Managing Duration Risk in Litigation Finance (Pt. 1 of 2)

The following is the first of a two-part series, 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)

When you are speaking to an institutional investor about litigation, it doesn’t take long until the concept of “duration risk” enters the discussion.  Everyone seems to have a story about that one piece of patent litigation or commercial dispute that went on for over a decade that seems to have marked them for life even though they weren’t in any way involved.

Yet, it’s a real risk.  Thankfully, it’s not a real risk for a well-constructed portfolio of different case types in different jurisdictions, which is one of the reasons that prompted me to raise a commercial litigation finance fund-of-funds in 2016 – it will ultimately serve as a very good proxy or index for how the industry performs.

The whole concept of duration risk is critically important for investors in legal finance to understand, including ways in which duration risk can be managed in this specialized asset class.

Private alternative asset classes, such as litigation finance, always need to deal with duration as part of their fundraising pitch to investors as the investments are inherently illiquid investments.  This means that in order for investors to obtain their liquidity, their needs to be a mechanism to allow for that to happen.  Within most private equity sub-classes (venture capital, growth equity, leveraged buy-out, real estate, etc.) the exit is typically a sale of the business.  An argument is often made that there is always a clearing price for any private company and the path to liquidity is generally through an investment bank or intermediary that canvasses the market to search for the best price for that asset at any given point in time.  However, with litigation finance, the pool of capital providers is relatively small, the complexity is very high and the nascency of the market means that beyond the settlement of the case (either through negotiation or a court/arbitral decision) there are not many options. But that is changing…

Duration Risk

Let’s start by defining duration risk for purposes of litigation finance investing, as the risk that the time horizon of a given investment is different than that which was originally underwritten without a commensurate increase in economics.

Most Litigation Funding Agreements (or “LFA”s) have provisions to deal with duration risk such that the negotiated economics increase as time progresses, but often this ultimately gets capped as the claimant is concerned that the funder can end up with the lion’s share of the settlement amount.  Similarly, the funder does not want to put itself in a position where the claimant is not participating in the economic outcome of the claim, otherwise the claimant is wasting their time and effort (and stress). The two opposing forces work to keep each other “in check”.

And while the LFA is typically structured to mitigate this risk, there is the potential that the case simply takes much longer than originally thought and investors want to get their money back to redeploy into another, perhaps slightly more liquid, investment.  And this is where many investors, individual and institutional, who poured into the space since 2015 find themselves today.

Now, the duration risk inherent in commercial litigation is not to suggest they will rival Myra Clark Gaines (the longest-running civil lawsuit in the US at 57 years), but the difference between 5 years and 10 years can make a meaningful difference to an investor’s return profile if the economic benefits are not commensurate with the timeline extension.  While many funders quote an average hold period of 30+- months, one needs to be careful of the use of averages in litigation finance.  Many of those averages have been derived from the average length of settled cases only, which inherently ignore the duration of the unsettled cases, which is obviously not reflective of reality.

Since there are very few fully realized funds in existence globally, it is difficult to determine an actual industry average for litigation finance but I would confidently say that the average will in fact be greater than the 30-month time period often quoted.  The other thing to consider is that any average should be weighted based on dollars invested to ensure that the early settlements, which by definition would likely have fewer invested dollars, do not contribute disproportionately to the average.  The reality is that funders rely on the relatively early case wins to produce strong IRRs (albeit lower MOICs) in order to offset the IRR drag of those cases that are not successful and that exceed the average duration.

If we look at a case where the LFA calls for 3X multiple (200% return on investment) during the 3-year period and a 5X multiple (400% return on investment) thereafter, then the IRRs would look as follows for different durations:

Original InvestmentProceeds ReceivedDurationInternal Rate of Return
100300344%
100500538%
100500822%
1005001020%

The first two data points illustrate that where the cap on the proceeds move in lock-step with timing, it has little effect on IRRs. However, the last three data points illustrate the punitive impact that duration has on internal rates of return. When duration moves from 5 to 10 years for a fixed outcome the internal rate of return decreases by approximately half.

In addition to the duration necessary to get to a decision (after the potential for an appeal), you may then get caught up in additional enforcement and collection timelines which could add years and additional investment to the original investment proposition.  A good example of this is the “Petersen” & “Eton Park” claims that Burford invested in involving a claimant that is fighting Argentina & YPF over the privatization of energy assets without due compensation.

The Implications of Time on the Value of Litigation 

In a prior article written about the value of litigation, I describe how a piece of pre-settlement litigation starts off at the risky end of the spectrum due to a lack of information about the various parties’ positions, it then starts to de-risk as each side goes through discovery (approaching the optimal zone of resolution) and then the it starts to re-risk as each side becomes entrenched in their positions and pushes on to a third party decision.  This then leads to a bifurcation in value because the more the outcome of a case is dependent on the outcome of a disinterested third party (a judge, jury or arbitral panel) the more binary the outcome becomes as displayed in the chart below.

This of course begs the question, if the timeline of a lawsuit extends beyond its original timeline, what does this say about the value of the case itself? Is it that the case is seen as a win by both sides and therefore each side ‘digs in’ to ensure the other side loses (hence a more binary outcome), or is this just a reflection of healthy sparring between parties to delay the inevitable and increase the friction costs to force the claimant to drop its case?

Sadly, because every case has its idiosyncrasies and different personalities involved, we will never know the answer.  But what we do know is that any case that does get decided by a third party results in a binary outcome and as an investor “binary” doesn’t make for a good night’s sleep.

I have written about this issue in an article about secondary investing, and in that article I make the argument that secondaries, if not valued properly, likely have a higher risk profile then the rest of the portfolio in which they reside because they are moving into the re-risk zone which inherently has a higher level of binary risk attached thereto.  I think this is important for investors to understand because it suggests that if you are concerned about duration in a litigation finance investment, it is probably (although not always) in your best interest to get out earlier than later.  Of course, the counter-argument is that the longer the case has elapsed the more you know about its merits and how the other side has conducted itself during the case and so your case may in fact be less risky than when it started. However, in these cases you are going to be asking the secondary investor for a premium to reflect that fact and that means you need to convince them of the merits, the likely duration and any credit/collection risks, which is a difficult task by any measure.

We must also not lose sight of the fact that the longer a case proceeds, depending on the size and financial capacity of the defendant, the risk of collection may increase due to the financial condition of the defendant especially those with multiple lawsuits or those whose fortunes (profits and cashflow) are tied to more cyclical industries.  What looked like a good credit risk five years ago when the case commenced may look very different coming out of a recession or a commodity cycle.  Similarly, if the plaintiff is not of sound financial condition, the risk that the plaintiff runs out of money or interest in pursuing the case is also a risk that you are implicitly assuming.

Given that the secondary industry is in its infancy and there is very little in terms of empirical results on secondaries, it remains to be seen how secondary portfolios will perform but if I were an investor in the sector I would go in with ‘eyes wide open’ and a deep value mindset.  The reality of most litigation finance is that the economic benefits tend to be somewhat capped, and so whatever premium is paid on a secondary, it means it reduces the overall economics available to the secondary investor. Dissimilar to private equity where a secondary investor can still benefit from growth in the value of the underlying company it acquires, the same does not generally hold for litigation finance investments and in fact the risk is to the downside with most LFAs.

In the second article of this two-part series, we will look at the various ways in which investors can manage duration risk, both before they start investing and after they have invested.

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.”