Managing Duration Risk in Litigation Finance (Part 2 of 2)

The following is the second of a two-part series (Part 1 can be found here), contributed by Ed Truant, founder of Slingshot Capital,

Executive Summary

  • Duration risk is one of the top risks in litigation finance
  • Duration is impossible to determine, even for litigation experts
  • Risk management tools are available and investors should make themselves aware of the tools and their costs prior to making their first investment
  • Diversification is critical in litigation finance

Slingshot Insights:

  • Duration management begins prior to making an investment by determining which areas of litigation finance have attractive duration risks
  • Avoidance can be more powerful than management when it comes to duration in litigation finance
  • There is likely a correlation between duration risk and binary risk (i.e. the longer a case proceeds, the higher the likelihood of binary risk associated with a judicial/arbitral outcome)

In the first article of this two-part series, I provided an overview of some of the issues related to duration in the litigation finance asset class.  In this article, I discuss some of the ways in which investors can manage duration risk, both before they invest and after they have invested.

Managing Duration Risk

The good news is that there are many ways to manage duration risk in litigation finance and you can use the various alternatives in combination to create your own portfolio to mitigate the risk.

Before we look at how we can manage duration through an exit of an investment, let’s first explore how we can avoid duration risk before we even start investing.  That is to say which investments have lower levels of duration risk to begin with so we can avoid duration risk going into an investment.

Case Type Selection

On the commercial side, post-settlement cases have a low degree of duration risk as the litigation risk has mainly been dealt with through the settlement agreement and the resulting risks relate to procedural (generally timing) and collection risk.  Similarly, appeals finance is generally involved with cases that have less litigation risk as the issue at play is usually a specific point of law and the timeline for appeals tends to be relatively certain and short while the costs are fairly well defined.

Consumer litigation cases (think personal injury cases, other than mass torts) tend to have relatively dependable timelines and so this can be a very attractive area in which to invest with less duration uncertainty, but it does come with some ‘headline’ and regulatory risk.  Mass tort cases, which technically are consumer cases, have different dynamics because of the sheer size of the claims and the complexity of the multi-jurisdictional process which require test cases to prove out the merits and values of the cases.  So, I would view these as being similar to large commercial cases in terms of their dynamics with respect to duration. Other case types such as international arbitration and intellectual property disputes tend to have much longer durations in general and so avoiding these case types is a way to mitigate duration risk within a portfolio.

Case Sizes

Based on some statistical analysis I had prepared from funder results (my demarcation point between small and large was based on one million in financing) and on review of a large number of case outcomes of different sizes, there appears to be some correlation between the size of the financing and the duration of the case. Smaller financings (and presumably, but not necessarily, smaller cases) tend to have shorter durations than larger financings.  The correlation could result from the fact that litigation finance is more effective in smaller cases or that there is generally less at risk in smaller cases and hence rational parties tend to resolve things more quickly when there is less to squabble over.  The exact reason will never be known, but there does appear to be some statistical correlation to support the finding.  Accordingly, one way to manage duration risk would be to focus on smaller sized cases.

Case Jurisdiction Selection

Not all jurisdictions are created equal in terms of speed to resolution.  Accordingly, one might want to investigate the best venue for their cases given their portfolio attributes to ensure they are in jurisdictions where duration risk is lower than others.  Of course, jurisdictions don’t offer duration risk in isolation and so you will need to know what you are trading off by investing in cases in jurisdictions with a faster resolution mechanism as there will likely be trade-offs with economic consequences.  This could involve different countries, different states within a given country, and different judicial venues (arbitration vs. court).  There are even certain judges that progress through cases at a quicker clip and are less prone to allow for unnecessary delays.  Of course, you may not be able to pick your judge and even if you can there is no guarantee you will end up with the same one you started.

