The reasons Silicon Valley financier Peter Thiel may have had for bankrolling a lawsuit brought by former wrestler Terry Bollea against Gawker Media probably did not include a good return on his investment. But the $31m settlement which Gawker and Bollea reached last November underscores just how lucrative financing lawsuits can be.
The litigation financing industry has been growing in the UK and US for over a decade, though it was only after a series of reforms were introduced in 2013 that it really took off. According to RPC, a City firm, litigation funders committed £723m to legal claims in the UK in 2016, up from £575m the year before. It’s not really about helping the little guy, or even the likes of Bollea. A third party, usually a fund or a private equity house, pays the legal costs of a litigant in a civil case, usually a corporation, and receives in return a portion of whatever the court awards at the end of the case.
Why it’s growing
The increasing costs of regulatory compliance at many corporates, and of defending themselves when lawsuits are brought, mean that there is little money in the kitty for bringing lawsuits against other parties, even when it is in their best interests to do so, according to Chris Bogart, chief executive of Burford Capital.
“Companies tell their law firms they want to bring a case, but don’t have the budget, so you need to find a way other than the billable hours model,” says Bogart. “Law firms are cash partnerships, so don’t have a balance sheet and cannot access capital markets.” But firms like his, which is Aim-listed and has a market capitalisation of around £1.5bn, can plug the funding gap, freeing up clients’ cash flows and removing the risk of litigation from their own balance sheets. While a bank might feel that it is unable to lend because it cannot evaluate the prospects of a potential client’s success, litigation funders think they can.
Large institutional investors such as pension funds and family offices have recently poured into the space, investing in fundraises by the likes of Longford Capital Management, which opened a $250m fund in February.
But there is also the option for consumers to buy equity in publicly-listed litigation funders, such as Burford, whose share price has risen over 200 per cent in the last year, or the Australian IMF Bentham (up more than 50 per cent), which has funded class and multi-party group actions since 2001, and now operates all over the world. Both are large enough to offer diversification through a great number of cases being funded at any one time. Another Australian firm, Litigation Capital Management, listed in December.
What cases are taken on?
In a recent article for Law360, Noah Wortman of Goal Group and Jeremy Marshall of Bentham Europe identified four major reasons for a litigation funder to take a case. First, a jurisdiction must legally allow for litigation funding to occur. Second, the case must be a strong one. Third, damages should account for 10 times the cost of the litigation. And fourth, the defendant must be in a position to pay those damages.
Which are the biggest markets? The crucible of litigation funding was Australia. “It is fairly unique because it allows class actions to be brought quite easily, but does not permit lawyers to do them on a contingency fee,” says Bogart. “In many Australian cases, the only way for a class action to proceed is with litigation funding.” The US is the world’s largest market, where funders invest in big portfolios of cases being pursued by a particular law firm, rather than on a case-by-case basis. The UK allows both classic litigation and international arbitration cases to be brought – Hong Kong and Singapore are emerging in Asia for this same reason.
The investment opportunity
Why should retail investors care? “Litigation is inherently uncorrelated to economic and market factors,” says Bogart. Perhaps better still, there is always an exit to every investment. “While venture capital and private equity investors have to own companies until they can find a buyer, litigation follows a prescribed process which always ends eventually.”
Though growing, litigation funding is still quite nascent. And its disruption of the industry has caused a stir. Last year, Burford said in its filings that it had given $100m to one law firm, insisting that this is funding for cases and not an equity stake in the firm itself, which is not allowed in the US. And the US Chamber of Commerce’s Institute for Legal Reform has criticised the industry for a lack of oversight. Regardless, it looks like it is here to stay.
This article appears in the latest edition of City AM's Money Magazine, released with the paper on Thursday 24 March