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Implications of Portfolio Financings on Litigation Finance Returns

The following article is the first in 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

  • Portfolio financings represent as much as 62% of all US commercial litigation finance investments
  • Strong growth trend for Law Firm and Corporate portfolios
  • Law firms recognize the inherent value in incubating portfolios
  • Not prevalent in non-contingent fee jurisdictions

Investor Insights

  • Potential effect of reducing overall investor returns relative to a portfolio of single case risks
  • Investors benefit from better risk-adjusted returns than single case investing
  • Cross-collateralized nature significantly reduces risk & shifts value to law firm
  • Portfolio financings may limit upside potential for investors
  • Review the portfolio composition (single vs. portfolio), past and future, to set return expectations.

One of the most significant trends in litigation finance for fund managers over the last few years has been the strong trend toward “portfolio financings”. Litigation finance can be broadly segmented between single case investments and portfolio financing investments. Single case is a reference to the provision of litigation finance to a single litigation, the outcome of which is completely dependent on the idiosyncratic case risk and binary litigation process risk.  Portfolio financing is a reference to the aggregation and cross-collateralization (typically) of a portfolio of cases, whether Law Firm or Corporate, whereby the results are determined by the performance of the portfolio as opposed to a single case. The trend has been so significant, that according to WestFleet’s 2019 Buyer’s Guide, Law Firm portfolio financings now account for 47% of capital commitments and Corporate portfolios account for 15% of commitments, for an aggregate of 62% of the commitments of the US industry.

Why is Portfolio Financing Growing So Quickly? 

  1. The primary growth driver of portfolio financings is that the industry, arguably, started in the area of single case financings and is now evolving its offerings into a more complex and larger area of litigation finance. It is typical for an industry to begin with the financings of single exposures, and then as the industry gets more comfortable and gains deeper experience, it evolves into other larger applications like portfolio financing.
  2. The second driver is that as litigation funders have expanded their capital base, they have had to look further afield in terms of where they can effectively invest their capital at scale. To this end, portfolio financings are an ideal way for litigation funders to put large amounts of capital to work quickly and in a better risk-adjusted way than undertaking the laborious task of assembling a series of single case investments into a portfolio.
  3. One of the knocks against litigation finance is a low degree of capital deployment. Managers are motivated to reduce risk by slowly investing capital into the case in a measured way so as to mitigate loss of capital. Unfortunately, this negatively impacts the amount of capital they deploy and is inversely proportional to the effect their management fees have on returns. Portfolio financings, on the other hand, allow litigation funders to commit large amounts of capital and also expedite the deployment of capital, as they typically replace dollars that have been deployed (actual or notional) previously by the law firm. One could view a portfolio as a series of cases that have been ‘incubated’ by the law firm, and are now ready to be invested in by a litigation funder.
  4. Law firms have, astutely, come to realize there is value in (i) originating cases, arguably one of the most difficult and expensive services litigation funders provide, and (ii) applying modern portfolio theory to a series of cases and cross-collateralizing the pool, both to the benefit of the law firm. Progressive law firms married the new availability of large amounts of capital with the value inherent in their incubated portfolios and parlayed that into significant portfolio financings at a reasonable cost of capital, thereby capturing some of the economics for themselves.
  5. As awareness for litigation finance has grown throughout the legal community, awareness has also grown for plaintiff bar firms with large portfolios of cases. This market has also evolved and extended into corporate portfolios (LCM, an Australian litigation finance manager, is actively pursuing corporate portfolios). Accordingly, the increased awareness of the industry in general has also increased awareness for portfolio financing opportunities.

What Does it All Mean for Investors in the Asset Class?

