Global businesses operating in the UK that help fund law suits and take a cut of any damages have raised more than £10bn, with hedge funds, banks and other large investors all attracted by the potential for big returns.
These third-party litigation funders provide upfront financing for legal disputes if a claimant cannot afford it. In return, the funder receives a share of any damages won and insures themselves against costs if they lose.
Some of the most prominent cases backed by third-party funders include group litigation, for example, Volkswagen drivers suing the company over the diesel emissions scandal and shareholder lawsuits against Royal Bank of Scotland and Lloyds Banking Group.
But disputes between companies, insolvency cases and investment treaty claims involving businesses and states are also increasingly attracting litigation funders.
Investors like third-party funding partly because there is no link with how stock markets perform and although the funders are reluctant to reveal details of their wins and losses, a 150 per cent to 300 per cent return on investment from a successful case is considered typical.
Among the main litigation funders with a UK base are Aim-listed Burford Capital, which says it has access to about £2.3bn of financing, Chancery Capital with £2bn, Harbour Capital Advisors, Vannin Capital and Therium Capital Management. Last month a US-based funder, Bench Walk Advisors, entered the UK market with £800m in available funding.
Hedge funds, asset managers, banks, family offices and other institutional investors are all providing the financing. But some investors are also going direct to claimants and law firms, meaning that the real total deployed or available to UK-based funders is likely to be several times more than £10bn.
According to Nick Rowles-Davies, who founded Chancery in May this year, so much money is piling up that funders and law firms are having difficulty finding enough cases to invest it in. “The biggest challenge is deployment,” he said. “That’s where the skill is in this market.”
Steven Friel, chief executive of funder Woodsford Litigation Funding, said that worldwide a figure of £70bn was a reasonable estimate of the amount of money available to both funders and law firms.
However, much smaller sums than this have been used to fund legal cases, according to research by law firm RPC: in 2016 the balance sheets of the 20 biggest funders in the UK rose to £723m, indicating only a fraction of the amounts available are being spent on claims.
Philip Marshall QC, a barrister who specialises in complex commercial cases, said funded cases were “certainly becoming more prevalent” but added: “There has not been a huge deluge. Funders are essentially quite picky — they are looking for large claims that make it worth their while, and one where the client is willing to take a significant discount to recovery [in exchange] for the funding.”
In the hunt for opportunities, some funders are moving from big single claims to financing portfolios of cases.
For example, in July the UK law firm Shepherd and Wedderburn announced a “multimillion-pound” portfolio financing deal with Burford. In August, Woodsford announced a similar deal, a $20m global portfolio facility, with the US law firm Lewis Baach.
“There has been a massive increase in the amounts raised by funders in the past few years,” said Guy Harvey, head of disputes at Shepherd & Wedderburn. “Some of that is coming from the established big funders raising money publicly but there is also a lot from new entrants who want to get in on the act.”
Mr Rowles-Davies said single-case funding was in the long term unviable as it was “not a model that is scaleable — it relies on a distressed purchaser. Secondly, in London every funder is going for the same cases.”
By contrast, portfolio funding offered investors “mainstream asset-based lending”, Mr Rowles-Davies said.
Part of the attraction of third-party funding for companies is that they can in effect offload cases that would otherwise be too expensive or troublesome to pursue.
“The holy grail is to get to talk to a chief financial officer with a pile of claims that are uneconomical to pursue and run them as portfolio financing,” one City lawyer said.
As the sector matures, law firms are also offering discounted or deferred fees to claimants, or damages-based arrangements.
Because law firms have to discuss funding with clients, third-party financing was coming into the discussion more frequently, said Michael Barnett, head of litigation at Addleshaw Goddard. “You now have lawyers ‘growing up’ with litigation funding,” he said.
Three cases where litigation funding has been used
• Burford Capital provided financing to the liquidators of Petersen Group, which went bankrupt after Argentina nationalised energy company YPF, in which Petersen had a sizeable stake, in 2012.
The legal claims against Argentina and YPF are ongoing but Burford has already sold 25 per cent of its “economic entitlement” (what it is deemed likely to get if the liquidators win) for $106m — giving it a good return on its $18m funding investment before the dispute has even been resolved.
• In an international arbitration dispute between Essar, an oil-rig manager, and Norscot, an oilfield services company, Norscot used third-party funding to bring a claim over unpaid bills, which it eventually won in 2016. On top of the $12m in damages, the judge also awarded Norscot its full litigation funding costs — that is, what it had to pay back to the funder, Woodsford — because Norscot had no choice but to find a third-party funder in order to bring its claim.
• One that went wrong for the funders was a huge claim by a Delaware shell company called Excalibur against the US oil group Texas Keystone, over an interest in an oilfield in Iraqi Kurdistan. After a five-month trial the judge derided the claim as “speculative and opportunistic” and, although the various funders had played no part in the case itself, they were ordered to jointly pay the defendant’s costs.
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