentiation, and as a means to lower risk and enhance returns in a given investment strategy.
In thinking about how a litigation funder can develop ‘edge’, one option is to acquire an informational advantage that enables the funder to invest where others do not dare to tread, or avoid investing where the path is well worn. One way to obtain an informational advantage is to look where others are not looking. Today, we have at our disposal the world’s largest accessible database free for anyone to access – the worldwide web. We also have the so-called “dark web”, where fewer dare to participate, but which may possess insights nonetheless.
In order to get a better perspective on the nuggets of gold that lie within the web, I decided to reach out to Cameron Colquhoun of NEONCentury, a UK-based intelligence firm, to better understand how the litigation finance community may be able to generate edge.
The Web….
In some ways, little has changed about our use of the internet in 30 years: we all still use screens, keyboards and mice to open windows and browser pages. What has changed, without exception, is the size of the world behind our screens – which is far bigger than our brains and imaginations can appreciate. As of 2016, Google revealed it knew of 130 trillion web pages, and the real number today is likely to exceed 200 or 300 trillion. To put it another way; as the Head of Security at Twitter pointed out back in 2011, one-in-a-million events happen on the internet every second, and one in a billion events happen almost as frequently.
It is a mathematical near-certainty that within all of this data, game-changing intelligence is sitting there, waiting to be found – vital to the success of any litigation. The truth is, very few law firms or investors understand this reality, and therefore rarely ever engage or commission the type of intensive, detailed online investigations that are required to push the confidence intervals of success up by 1, 2, 5, 10 or even 20%. In the biggest cases, this can mean tens if not hundreds of millions of dollars of difference in settlement.
…and the Dark Web
The dark and unindexed web is another part of the web that is as yet untouched by both law firms and litigation finance. In particular, leaked data and data ‘dump’ sites hold huge amounts of pivotal intelligence. The most prominent case of leaked data to date is of course the Panama Papers, where millions of files belonging to a single Panamanian law firm were leaked online and led to over $1.2bn in recoveries (the real figure is likely to be far higher, as most countries do not make settlement data public). Dozens of prominent individuals had their assets exposed, and with millions of documents available to research – many more hidden assets and frauds are likely to be revealed amongst the 11.5 million files. Every time a new major leak is released online, (more recently BlueLeaks and 29Leaks), law firms or litigation financiers should be feverishly combing through its contents looking for angles.
Case Study
At NEONCentury, we are often tasked with conducting investigations prior to a potential litigation. In one case, a hedge fund asked for our help as they believed a group of CEOs were meeting in secret, and were considering a litigation. This global company, they suspected, was going to be sold for several billion below market value in some kind of backroom boys club deal.
Using our data capabilities, we tracked the private jets owned by those who attended these meetings, but the planes were delisted from public view (this is known as a BARR / LADD request and often used by CEOs and Ultra High Net Worth investors for anonymity).
BARR-listed jets do not appear on sites like FlightRadar and FlightAware. However, these aircraft, by law, must emit radio signals (ADS-B) data, and using the right online databases and sources, the aircraft can be tracked and historical manifests can be discovered. We were able to conclusively prove that the private jets belonging to three members of the secret meetings were all on the same runways at multiple times and locations, giving our client a route to a potentially multi-billion dollar litigation.
It is difficult to imagine a single law firm on the planet that would have these capabilities in-house, or even understand the ‘art of the possible’ when it comes to open data.
Today, litigation financiers allow law firms to manage the research and investigation sides of a case, hoping that either the law firms’ in-house research teams or external corporate intel firms might yield further intelligence to tip the outcome in their favour. Law firms are not known for their technological prowess or understanding of the internet, generally, and therefore the litigation finance world may be missing real value in allowing law firms to manage the technical and cyber side of a case on their behalf.
…the “Edge”
If investors can accept that game-changing intelligence for any litigation is out there in the public domain, they may be better-prepared to commission this research directly with corporate investigations firms *before* any litigation is even considered. Investors would then be forearmed with a much stronger hand when they engage both law firms and claimants.
This approach would greatly improve the ROI of litigation finance, and is analogous with the world of hedge funds and short-sellers. Many of these firms spend months or years investigating a company, searching for hidden value or opportunity. In the case of Wirecard, hedge funds discovered evidence of fraud just by conducting deep online investigations of Wirecard’s clients. Some walked away with billions in returns on this research.
There is no reason why the same approach cannot be applied to the world of litigation finance: forward-thinking investors, who understand the power of corporate intelligence and the scale of the internet, can partner with world class investigators, and take these results to the right law firms to alter the course of multimillion and multibillion-dollar litigations.
Investor Insights
As the litigation finance industry matures, there will be a significant increase in managers who are attracted by the returns inherent in the industry, and the intellectual challenge of applying their litigation craft in another application. The industry will scale, fragment and specialize. This will make it more difficult for fund managers to differentiate their approach and value. Forward-thinking managers should be looking at ways to create “edge” for themselves to attract institutional capital and generate superior risk-adjusted returns. An informational advantage is one such way to create “edge”.
As always, I am open to criticism and other points of view, so feel free to contact me to exchange ideas.
Edward Truant is the founder of Slingshot Capital Inc., an investor in the litigation finance industry (consumer and commercial) and a former partner in a private equity. Ed is currently designing a new fund focused on institutional investors who are seeking to make allocations to the commercial litigation finance asset class.
Cameron Colquhoun is the founder of Neon Century, a former UK intelligence officer and winner of the Fulbright Award for Cyber Security. Neon Century is an elite corporate intelligence firm based in London, providing clients in the hedge fund, equity and litigation sectors with decisive advantage.