Case Entry Point 

If you are a fund manager, another way to manage duration risk on the front end, aside from case type selection, is to focus on those cases that are already in progress and therefore should have a shorter life cycle because you are entering them later in their life cycle.  While this doesn’t deal with the situation where the case goes on longer than anticipated, it does decrease the overall length of the case by deciding to enter it at a later stage, but then you don’t always have a choice when you enter a case as it may be presented to you at a particular point in time and then you may never get the opportunity to invest in it again.  In this sense you could suffer from adverse selection if you only selected late-stage cases as you are only investing into a subset of the broader market of available cases.

Liquid Investments

Another way to mitigate duration risk is to focus on a liquid alternative that provides similar exposure through the publicly-listed markets, which is a topic I covered recently in a two-part article which can be found here and here under the heading of Event Driven Litigation Centric (“EDLC”) investing.  EDLC has the distinct advantage of being liquid through a hedge fund structure that provides redemption rights which allows the investor to somewhat control duration although ultimate duration is typically dictated by the timing of the event itself.  Of course, as investors move into the public markets, they start to add correlation to their portfolio which may be at odds with your duration/liquidity objectives.

While it is beneficial to deal with duration risk on the front end through the case selection options outlined above, once an investor has concluded their investments, there are some options still available to deal with duration risk as outlined below.

Secondary Sales 

As the litigation finance industry has evolved, so to have the number of solutions in the marketplace.  While secondaries have been taking place informally for years (hedge funds, litigation funders, family offices, etc.) there has only recently been a formalizing of the secondary market and I am very keen to see how the early market entrant, Gerchen Capital, ultimately performs. Nevertheless, for managers and investors seeking liquidity and an end to duration risk entering into a secondary transaction may be a very viable solution.

I believe it will be more economically viable in the context of a portfolio sale than a single case investment, but I am sure there will be some level of appetite and valuation for both.  It may be the case that the investor does not obtain 100% liquidity for their position but rather risk shares alongside another investor who doesn’t want to suffer from adverse selection and thus makes it a condition of their secondary offer that the primary investor retain an ownership position.  Other situations may allow for complete liquidity, but that will likely come at an economic cost.  And there are even other times when the case is moving along exactly as planned and the primary investor is able to sell a portion of its investment at such a high valuation that it produces a return on its entire investment, which is the case with Burford and its Petersen/Eton Park claims, despite the fact that no money has exchanged hands between the plaintiff and the defendant and there is still no clear path to liquidity.

While selling a portion of an investment allows the manager to obtain some liquidity for its investors, it also serves to validate the value of the investment/portfolio to its own investors, which may in turn allow that manager to write-up its portfolio to the value inherent in the secondary sale transaction (again, this assumes that the transaction is completed with a third party investor).  As an investor, you really need to assess whether any secondary transaction is being undertaken for the intended purpose (liquidity or duration management) or whether there are alternative motivations at play (i.e. for the manager to post good return numbers to allow them to increase their chances of success at raising another fund).  And while third party validation may be comforting, too much comfort should not be derived by someone’s ability to sell an investment to another party, it could have more to do with sales acumen than the value of the underlying investment.

Insurance

Any discussion regarding litigation finance wouldn’t be complete without mentioning its close cousin, insurance.  In the early days of applying insurance to litigation finance, the focus was more on offsetting the risk of loss.  While that is still true today, there is an increasing focus being put on insurance as a way to deal with duration.  The thinking is that investors don’t want to get stuck in funds that take years beyond their original term to pay out and so they are prepared to accept the duration risk if there is a safety valve in place. The safety valve is the insurance which will pay out at the end of a defined term, which provides the investor with assurances that they will at the very least get their original principal repaid (and possibly a nominal return).  In essence, the insurance functions as a risk transfer mechanism between investor and insurer until the case is finally resolved. While it is more common to put insurance in place on making the investment, one could place insurance after the fact as well.

