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Key Takeaways from LFJ’s Special Digital Event “Litigation Finance: Investor Perspectives”

April 8, 2024

Key Takeaways from LFJ’s Special Digital Event “Litigation Finance: Investor Perspectives”

On Thursday April 4th, 2024, Litigation Finance Journal hosted a special digital event titled “Litigation Finance: Investor Perspectives.” The panel discussion featured Bobby Curtis (BC), Principal at Cloverlay, Cesar Bello (CB), Partner at Corbin Capital, and Zachary Krug (ZK), Managing Director at NorthWall Capital. The event was moderated by Ed Truant, Founder of Slingshot Capital. Below are some key takeaways from the event: If you were to pinpoint some factors that you pay particular attention to when analyzing managers & their track records, what would those be? BC: It’s a similar setup to any strategy that you’re looking at–you want to slice and dice a track record as much as possible, to try to get to the answer of what’s driving returns. Within litigation finance, that could be what sub-sectors are they focused on, is it intellectual property? Is it ex-US deals? What’s the sourcing been? How has deployment been historically relative to the capital they’re looking to raise now? It’s an industry that is starting to become data rich. You have publicly-listed companies that have some pretty interesting track record that’s available. I’m constantly consuming track record data and we’re building our internal database to be able to comp against. Within PE broadly, a lot of people are talking about DPI is the new IRR, and I think that’s particularly true in litigation finance. If I’m opening a new investment with a fund I’ve never partnered with before, my eyes are going to ‘how long have they been at it, and what’s the realization activity?’ There is also a qualitative aspect to this–has the team been together for a while, do they have a nice mix of legal acumen, investment and structuring acumen, what’s the overall firm look like? It’s a little bit art and science, but not too dissimilar from any track record analysis with alternative investment opportunities. Zach, you’ve got a bit more of a credit-focus. What are you looking for in your opportunities?  ZK: We want to understand where the realizations are coming from. So if I’m looking at a track record, I want to understand if these realizations are coming through settlements or late-stage trial events. From my perspective as an investor, I’d be more attracted to those late-stage settlements, even if the returns were a little bit lower than a track record that had several large trial wins. And I say that because when you’re looking at the types of cases that you’ll be investing in, you want to invest in cases that will resolve before trial and get away from that binary risk. You want cases that have good merit, make economic sense, and have alignment between claimant and law firm, and ultimately are settleable by defendants. That type of track record is much more replicable than if you have a few outsized trial wins. What are things that managers generally do particularly well in this asset class, and particularly poorly?  CB: I don’t want to paint with a broad brush here. With managers it can be idiosyncratic, but there can be structuring mistakes – not getting paid for extension risks, not putting in IRR provisions. Portfolio construction mistakes like not deploying enough and being undercommitted, which is a killer. Conversely, on the good side, we’ve seen a ton of activity around insurance, which seems to be a bigger part of the landscape. We also welcome risk management optionality with secondaries. Some folks are clearly skating to where the puck is going and doing more innovative things, so it really depends who you’re dealing with. But on the fundamental underwriting, you rarely see a consistent train wreck – it’s more on the other stuff where people get tripped up. How do you approach valuation of litigation finance portfolios? What I’m more specifically interested in is (i) do you rely on manager portfolio valuations, (ii) do you apply rules of thumb to determine valuations, (iii) do you focus your diligence efforts on a few meaningful cases or review & value the entire portfolio, and (iv) do you use third parties to assist in valuations?  CB: If you’re in a fund, you’re relying on the manager’s marks. What we do is not that – we own the assets directly or make co-investments. We see a lot of people approach this differently. Sometimes we have the same underlying exposure as partners and they’re marking it differently. Not to say that one party is rational and the other is not, it’s just hard to do. So this is one we struggle with. I don’t love mark-to-motion. I know there’s a tug toward trying to fair value things more, but as we’ve experienced in the venture space, you can put a lot of valuations in DPI, but I like to keep it at cost unless there is a material event. Check out the full 1-hour discussion here.

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Commercial

Commentary Argues Funding Disclosure Bills Would Weaken Small-Business Patent Enforcement

A new opinion piece defends third-party litigation funding as a precondition for small businesses and independent inventors being able to enforce their intellectual property rights, and argues that pending federal disclosure legislation would undercut them.

