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Commercial Special Features

Why Litigation Finance is Suited to Public Markets

August 28, 2019

Why Litigation Finance is Suited to Public Markets

The following was contributed by Nick Rowles-Davies, Executive Vice Chairman of Litigation Capital Management (LCM). The recent and well documented attacks by activist short-seller Muddy Waters on Burford Capital have brought litigation finance into the limelight. Whilst largely focussed on Burford’s accounting methods and corporate governance, the hedge fund’s accusations have raised concerns around the practices and legitimacy of the industry more broadly. One key question raised is around whether funders should even be listed on a public market. More pointedly, why can companies with questionable governance practices, an unpredictable revenue forecast, and operating in an industry with limited access to a secondary market against which claims can be evaluated, be listed? A lot of this is down to varying levels of understanding around Burford’s accounting practices, and indeed those of the wider industry. It is important to recognise that while there are many companies operating in the growing litigation finance space, they do not all do the same thing, or account the same way and shouldn’t all be tarred with the same brush. Fair value accounting – adopted by Burford and others under IFRS 9, is not an evil. But the application of it does matter. There are differing ways of adopting fair value accounting and how it is used is ultimately a management team decision. The accounting treatment for litigation projects varies across the industry and some approaches are more reliant on subjective judgement by management teams than others. For a clear representation, fair value numbers should always be given alongside historical cash accounting figures, so investors and counterparties are able to see the underlying performance of the business. It is vital that funders are fully transparent and have numbers that can be easily verified and valued externally. In practice, this entails the development of a fair value accounting method that can be scrutinised and tested by external parties. This probably results in lower valuations than management may have reached alone. But ultimately, as we’ve seen over the past fortnight, it is prudent to be cautious and conservative. The importance of disclosure to shareholders and clients cannot be underestimated. Subject to the right application of fair value accounting, there are several significant advantages to being listed – relating to transparency, regulation and access to capital – that make it a highly appropriate model for funders. Being listed on any stock exchange ensures a level of regulation and transparency that the private markets do not. We say this with some authority having been listed on both a main market (the Australian Securities Exchange) and the Alternative Investment Market (“AIM”). Our experience has been that there is little difference in standards and accountability between the two. As a constituent of a public market, there is pressure to ensure that standards of corporate governance are upheld. Natural checks exist to hold companies to account in the form of selling investors, analysts publishing negative research, and, at the most extreme level, activists or short sellers publicly targeting companies. What’s difficult is that there is no formal regulation of the litigation finance sector, although its introduction in multiple jurisdictions is inevitable in time. It is hard to predict what form it will take, but I have no doubt that respectable funders will welcome it when it arrives, and we should do. In the meantime, our listed status provides a platform through which we can continue to meet regulatory standards. This is particularly important for firms like LCM looking to fund corporate portfolio transactions. Naturally, sophisticated corporates have stringent KYC protocols, and being listed demonstrates a level of oversight and transparency around where your capital is coming from, often in stark contrast to some. Furthermore, litigation finance is capital-intensive by its very nature and being listed provides funders with access to public sources of capital in the equity and bond markets. Equity raises provide funders with permanent capital to invest from the balance sheet, thereby avoiding any potential liquidity mismatches that might occur with some alternative fund structures. It also means investors of all types (from institutions to individuals) can gain access to the asset class’s attractive, uncorrelated returns. There will be a failure in this industry soon. This will be in large part due to the use of contingent revenues to hide loss positions, as well as funders being over reliant on one part of the market, such as single case investments. This is clearly not a sustainable business model and further illustrates the need for the considered use of fair value accounting. Recent events have been no help to the ongoing education process around the benefits of legal finance generally. It is a rude awakening that the practices of one business in our industry have raised so many questions around the governance and reporting of its peers. It will take time for the jitters to settle. In the meantime, the regulatory oversight that being a listed company provides should be seen as a positive. Nick Rowles-Davies is Executive Vice Chairman of Litigation Capital Management (LCM) and leads the company’s EMEA operations.

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UK Government Signals Funding Crackdown in Claims Sector Reform

By John Freund |

The UK government has signalled a renewed regulatory focus on the claims management and litigation funding sectors, as part of a broader effort to curb what it characterises as excessive or speculative claims activity. The move forms part of a wider review of the consumer redress and claims ecosystem, with third-party funding increasingly drawn into policy discussions around cost, transparency, and accountability.