The following quote from Burford’s 2018 capital markets event sums it up nicely:

“When we moved from single cases to portfolio investments, people wondered whether returns would decline, but they went up”

This statement suggests that on a risk-adjusted basis, portfolio financings deliver superior outcomes. However, when you look at Burford’s return profile over a long period of time, you will see that relatively few single case investments contributed to their overall multiple of capital, with the Pedersen & Teinver claims being considerable contributors. In fact, the size of the gross dollar returns of these single case investments dwarfs the rest of the portfolio and skews the overall results. Burford makes the point in their disclosures that removing these outliers disrupts the core of their strategy, which is more akin to venture capital. As with all portfolios, one needs to assess the outliers. Yet having witnessed a large number of portfolio results, I would suggest the return profile of a portfolio is more aligned to the approach, strategy, size and nature of cases in which the manager has chosen to invest, as opposed to the notion that portfolio financings produce inherently superior results than investing in a cross-section of single cases. Some funders produce very consistent results in terms of returns and duration, whereas other strategies are more volatile; it just depends on what risk profile you are willing to accept (i.e. are you looking for venture capital or leveraged buy-out type returns).

I think it is fair to say that the public domain lacks enough data to determine whether portfolio financings are better risk-adjusted returns than a diversified portfolio of single cases. However, when you consider that most portfolio financings are cross-collateralized, this single feature does have a significant impact on risk. The question then becomes how much return does the Law Firm or Corporation extract for delivering a fully originated portfolio with cross-collateralization features.

I would expect that over a large portfolio of transactions, portfolio financings will outperform in terms of returns in relation to volatility, and that single cases will outperform in terms of returns, but at the expense of higher volatility. The other aspect that is difficult to control in comparing results of two sets of portfolios is whether the nature of the cases (case type, life cycle, jurisdiction, size, etc.) are common across the single case control group and the portfolio financings group.

We may never know the answer, but logic dictates that portfolio financings should be lower returning, lower volatility investments, as compared to a portfolio of single cases – the key difference being the cross-collateralization feature.

Investor Insights

When reviewing fund manager results one should look closely at the composition of the portfolio to understand what portion is being derived from portfolios compared to single cases.  It will also be important to note the trending in these case types.  If the manager is scaling its operations, as many currently are, their motivations are to deploy large amounts of capital quickly in large portfolios with lower risk.  While this is a prudent approach for the manager, one then has to determine whether the historic return profile based on a portfolio of single case exposures is indicative of a future portfolio which will be mainly comprised of portfolio financings.  The portfolio financings will have a different risk-reward dynamic and so investors will need to model their return expectations accordingly.  Either way, I expect the return profile for litigation finance to remain robust both in the areas of single cases and portfolios and continue to believe that diversification is a key success factor to prudent investing in the commercial litigation finance asset class.

Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.

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Community Spotlights

Community Spotlight: Dean Gresham, Managing Director, Certum Group

Dean Gresham is a Managing Director who oversees the evaluation, underwriting, and risk management of all the company’s risk transfer solutions, including litigation finance and contingent risk insurance. With 25 years of experience in complex litigation and legal risk analysis, Dean ensures rigorous underwriting standards and strategic risk mitigation across the company’s risk transfer solutions.

Before joining Certum Group, Dean was a trial lawyer for more than 21 years handling complex commercial, catastrophic injury, qui tam, and class action litigation across the country. While practicing, Dean litigated on both sides of the docket and developed a keen ability to analyze and assess risk from both the plaintiff’s and defendant's unique perspectives.

In 2020, Dean was awarded the Elite Trial Lawyer of the Year award by the National Law Journal for his trailblazing work on a complicated wrongful adoption case. Dean is consistently chosen by his peers as a Texas Super Lawyer (2009-2024); one of the Best Lawyers in Dallas by D Magazine (2009-2024), one of the Top 100 Trial Lawyers in Texas by the National Association of Trial Lawyers (2011-2024), and in the Nation’s Top One Percent by the National Association of Distinguished Counsel (2019-2024).

Dean is the 2025 Chair of the Dallas Bar Association's prestigious Business Litigation Section and sits on the DBA’s Judiciary Committee.

