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Day Two Recap of the LF Dealmakers Conference

By John Freund |

Day two of of the two-day event saw a trio of panels that covered topics such as investment strategy and risk management, the interplay between fund types, and litigation finance as a tool for ESG.

The first panel of the day was titles “CIO Roundtable: Focus on Investment Strategy & Risk Management,” and was moderated by Steven Molo, Founding Partner of MoloLamken. Panelists included:

  • Patrick Dempsey, Chief Investment Officer, US, Therium Capital
  • Sarah Johnson, Co-Head Litigation Finance, The D. E. Shaw Group
  • Aaron Katz, Chief Investment Officer, Parabellum Capital
  • David Kerstein, Chief Risk Officer & Senior Investment Manager, Validity Finance

The conversation began with the rise of business interruption claims. Patrick Dempsey of Therium hasn’t seen much in the way of business interruption claims that have been successful yet.  There was an initial interest in this case type, but then a lot of negative decisions came out of federal courts, and so interest waned. That said, you can build a portfolio of these claims and hedge your risk going forward.

Aaron Katz of Parabellum noted how his firm hasn’t been active in the business interruption space, though the pace of all other claim types is picking up, with interesting new product areas being developed, including credit-like structures, different stages of cases being presented, lower risk investment types, and even partial recourse feature investment.

Sarah Johnson of D.E. Shaw commented on the emergence of new entrants into the litigation funding space. Competition does affect pricing, and this has more of an impact in creative structuring—with new tranches of risk being created. David Kerstein of Validity jumped in to parse this out. He has seen more competition in pricing in larger size deals, however not so much in the more modestly-sized deals. There is still competition there, as claimants are approaching a lot of funders, just not as much price pressure in these types of claims.

The conversation then turned to bankruptcy. This was a very quick distressed cycle—given that there was a lot of sophisticated money chasing these deals, there wasn’t as much of a need for litigation funding. However, we may soon begin to see bankruptcies driven by litigation, which could prompt claimants to approach funders for partnership or monetization. And smaller cases might be a place for funders, given that these bankruptcy claims are typically underfunded. As David Kerstein of Validity noted, “When there are bankruptcies that are based on litigation assets or issues, litigation funders are well placed to come in and provide value.”

And on the issue of insurance, Aaron Katz noted that judgments are being protected with insurance, products are out there to preserve capital or even back some of the profit in a deal. That said, Parabellum hasn’t seen it as part of the bread and butter of their work. Yet Katz feels it’s only a matter of time before insurance permeates the space, but we’re not there yet.

Patrick Dempsey chimed in on his experience with insurance in UK-based claims. Adverse costs insurance is inherent in the jurisdiction there, and so insurance on a portfolio basis was being considered very early on. That was ultimately deemed unnecessary, but that discussion is starting to return, and will likely come back in full force. Therium only uses insurance for judgment protection in the U.S.

On the issue of regrets, Sarah Johnson noted how she wishes she had been more aggressive at the outset—doing more deals, and being less price sensitive. Having worked previously in distressed investments, she was used to price sensitivity being an issue, but she found that the industry grew a lot faster and provided much better returns than perhaps even she expected. This speaks well to the industry’s continued growth potential.

Later in the day, a pair of panels tackled topics such as fund types, deal structures and costs of capital, as well as ESG and impact investing. One interesting takeaway from the former discussion came from Sarah Lieber, Managing Director and Co-Head of the Finance Group at Stifel. Lieber commented on the large commercial bank syndication model that her firm is structured with. What Stifel does is essentially a merchant banking model—they use their own balance sheet and originate their own transactions. When they approach a partner, whether that is a litigation funder, insurance company, private equity or multi-strategy firm, they choose their partner based on the return profile. And they can syndicate their partnerships within a larger deal construct. Stifel generally operates in the $50MM+ range, and can take on multiple co-investors with various tranches. So Stifel operates in cooperation with many other in the space, in a syndicated investment model.

Stifel’s very presence in the market is emblematic of how prominent the funding industry has grown, and how much it has matured over the past few years. Doubtless there will be further maturation ahead, and likely more funding entities which enact a similar merchant banking model. As Tets Ishikawa Managing Director of LionFish noted (on the same panel discussion): “When the market started in the last 15-20 years, it really started as a litigation funding industry—as one single entity. But I believe this market will become like the commercial real estate market. There are many different types of real estate, just as there are many different types of litigation, so in the end there will be many different types of litigation finance investors.”

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Commercial Regulatory Issues

Legislation to ensure the enforceability of LFAs is progressing smoothly through Parliament

By John Freund |

The following is a contributed piece by Tom Webster, Chief Commercial Officer at Sentry Funding.

So far, the Litigation Funding Agreements (Enforceability) Bill has been passing through Parliament without a hitch.

The government is bringing the legislation in response to the Supreme Court’s decision last summer in PACCAR Inc & Ors v Competition Appeal Tribunal & Ors [2023] UKSC 28, which called into question the enforceability of LFAs.

The Bill was briefly introduced into the House of Lords on 19 March, and was debated at second reading on 15 April. During the debate, while some peers discussed the need for regulation of the litigation funding industry and for careful consideration of whether the retrospective nature of the legislation was justified, no peers opposed the Bill – and many welcomed it.