An article in Solicitor News reports that ministers are examining whether litigation funding and related financial arrangements are contributing to an imbalance in the claims market, particularly in mass claims and collective redress actions. While litigation funding has historically operated outside the scope of formal regulation in England and Wales, policymakers are now considering whether additional oversight is required to protect consumers and defendants alike. This includes potential scrutiny of funding agreements, funder returns, and the role of intermediaries operating between claimants, law firms, and capital providers.

The renewed attention comes amid political pressure to rein in what critics describe as a growing “claims culture,” with the government keen to demonstrate action ahead of future legislative reforms. Industry stakeholders have cautioned, however, that overly restrictive measures could limit access to justice, particularly in complex or high-cost litigation where claimants would otherwise be unable to pursue meritorious claims. Litigation funders have long argued that their capital plays a stabilising role by absorbing risk and enabling legal representation in cases involving significant power imbalances.

While no formal proposals have yet been published, the article suggests that funding models linked to claims management companies may face particular scrutiny, especially where aggressive marketing or fee structures are perceived to undermine consumer interests. Any regulatory changes would likely build on existing reforms affecting claims management firms and contingency-style legal services.

Case Developments Commercial

Litigation Lending Funds Woolworths Shareholder Class Action

By John Freund |

Litigation Lending Services Limited has agreed to fund a large-scale shareholder class action against Woolworths Group Ltd, adding another high-profile Australian securities claim to the growing docket of funded investor litigation. The proceeding has been filed in the Federal Court of Australia by Dutton Law and focuses on Woolworths’ alleged failure to properly disclose the financial impact of widespread employee underpayments over a lengthy period.

Litigation Lending's website notes that the claim covers shareholders who acquired Woolworths shares between 26 February 2010 and 8 September 2025. It alleges that Woolworths did not adequately record and account for employee entitlements owed to salaried staff, resulting in financial statements that understated expenses and overstated profits. According to the pleadings, these accounting issues had the effect of artificially inflating Woolworths’ share price, causing losses to investors once the extent of the underpayments began to emerge through company disclosures.

Woolworths has previously acknowledged underpayment issues across its workforce, announcing remediation programs and provisions running into the hundreds of millions of dollars. The class action contends that the company’s disclosures came too late and failed to provide the market with an accurate picture of its true financial position during the relevant period. Investors who purchased shares while the alleged misstatements were in place are now seeking compensation for losses suffered when the share price adjusted.

Participation in the class action is open to eligible shareholders on a no-cost basis, with Litigation Lending covering the legal costs of running the claim. Any funding commission or reimbursement payable to the funder would be subject to approval by the court, consistent with Australia’s regulatory framework for funded class actions.

Commercial Regulatory Issues

Federal Legislation Targeting Foreign Litigation Funders Raises Industry Alarm

By John Freund |

A new federal bill seeking to restrict foreign investment in U.S. litigation is drawing sharp criticism from international litigation funders who warn the measure could significantly disrupt the industry. The legislation, introduced by Rep. Ben Cline (R-Va.), would prohibit sovereign wealth funds from backing U.S. lawsuits and impose disclosure requirements on overseas investors participating in American litigation.

According to Bloomberg Law, the proposed bill (H.R. 2675) has major implications for prominent funders including Burford Capital, Fortress Investment Group, Omni Bridgeway, Ares Management, and BlackRock. Susan Dunn of UK-based Harbour Litigation Funding characterized the current political climate as increasingly "anti-foreign," suggesting that international funders are now reassessing their U.S. growth strategies in light of the legislative push.

The bill advanced from the House Judiciary Committee with a 15-11 vote in favor of recommending it to the full House. Supporters of the legislation argue that foreign investment in U.S. litigation raises national security concerns and could allow hostile nations to influence American legal proceedings. Critics counter that the measure unfairly targets legitimate business practices and could reduce access to justice by limiting available capital for plaintiffs pursuing meritorious claims.

The legislation represents the latest effort in a years-long campaign by insurance industry groups and business organizations to increase regulation of third-party litigation funding. If enacted, the restrictions on foreign investment could reshape the competitive landscape of the U.S. litigation finance market, where international funders currently play a significant role.