Slingshot Insights

 

Duration management in litigation finance is almost as critical as manager selection and case selection.  I believe duration management starts prior to making any investments by pairing your investment strategy and its inherent duration expectations with the duration characteristics of your investments.  From there, you should ensure your portfolio is diversified and you should be actively assessing duration and liquidity throughout your hold period.  You should also assess the various tools available to you both on entry and along the hold period to determine your optimum exit point.

As always, I welcome your comments and counterpoints to those raised in this article.

 Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.  Slingshot Capital inc. is involved in the origination and design of unique opportunities in legal finance markets, globally, advising and investing with and alongside institutional investors.

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Community Spotlight: James Koutoulas, CEO, JurisTrade & Typhon Capital Management

James Koutoulas is the CEO of JurisTrade as well its asset management affiliate, Typhon Capital Management, which is a multi-strategy hedge fund with US and Cayman private fund platforms. He is also Managing Member of Koutoulas Law, LLC, a law firm specializing in high-profile financial services litigation.

James founded Typhon in 2008 and it has since grown to 25 staff members, 15 (including many award-winning) trading strategies with operations in 4 countries and 8 cities. While running Typhon, he served as lead customer counsel in the MF Global bankruptcy, leading the recovery of all $6.7 billion in customer assets.

He has successfully litigated a multi-billion cryptocurrency fraud class action, a statistical arbitrage IP theft arbitration, a breach of contract jury trial against a billion-dollar asset management, and a capacity-rights guarantee contract dispute against a quantitative hedge fund. He is a frequent contributor to CNBC, thestreet.com, CoinDesk, and other prominent media outlets. He served on the Board and Executive Committee of the National Futures Association, the derivatives self-regulatory organization, where he helped implement the Dodd-Frank rules on the multi-trillion-dollar swaps market and has advised Congress on commodity and bankruptcy laws and regulations.

James has a JD from the Northwestern University School of Law with a securities concentration.

Company Name and Description: JurisTrade has designed a Litigation Asset Marketplace (operated by trading affiliate, Typhon Capital Management) to package and/or securitize litigation finance solutions to law firms, owners of bankruptcy, mass tort, and other litigation claims, and third-party investors looking for exposure to the asset class. JurisTrade offers a new and disruptive solution: it allows law firms, plaintiffs, and/or those with a financial interest in litigation the opportunity to sell or assign an interest in litigation outcomes to qualified investors in a much more efficient manner than is currently available.

Typhon Capital Management is a multi-strategy hedge fund specializing in tactical trading strategies designed to be uncorrelated to traditional markets under most market conditions and have strong negative correlation during periods of stress. Typhon dedicates itself to developing unique strategies that are truly differentiated and perform when almost everything else fails. Typhon uses unique, modular strategies as building blocks to design bespoke products to meet each investor’s individual needs.

Company Website: https://juristrade.com/ & https://typhoncap.com/

Year Founded: JurisTrade – 2023 & Typhon - 2008  

Headquarters:  1691 Michigan Ave Suite 200, Miami Beach, FL 33139

Area of Focus:  JurisTrade – Litigation Finance & Typhon Capital Management – Finance, Alternative Investments

Member Quote: “By adding standardization, liquidity, and transparency to the nascent but growing litigation finance market, we will institutionalize one of the final frontiers in asset management.”

Angeion Group Expands Mass Tort Litigation Management Capabilities Through Merger with Case Works

By Harry Moran and 4 others |

Angeion Group (“Angeion”), the industry leader in end-to-end group litigation support, announced today its merger with Case Works, a premier provider of case data management solutions, including client engagement, medical record retrieval, medical review, and inventory analysis. Neutral, but never passive, this strategic integration of Case Works reinforces Angeion’s forward thinking approach to providing seamless tech-enabled support for complex litigation firms and leading law departments, with efficiency and precision.