Company Name and Description: Certum Group offers a next-generation litigation risk transfer platform that provides bespoke solutions for companies, law firms, and funders facing the uncertainty of litigation. Latin for “certainty,” Certum represents the core benefit the company delivers to its clients across its entire suite of risk transfer solutions.  Certum is the full-service funding and insurance partner for law firms and their business clients.

Company Website: www.certumgroup.com

Year Founded: 2014 

Headquarters:  Plano, Texas

Area of Focus: Member: Head of Underwriting and Chair of the Investment Committee.

Member Quote: “Litigation funding doesn’t just fuel cases—it fuels justice. Power should never trump merit.”

Commercial Special Features

Highlights from LFJ’s Virtual Town Hall: Investor Perspectives

By John Freund and 4 others |

On March 27th, LFJ hosted a virtual town hall featuring key industry stakeholders giving their perspectives on investment within the legal funding sector. Our esteemed panelists included Chris Capitanelli (CC), Partner at Winston and Strawn, LLP, Joel Magerman (JM), CEO of Bryant Park Capital, Joe Siprut (JSi), Founder and CEO of Kerberos Capital, and Jaime Sneider (JSn), Managing Director at Fortress Investment Group. The panel was moderated by Ed Truant (ET), Founder of Slingshot Capital.

Below are highlights from the discussion:

One thing that piqued my interest recently was the recent Georgia jury that awareded a single plaintiff $2.1 billion in one of 177 lawsuits against Monsanto. What is your perspective on the health of the mass tort litigation market in general?

JSn: Well, I think nuclear verdicts get way more attention than they probably deserve. That verdict is going to end up getting reduced significantly because the punitive damages that were awarded were unconstitutionally excessive. I think it was a 30 to 1 ratio. I suspect that will just easily be reduced, and there will probably be very little attention associated with that reduction, even though that's a check that's already in place to try to prevent outsized judgments that aren't tied as much to compensatory damages. I expect Monsanto will also likely challenge the verdict on other grounds as well, which is its right to do.

The fact is, there are a whole number of checks that are in place to ensure the integrity of our verdicts in the US legal system, and it's already extraordinarily costly and difficult for a person that files a case who has to subject himself to discovery, prevail on motions to dismiss, prevail on motions for summary judgment, win various expert rulings related to the expert evidence. And even if a plaintiff does prevail like this one has before a jury, they face all sorts of post-trial briefing remedies that could result in a reduction or setting aside the verdict, and then they face appeals. The fact is, I think corporate defendants have a lot of ways of protecting themselves if they choose to go to trial or if they choose to litigate the case.

And I think, oftentimes when people talk about the mass tort space, their disagreement really isn't with a specific case, but with the US Constitution itself, which protects the right to juries, even in civil litigation in this country. The fact is that there is a rich tradition in the United States that recognizes tort is essential to deterring wrongdoing. And ensuring people are fairly compensated for the injuries that they sustained due to unsafe products or other situations. So, broadly speaking, we don't think in any systematic a way that reform is required, although I suspect around the margins there could be modest changes that might make sense.

Omni has made a number of recent moves involving secondary sales and private credit to improve their earnings and cash flow. What is your sense of how much pressure the industry is under to produce cash flow for its investors?

JM: I think there is some pressure for sure, but more than pressure, I think it's a natural thing for self-interested managers to want to give their investors realizations so that they can raise more capital, right?

So, even if no one had ever told me, boy, it would be nice to get money back at some point in the future, that would obviously still be what I'm incentivized to do because the sooner I can get realizations and get cash back, the sooner people can have confidence that, wow, this actually really works, and then they give you 2x the investment for the next vehicle.

So the pressure is, I think, part of it. But for a relatively new asset class like litigation finance, which is still in middle innings, I think, at most, you want realizations. You want to turn things over as quickly as you can, and you want to get capital back.

In terms of what ILFA is doing, do you feel like they're doing enough for the industry to counter some of the attacks that are coming from the US Chamber of Commerce and others?

