With an estimated value of $1 billion the global litigation market is no small player in the financial markets. At a time when few individuals can afford to fund their own litigation and even corporate companies baulk at the risk, then it is hardly surprising that money-rich investors see an opportunity for speculation as third party funders. Add to this the recent global recession and the uncertainties of traditional asset investment and world stock markets, the attraction of investing in litigation has been all the keener. Litigation funding, defined as an arrangement where the litigants (usually the claimant but not exclusively so) have part or all of their legal costs paid by a third party, has its roots in Australia but recent expansion has been in the USA and UK, both global jurisdictions.
Obviously third party funders have to see a strong potential return on their investment. On average a funder would be looking for a share of between 30 and 60% of a winning claim, which would yield 3 to 4 times the initial investment. Also it is only worthwhile backing cases that are of sufficient value; most litigation funders would not consider claims below £500,000 and on average most would be several million. The agreement for each funded case is obviously a unique one, and confidential! However, the principles are the same. Some might claim a fixed percentage of the successful damages. Others might reclaim a multiple of the initial funding. Experienced funders will purchase insurance to protect their risks.
How big are those risks for the would-be third party funder? Clearly the biggest risk is that a claim will not succeed. In such cases, the ruling is clear: the investment is lost and must be written off. No costs are incurred by the client. In the worst case scenario, a failed claim might also involve in payment of costs and damages to the successful party. So it is of paramount importance that the litigation funder chooses cases with a high chance of winning. They must work closely with the lawyers; before agreeing to invest in a case they might need to get an opinion from counsel. They will need to assess the reliability of their witnesses and expert opinions will be advisable. Also it would be foolish to back a case without doing a thorough examination of the defendant, and especially his ability to fund a claim. Needless to say, all this due diligence will be costly and time-consuming, but far better than signing up dubious and weak cases. Indeed, successful funding companies can expect to reject over 90% of applications. One leading company claimed it funded 30 cases of the 1200 it considered. Litigation is a slow and costly process: it only follows that litigation funding is equally slow and costly. Would-be investors must realise that there will be no fast return on their investment, and that choosing the cases to actually invest in is a key factor. Once a case is filed the progress can be painfully slow, many cases taking years.
Therefore, third party funders must have big funds available for investment. Most funders will be managers of investment funds, such as Juridica Investments Ltd. and Burford Capital or private equity companies, such as Vannin. Some funders are insurance companies and others might be brokers. Average funds available for investment are in the region of £150 million.
So given that at least some carefully chosen cases will be winners, what sort of profits can the third party funders expect to make? Juridica’s 2012 profit was $38 million, based on a $256 million investment. Burford claimed a 61% net return on its invested capital for 2012. An example of the returns on a winning case for the latter was a $18 million return on a $6 million investment. The case was a breach of contract dispute between two Arizonian real estate agents. However, that can be weighed against its selling of its investment in Lago Agrio v. Chevron when charges of fraud emerged. Another funded case which crashed was Stone & Rolls (in Liquidation) v. Moore Stephens. IM Litigation Funding bore the loss (£40million). In this swings and roundabouts business IM L claim an 80% success rate.
Legal opinion is strong on the side that third party litigation funding will grow. Thus it remains a growing opportunity for the canny investor. The investor in litigation funding must have a good appetite for risk and reward, a healthy investment pot and the patience to wait for a return on his investment. Like all gambles, some cases will be winners!
This article was provided by Vannin Capital, experts in litigation funding. Visit litigationfunding.com today for more information.