More recently, during scrutiny at grand committee on 29 April, the relatively small number of peers who attended the session broadly supported the Bill, and several spoke in favour of the need for its provisions to be retrospective.

In terms of the Bill’s drafting, the government proposed some small changes at committee stage, which were waved through by peers. The most significant was to address a potential problem with the original drafting where the LFA relates to the payment of costs rather than funding the provision of advocacy or litigation services.

The problem was that, in the original wording, it could be argued that the Bill only applied to the funding of costs that relate to court proceedings, but not those relating to arbitration, or settlements. This has now been resolved by new wording to make clear that an LFA may relate to the payment of costs following court, tribunal or arbitration proceedings, or as part of a settlement. An LFA may also relate to the provision of advocacy or litigation services.

Meanwhile another government amendment was aimed at avoiding problems for litigants-in-person, by ensuring that the definition of LFAs in the Bill includes agreements to fund the expenses of LiPs, for example where they need to pay for an expert’s report.

During grand committee, peers also expressed their approval of the broad terms of reference that have now been published by the Civil Justice Council for its review of litigation funding, which will include an examination of whether the sector should be regulated; and if so, how. Peers commended the speedy timescale that the CJC has set itself, aiming to produce an interim report by the summer, and a full report by summer 2025.

As the Litigation Funding Agreements (Enforceability) Bill continues its journey through Parliament and the CJC begins work on its review, there are clearly significant changes on the way for the litigation funding sector in the UK.

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Commercial Regulatory Issues

Rowles-Davies: Retrospective Provision in Litigation Funding Bill is ‘Fundamentally Flawed’

By John Freund |

In an article shared on LinkedIn, Nick Rowles-Davies, founder and CEO of Lexolent, makes the case against the retrospective aspect of the UK government’s Litigation Funding Agreements (Enforceability) Bill. Whilst acknowledging that many within the industry disagree with his position, Rowles-Davies argues that ‘the Bill should be prospective only and that the retrospective element is fundamentally flawed.’

Rowles-Davies summarizes his extensive article into the following key points:

  1. ‘The starting point for any consideration of the Bill must be firstly to correct the various inaccurate Supporting Documents (to the Bill) such that the law as it stands, and has always stood, is properly reflected. 
  2. The Government has put forward no credible justification to support the retrospective provision in the Bill.
  3. When considered under the true set of facts, this legislation appears to be incompatible with the ECHR. 
  4. The justification for the Bill’s prospective elements and its (arguably unprecedented) retrospective aspect must be considered separately. The Supporting Documents grossly misrepresent the position. Save for pure value transfers from previously funded parties to existing funders, what the Bill properly seeks to achieve can be accomplished through prospective only legislation. 
  5. If retrospectivity survives, it is likely that the matter will come before the courts quickly thereafter in relation to the ECHR.’

Rowles-Davies argues in the article that ‘the Supporting Documents to the LFA Bill provide absolutely no evidence of legal precedent to support the retrospective aspect of the Bill.” He goes on to say that not only is this bill ‘unprecedented’, but it also fails to provide ‘credible “public interest” justification for the retrospective aspect.’ 

In the conclusion of the article, Rowles-Davies calls on both chambers of Parliament to ‘take proper time to explore the foundation upon which the Bill rests and then test its contents after it has been repaired.’ Furthermore, he argues that ‘the positioning of the Bill is disrespectful to a busy Parliament tasked with addressing far more pressing global, social, and public interest matters.’

Commercial Regulatory Issues

Bills Targeting Litigation Finance Disclosure and Foreign Funders Make Progress in Louisiana

By John Freund |

Reporting by Bloomberg Law covers the campaign to introduce new rules governing litigation funding in the state of Louisiana, with proponents of the legislation sensing an opportunity to make progress since the state elected a new governor, Jeff Landry. The two bills making their way through the Legislature are: HB336, which would create a Litigation Financing Disclosure Act, and SB355, which would enact ‘transparency and limitations on foreign third-party litigation funding’. 

In an interview with Bloomberg, Representative Emily Chenevert ,who brought HB336, explained that the turnover in elected representatives provided a fresh opportunity, saying: “The appetite was there already within the legislature and so now it’s like, let’s attempt this and let’s see with a new House and some new senators what could happen.” Dai Wai Chin Feman, managing director at funder Parabellum Capital, spoke out in opposition to Chenevert’s bill but said that SB355 was “acceptable to our industry.”

HB336 would require any party in a civil action to disclose the existence of a litigation financing agreement, whilst redacting the financial details of the agreement, and would make all financing arrangements ‘permissible subjects of discovery’. The bill also prohibits funders from controlling or making any decisions in the proceedings, stating that ‘The right to make these decisions remains solely with the plaintiff and the plaintiff's attorney in the civil proceeding.’

SB355 requires any foreign litigation funder involved in a civil action in Louisiana to disclose its details to the state’s attorney general (AG), and to provide the AG with a copy of the funding agreement. Similarly to HB336, this bill would prohibit the foreign funder from controlling the legal action in any way and also prohibits the funder from being ‘assigned rights in a civil action for which the litigation funder has provided funding’.

HB336 has been approved by the state House and was referred to the Senate Judiciary Committee, whilst SB355 has cleared the majority of procedural hurdles and now awaits a vote by the House.