Once the preserve of hedge funds and other large institutions, private investors can now share in the potential high returns offered by litigation finance.
The UK’s first litigation crowdfunding platform, AxiaFunder, which launched in January, enables primarily high-net-worth and sophisticated investors to provide funding to claimants who can’t afford to pay for their legal disputes. In return for their investment, investors receive a fixed return on their capital if the case wins. Factoring in some losses, average returns are expected to be between 25% and 30% a year although the outcome of each case is binary, making it important to spread your investment across several cases.
The platform’s first case, a professional negligence dispute that was seeking to raise £12,720, was funded in January and settled in August for an investor return of 43% in 8 months. Meanwhile, AxiaFunder’s second case, a breach of contract by a property developer which was seeking to raise a minimum of £12,000, was funded – less 8 hours after going live on the platform. Structured as an Innovative Finance ISA (IFISA) bond, it targets a fixed return of 75% a year if the case wins. To date this case is progressing well and has already accrued interest (if successful) of 56.25%. AxiaFunder’s third case raising £40,000 was funded in under 30 minutes. There is now a fourth case available for funding in the AxiaFunder platform that offers potentially high returns.
Risks and rewards
Given the potential for attractive returns on offer investors could be forgiven for asking: what’s the catch? It’s important to note that investments in litigation are usually provided as a loan on a “non-recourse” basis. This means the investor won’t recover any of their investment if the case is lost at trial.
There are, however, lots of measures in place to try to reduce that risk. First off, AxiaFunder takes a rigorous approach to assessing potential deals, targeting a win probability of at least 60% if a case goes to trial. In fact, statistically (source: Solomonic Litigation Analytics) over 80% of cases settle before trial, and in this scenario AxiaFunder’s investors get paid (normally in full). In addition to the case having strong legal merits, estimated damages should typically be at least five times the costs of pursuing the case to trial, with an expected time to resolution of less than three years.
AxiaFunder also insists on after-the-event (ATE) insurance being put in place, providing protection against the claimant having to pay their opponent’s costs if the case is lost. The breach of contract case, for example, is backed by an A- rated insurance firm, and in this instance, if the case loses, the insurance limits the loss for investors to 17% of the capital invested.
A selective approach
Litigation is unpredictable by nature, but by taking care when selecting cases the risk of losing the entire investment is reduced. To illustrate: in a portfolio of 10 cases, seven will usually settle and of the three that proceed to trial, one or two will win and only one or two will lose. Once investors have joined the platform, electronically signed a non-disclosure agreement and confirmed they have no conflicts with the parties, they gain access to the case’s legal correspondence, which provides transparency over the investment.
For sophisticated and high-net-worth investors, litigation funding offers a new way of diversifying an investment portfolio. Legal claims are not correlated with traditional asset classes, such as equities, bonds, property or commodities, and instead have their own unique risk/return profile. The UK litigation funding market is growing at a rapid pace, yet the smaller claims end of the market is underserved – this makes it an ideal time for private investors to get a foot in the door.
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Remember that investing in litigation funding puts your capital at risk and returns are not guaranteed.