Forget shares, litigation is the hot new asset class for investors. For companies that either cannot afford to bring a case or want to remove the risk of litigation costs from their balance sheets, it is an attractive way to pursue a legal action. For investors, third-party funding (TPF), as it is known, is an uncorrelated risk, meaning the investment’s prospects do not rise and fall with the economic waves.
TPF is a simple concept: a disinterested third party takes on the financial risk of another’s litigation in return for a cut of the damages. It sends powerful messages to the other side that the claimant’s pockets are deep, and a third party has taken an objective look at the case and thought it a likely winner.
There is now a mixed economy of litigation financing options and TPF has rapidly become established within that, encouraged by its development in Australia and Central Europe over the past decade. Concern that some sort of control needed to be exerted on a largely unregulated market, worth hundreds of millions of pounds, led to the recent publication of a voluntary code of conduct and creation of an Association of Litigation Funders, negotiated through the Civil Justice Council.
Hedge funds, private offices and other investors are seeing opportunities. There are two funders currently listed on AIM (the London Stock Exchange’s international market for smaller growing companies) – Burford Capital and Juridica – and a further one recently listed on the Channel Islands Stock Exchange, Argentum Capital, while listed Australian funder IMF also has interests in the UK. Then there is a group of funders with private backing, such as Calunius Capital, Harbour Litigation Funding, Therium and Vannin Capital. Recent new entrants to the market include private bank Investec.
Third-party funding has rapidly become almost exclusively a tool for businesses
Burford Capital, which has used its listing to raise around £200 million, making it the world’s largest litigation funder, has up to now only invested in US litigation and international arbitration, but recently announced the acquisition of heavyweight after-the-event legal expenses insurer FirstAssist as its path into the UK market.
There are, of course, catches. For one thing, the claimant needs to be prepared to give up a substantial portion of their damages; it is often pointed out to impecunious claimants that 60 per cent of something is better than 100 per cent of nothing. The nature of the funding means it is only really appropriate for larger cases where there will be enough of a return to justify the investment. Some of the bigger funders are only interested in litigation where they can put in millions, although there is a move towards targeting smaller cases, such as by new funder Caprica.
In part because of this, TPF has rapidly become almost exclusively a tool for businesses, even though it was initially hoped that funders would support consumer-redress actions that are otherwise exceptionally difficult to get off the ground. A report published in January by the universities of Oxford and Lincoln said TPF has improved access to justice for small and medium businesses.
But even if a client has a suitable case, they may have to lead their solicitor towards TPF. Many lawyers either do not know, or do not want to know, the option is there, despite a professional obligation to lay out the various methods for funding a client’s case. It is a lot easier to get a client to pay by the hour in the traditional way.
A little over 40 years ago TPF was a criminal offence. The legal system, recognising the need for more ways to back litigation in an era of little money and legal aid cuts, has responded in the last few years by embracing TPF. And one thing’s for sure, there will never be a shortage of litigation.
Forget shares, litigation is the hot new asset class for investors. For companies that either cannot afford to bring a case or want to remove the risk of litigation costs from their balance sheets, it is an attractive way to pursue a legal action. For investors, third-party funding (TPF), as it is known, is an uncorrelated risk, meaning the investment’s prospects do not rise and fall with the economic waves.