The merger of Angeion and Case Works follows majority investments into both companies by private equity firm Renovus Capital Partners (“Renovus”) in 2024. Angeion also acquired bankruptcy administration solutions provider Donlin Recano in late 2024. Renovus worked alongside the companies’ founders and management teams to unify the businesses and deliver a seamless experience for clients and employees throughout the integration.

Case Works has earned a reputation of excellence by ensuring accuracy, completeness, and applicability of case data to support legal requirements. By combining their core capabilities with Angeion’s advanced technology and data-driven approach, this merger further solidifies Angeion’s position as the most trusted partner for navigating complex, high-stakes litigation and settlements.

Effective large-scale litigation and settlements rely on comprehensive, well-organized data and the ability to apply that data effectively within the context of a particular project. Combining Case Works’ proven excellence in capturing and managing critical case information with Angeion Group’s expertise in technology, process efficiency and claims management, provides a more structured, more transparent, and more effective approach to large-scale litigation and settlement management.

“Case Works brings deep expertise and a proven track record of supporting firms with large data and medical record retrieval needs. They are known for their dedication to precision, care and bedside manner,” said Steven Weisbrot, CEO of Angeion Group. “Together, we are raising the bar for what clients can expect—faster, more accurate processes and a commitment to white glove service.”

Angeion Group and Case Works share a common vision: to set the new standard for how large-scale litigation and group settlement support can combine technological efficiency with thoughtful human interaction. Both organizations are driven by a commitment to innovation, precision, and efficiency and are mindful that litigants should expect and receive compassion and respect throughout the group litigation process. This merger will elevate industry standards and ensure that all parties, their council, and the courts benefit from a more streamlined, thoughtful and effective process.

“We’re excited to join forces with Angeion Group,” said Susan Barfield, Founder of Case Works. “Their commitment to innovation and client service aligns perfectly with our own, and we look forward to delivering even greater value to the firms and clients we support.”

“We’re honored to have partnered with these leading companies, building upon our strong track record in tech-enabled legal services,” added Lee Minkoff, Managing Director at Renovus. “We’d also like to thank founders Steve Weisbrot and Susan Barfield for their leadership throughout this game changing merger for the group litigation support industry.”

Angeion remains steadfast in its mission to completely modernize and optimize complex litigation management to the benefit of all stakeholders.

About Case Works

Case Works is the leading provider of tech-enabled litigation support solutions to the country’s premier plaintiff law firms. Based in Austin, Texas, the Company was created with a single mission: To Help Lawyers Help People. Case Works provides a full suite of case management services including claims qualification, intake, medical records retrieval & review, case development, and ongoing plaintiff engagement.

About Angeion Group

Angeion Group is a leading provider of legal notice and settlement administration services, leveraging advanced technology, proven best practices, and expert consulting to manage class actions, mass torts, and collective redress administration. Recognized for its innovation, efficiency, and unwavering client commitment, Angeion Group continues to redefine industry standards.

Nicola Horlick Pauses Digital Bank Launch to Raise Funds for Motor Finance Claims

By Harry Moran and 4 others |

As LFJ covered last week, the group proceedings being brought against motor finance providers over commissions paid to dealers is attracting a significant amount of interest across the legal funding industry, with the possibility of lucrative settlements to come. 

An article in Financial News features an interview with investment fund manager Nicola Horlick, who discusses her focus on litigation funding for the high-profile motor finance claims in the UK. Horlick, founder and CEO of Money&Co, explained that her company is currently raising funds to lend to law firms that are working on the car finance commission claims. Speaking about the significance of these claims to the wider legal funding industry, Horlick argued that “this is the biggest thing that is likely to happen in litigation funding in the next 15 years.”

The emphasis placed on raising funds for these claims has caused Horlick to pause her plans to launch a digital bank in 2025, with the fund manager explaining that they “don’t have the bandwidth to do the fundraise for that and the bank”. Horlick went on to state that fundraising for the claims “has to be the priority”, and that in the time before these claims begin to reach settlements, “we need to help clients amass as many claims as possible.”