The attack by shortseller Muddy Waters on Burford Capital last week has slammed shut the window on other litigation funders looking to go public.
Muddy Waters criticised Burford’s use of fair value accounting – the inclusion of unrealised gains – and accused the funder of “aggressively marking” the value of the cases on its books, something Burford denied.
The Aim darling-turned-lame-duck lost nearly half its value on Wednesday before recovering some ground after it fired back at the shortseller.
With fellow shortseller Gotham City Research lining up to take a shot at Burford and a swarm of claimant law firms readying shareholder class action lawsuits, Burford faces a struggle to convince the market of its bona fides.
The affair has smashed confidence in what looked set to be a growing listed sector.
Two litigation funders – Manolete Partners and Litigation Capital Management (LCM) – listed in London late last year, but they are unlikely to be joined by any of their peers any time soon.
Augusta – which describes itself as the largest litigation funder in the UK by number of cases – is understood to have recently examined a London listing.
Vannin Capital announced its intention to float last September, before pulling its offering, blaming a volatile market.
Vannin said it was pausing until conditions improve. However, its failed float is a case study of the problems litigation funders face on the public markets.
Firstly, the firm delayed the publication of its prospectus after telling investors it expected to lose several million pounds in a case it is funding against Costa Rica, highlighting the unpredictable nature of litigation.
Secondly, in its 2018 accounts 100 per cent of the revenue it booked was based on fair value movements on investments.
The only investments that crystallised that year resulted in a £5.1m loss.
Hardly a cast-iron investment case.
Manolete says it deals with the issue by funding lots of small cases with a fast turnaround time; LCM, by using conservative, cash-based accounting.
The fundamental question is how do you value lawsuits? Even with the very best case things can go wrong; the judge might have a bad day, a jury could be won over by a mercurial performance by an opposing lawyer.
Such techniques are wise, but one has to wonder if this is one sector of the business world that’s largely unsuited to public markets.