Following our last article about defensive investing strategies, we take a more in-depth look at why litigation funding is such a good option in today’s unstable climate.
Access to justice for all
2018 saw litigation funding change from niche-business to big-business. Because it is uncorrelated to the economy, it is defensive to the uncertainty on capital markets Brexit has created.
Litigation funding is the advanced financing of a claimant’s legal costs in return for a percentage of the damages or, more frequently, settlement.
As spending on legal aid has shrunk by more than £1bn in five years, it has disproportionately affected civil litigation. And, therefore, the ability for claimants to seek justice. Litigation funding could help to fill the gaps but so far has been focused on corporate litigation.
The traditional model was high risk for high return and sits very much in the venture area of investing. Most funders seek big cases where the claims for damages are lucrative. The funder loses the investment if the case is unsuccessful. However, the pay off in successful cases is considerable. The funder gets their investment back plus a success fee of up to 50% share of the damages.
One of the most well-known cases involved a start-up company called ShaveLogic. ShaveLogic received a legal challenge from Procter & Gamble’s Gillette division in 2015 alleging patent infringement. Funding from Burford Capital allowed ShaveLogic to finance its defense and counterclaim. This prevented the company folding before it had even begun manufacturing.
With this type of model, litigation funders are banking on maintaining their win rate of 2 in every 10 cases to cover their losses and meet investor returns. Typically, 10 cases will be wrapped up in a separate fund. Therefore the length of time the case takes to complete is crucial as longer running cases lead to fluctuating earnings for the funder.
There are several big players in this part of the UK litigation funding market.
Burford Capital is the biggest litigation funder and has recently secured $1.6 billion for new litigation investments.1 Burford tends to have a minimum case size which excludes civil litigation.
In 2018, Manolete, another big player, invested £13.9 million in insolvency related claims in the UK.2
Recent capacity in the market
Increasingly the market is widening with new players taking up different positions on the risk return spectrum.
Augusta backs cases where the value of the claim is as low as £200,000. The funder announced recently it had completed a £150m fundraising round for further investment.3
However, civil litigation is significantly under served with thousands of cases going unfunded. The Disburse Fund is targeted at precisely these civil litigation cases. As well as filling a gap in the market, it could help provide access to justice for those hit hardest by the removal of legal aid. Disbursements are the costs, other than lawyers’ fees, that can arise during a legal case. A good example would be the fees payable to an expert witness.
Seismic’s Disburse Fund has been structured specifically to reduce the risk to investors with mitigation ultimately provided through ATE insurance and the volume and mix of cases. Key to the provision of funds is the insurance cover which the client will take out against their specific policy. This is not only key from a litigant’s perspective so they know there will be no recourse in the event that the case is lost but also key from a funder’s perspective so that they know their capital is ultimately underwritten by an insurer. The Disburse Fund will finance hundreds of small cases with a high probability of winning or settling early. With the risk spread over a large number of smaller cases the model allows for a predictable failure rate. The insurance policy pays out on a predictable minority.
The Disburse Fund has been structured as a retail product which will allow retail investors to invest alongside institutional investors in the civil litigation market. Find out more about it.