Litigation funders are looking for new areas to finance, with class actions, arbitration and asset tracing now on their menu.
The value of UK litigation funders’ ‘war chests’ has hit £1 billion, jumping 42 per cent in a year. Research reveals that assets held by the 20 biggest independent UK litigation funders now total £1.03 billion in 2016/17, up from £726 million in 2015/16. Litigation funders pay the costs of legal claims brought by businesses or individuals, in exchange for a share of any damages awarded.The rise comes as private equity firms and hedge funds continue to invest in this increasingly popular alternative asset class. A key attraction for investors is that returns are uncorrelated to mainstream assets, such as equities or bonds, helping to properly diversify portfolio returns.
Undrawn funding lines
The research, which was carried out by law firm RPC, adds that undrawn funding lines from private equity houses and hedge funds are thought to be many times the value of assets held on litigation funders’ balance sheets. Burford, for example, states that it in addition to direct investments that it holds on its balance sheet it has also committed US $1billion towards investments in litigation funding through investment funds that it manages over the last five years.
Litigation funders looking for cases to back
RPC says that as more money is invested into the asset class, litigation funders are stepping up their search for potential cases to back, in order to deploy that capital. It highlights group actions as a major area of focus for litigation funders, citing the recent litigation-funded group action against a major high street bank which was settled earlier this year with a £200m pay-out. The case involved allegations that shareholders had been misled over a rights issue in 2008 and is likely to encourage further similar actions. Other group actions backed by capital committed by litigation funders include another major bank facing claims of loss of shareholder value following its takeover of a competitor and a leading European car manufacturer over its use of ‘defeat devices’ to overcome emissions limits.
Specific practice areas
Other strategies include arranging ‘exclusive access’ to litigation pipelines across specific practice areas - litigation funders are also keen to fund law firms’ entire streams of litigation in specific practice areas, such as all medical negligence or product liability claims. For example, last month it was announced that London law firm Memery Crystal has agreed a deal with Woodsford Litigation Funding which will focus specifically on the energy and mining sectors.
The litigation funders are also focusing on funding major arbitration cases – in addition to funding litigation through the courts, investment treaty arbitration is an increasing area of interest. This concerns the resolution of disputes between investors and sovereign states involving international investment treaties or arising from different investment laws and contracts. Therium Capital and Calunius Capital are among those saying that funding arbitration proceedings is now one of their key activities.
Other activities include asset tracing with litigation funders increasingly prepared to fund the costs involved in enforcing court decisions, for instance tracking down and recovering money from overseas. Geraldine Elliott, partner at RPC comments: 'Litigation funders want to deliver good risk weighted returns and a meaningful deployment of funds. That means a balancing off between the pressure to invest funds and the need to do proper due diligence on cases. As the more obviously strong legal cases are getting multiple finance offers, the litigation funders are spreading their search into underserved parts of the market. They are also seeking more innovative origination strategies, such as securing a first look at cases from individual law firms.'