As reported by the Washington Examiner, the commentary is written by Kristen Osenga, chief policy counselor of the Inventors Defense Alliance and a professor of law at the University of Richmond School of Law. She frames funding as an access-to-justice question for the innovation economy rather than a question of litigation volume.

The piece points to two measures now before Congress: Representative Darrell Issa's Litigation Transparency Act and Senator Thom Tillis's Tackling Predatory Litigation Funding Act. Osenga argues that mandatory disclosure of funding arrangements would hand well-resourced defendants insight into a plaintiff's financial position and litigation strategy, giving them a means to outlast smaller opponents rather than resolve the merits.

Her economic case rests on the role small firms play in US innovation. Small businesses account for roughly 45% of US GDP, and smaller companies produce approximately 50% more patents per employee than large companies. Without outside capital, she contends, those inventors face infringement by parties who can afford to litigate indefinitely.

The commentary likens litigation funding to the contingency fee arrangement, a long-accepted mechanism for shifting cost risk away from claimants who cannot bear it. "The right to sue is only valuable if you can afford to exercise it," Osenga writes, casting the disclosure debate as one over who retains practical access to the courts.

Commercial

Pogust Goodhead Asks High Court to Rule Client Committee Cannot Remove It From Mariana Dam Case

Pogust Goodhead has escalated its dispute over control of the multi-billion-pound Mariana dam group action against BHP, taking the matter to the High Court rather than accepting the claimant committee's decision to change firms.

As reported by Legal Futures, the firm has applied for declarations that the committee had no contractual authority to terminate its retainer, no authority to direct a change in legal representation, and no authority to prevent it from instructing Quinn Emanuel for the damages phase of the claim.

The committee, made up of 17 members whose identities are confidential, decided in early September to move the claim to Bailey Glasser International, a joint venture between a firm run by former Pogust Goodhead staff and the US firm Bailey & Glasser. Pogust Goodhead had announced in June that it would instruct Quinn Emanuel on damages.

In a statement, the firm said that clients "are being encouraged to walk away from an established litigation structure on the representation that they can simply move to another firm with no material consequences."

The timing raises the stakes considerably. A damages trial listed for 22 weeks is only months away, and the underlying claim has been built on an extensively financed litigation structure whose economics depend on the identity of the firm carrying it to trial. The application asks the court to determine, in effect, who holds the contractual right to control the running of one of the largest group actions in the English courts, and on what terms a claimant committee can override the arrangements that funded it.

Commercial

Burford-Affiliated Investor Pursues $109M Claim Against Alberta Law Firm Over 2018 Funding Agreement

A Delaware investment vehicle closely affiliated with Burford Capital is pursuing a debt claim of roughly $109 million against Alberta lawyer Jeffrey Rath and his firm, Rath & Company, alleging default on a litigation funding agreement first entered into in 2018.

As reported by Global News, Diriba Investments LLC claims the firm defaulted two years ago on financing tied to First Nations and COVID-19 litigation, with the outstanding balance now standing at approximately $108.8 million plus interest and costs. Diriba acts as agent for co-funder Western Springs Investments LP, also a Delaware entity. A 2023 amendment expanded the agreement's scope to cover all claimant-side work at the firm, including First Nations treaty claims and litigation over COVID-19 restrictions.

The alleged breaches include failure to provide monthly reports, failure to keep the funders informed, failure to report or remit proceeds, non-disclosure of client terminations, and the granting of competing security to a separate Delaware entity, Vance SPV LLC. Diriba issued a default notice in November 2024 and, in late July 2026, served a formal demand alongside a notice of intention to enforce security under the Bankruptcy and Insolvency Act describing the firm as an "insolvent person."

The supporting affidavit was sworn by Paul Mysliwiec, Burford Capital's deputy general counsel, acting as Diriba's authorized representative. Burford did not respond to requests for comment, and Diriba's Calgary counsel declined to comment.

The claim runs alongside separate actions by the Tallcree and Sturgeon Lake First Nations alleging misappropriation of trust funds, a Mareva injunction freezing $8.5 million, and a court-appointed receiver. Diriba is seeking an expanded receivership mandate at a September 14 hearing in Calgary. The allegations have not been proven in court, and Rath denies wrongdoing.