CC: I think there has been a focus from ILFA on trying to prevent some of the state court legislation from kind of acting as a test case, so to speak, for additional litigation. So there's been, you know, they've been involved in the big stuff, but also the little stuff, so it's not used against us, so to speak.

So I think in that regard, it's good. I wonder at what point is there some sort of proposal, as to if there's something that's amenable, is there something that we can all get behind, if that's what's needed in order to kind of stop these broad bills coming into both state legislatures and Congress. But I think overall, the messaging has been clear that this is not acceptable and is not addressing the issue.

Pretium, a relative newcomer to the market, just announced a $500 million raise. At the same time, it's been rumored that Harvard Endowment, which has traditionally been a significant investor in the commercial litigation finance market, is no longer allocating capital to the Litfin space. What is your sense of where this industry continues to be in favor with investors, and what are some of the challenges?

JSi: On the whole, I think the answer is yes, it continues to be in favor with investors, probably increasing favor with investors. From our own experience, we talk to LPs or new LPs quite frequently where we are told that just recently that institution has internally decided that they are now green lighting initiatives in litigation finance or doing a manager search. Whereas for the past three or four years, they've held off and it's just kind of been in the queue. So the fact that that is happening seems to me that investors are increasingly interested.

Probably part of the reason for that is that as the asset class on the whole matures, individual managers have longer track records. Maybe certain managers are on their third or fourth vintage. And there are realized results that can be put up and analyzed that give investors comfort. It's very hard to do that on day one. But when you're several years into it, or at this point longer for many people, it becomes a lot easier. And so I think we are seeing some of that.

One of the inherent challenge to raising capital in the litigation finance asset class is that even just the term litigation finance itself is sort of shrouded in mystery. I mean, it's very unclear what that even means and it turns out that it means many different things. The media on the whole, not including LFJ obviously, but the media on the whole has not done us many favors in that regard because they often use the term litigation finance to mean one specific thing, oftentimes case finance, specific equity type risk on a single case, when in fact, there are many of us who do all kinds of different things: law firm lending, the credit stuff, the portfolio finance stuff. There's all kinds of different slivers. And so the effect of that is that an LP or factions within an LP may have a preconceived notion about what litigation finance is, which is completely wrong. And they may have a preconceived notion of what a particular manager's strategy is. That's completely wrong.

I also think that litigation finance provokes an almost emotional reaction sometimes. It's often the case that investments get shot down because someone on the IC says that they hate lawyers, or they got sued once, and so they hate lawyers. And so they want nothing to do with litigation finance. And so whether that's fair or unfair is irrelevant. I think it is something that is a factor and that doesn't help. But I'd like to think that on the whole, the good strategies and the good track records will win the day in the end.

The discussion can be viewed in its entirety here.

Announcements Commercial Fundraising

Manolete Partners Announces New Revolving Credit Facility with HSBC Bank

By Harry Moran and 4 others |

Manolete Partners Plc (AIM:MANO), the leading UK-listed insolvency litigation financing company, is pleased to announce it has signed a new Revolving Credit Facility ("RCF") with its existing provider, HSBC UK Bank Plc ( "HSBC"). 

The new RCF provides Manolete with the same level of facility as the previous arrangement, at £17.5m. However, the margin charged to Manolete by HSBC on the new RCF is at a reduced rate of 4.0% (previously 4.7%) over the Sterling Overnight Index Average (SONIA) and has a reduced non-utilisation fee, from 1.88% to 1.40%. 

The new RCF is a 3.25-year facility with an initial maturity of 27 June 2028. Manolete has the option to further extend the facility on its current terms by an additional year. 

The covenants remain unchanged except for the Asset Cover covenant which has been relaxed for the next six months. 

Steven Cooklin, CEO commented: "We are delighted to have secured a new long-term commitment to the business from HSBC, which is testament to the strong partnership we have established since 2018. The improved terms of the facility demonstrate confidence in the Manolete business." 

This announcement contains inside information as defined in Article 7 of the Market Abuse Regulation No. 596/2014 ("MAR").