On February 8th, 2024, Litigation Finance Journal hosted a special digital event titled 'Litigation Finance: What to Expect in 2024.'  The event featured Gian Kull, Senior Portfolio Manager at Omni Bridgeway, David Gallagher, Co-Founder of LitFund, Justin Brass, Co-CEO and Managing Director of JBSL, and Michael German, Co-Founder and CIO at Lex Ferenda. The event was moderated by Peter Petyt, founder of 4 Rivers. The discussion covered a range of topics pertinent to the litigation funding space. Below are some key takeaways from the event: Which areas are you particularly interested in investing in over this coming year?  MG: There is a supposition that this industry will continue to grow in 2024. All of the indicators suggest that the industry will continue to grow--nearly all of the funders are funding bankruptcy-related cases, and three quarters are funding patent cases. Those are areas of interest to us, and I think that will continue to make sense, given the types of commercial cases they are - complex cases that require significant amounts of attorney time and defendant time,  and yield significant costs to the litigaiton. JB: We're going to see a continued expansion into the mass arbitration space. That is something that has been coming up with more frequency. Mass torts has been staying quite busy. And where we see a lot of potential is with the evolution of the secondary market. There are a lot of funders coming up with maturing cases, and it makes sense for those funders to redeploy that capital into other opportunities - not necessarily exit that case - but just sell a minority stake or a portion of it. We that in traditional fixed income classes, so we think that is going to continue in the funding market as well. Are you seeing any kind of appetite to invest in jurisdictions you haven't previously invest in? Have some jurisdictions matured to the point where you now will give them a serious look?  GK: That's a hard question to ask Omni Bridgeway as a whole, because we try to be in a lot of places. But from my own experience in Europe, we've gotten quite comfortable in the Netherlands, we have a very large investment in Portugal. Spain is next on the list. Italy is after that. The jurisdiction I've been most disappointed in - aside from the UK with the regulatory issues there - is Germany. For such a large economy, from a commercial collective redress perspective that is a dead end. As we move through Europe, I'll be watching the regulatory regimes and how those are tested over the coming years. Are you seeing many requests for monetization of judgements or awards, or is that not an area that you are particularly interested in?  DG: We're especially interested in that, largely because my partners have spent a lot of their careers making those types of investments. And just speaking from my own experience, that has always been an important part of the market, and continues to be an important part of the market. I think the availability of judgement preservation insurance makes funding more available and appropriate both on the funder's side and the client's side. In my view, it's very interesting to see the number of people in the market moving into the insurance space. In my view quite a surprising number - it's certainly indicative of a trend. LFJ just announced today that Ignite has launched a capital protection insurance resource. So there are a lot of interesting things happening here. Is it still early days for this space, because there are a lot of people moving into it with interest?  MG: I share the sentiment of having a general level of surprise with how many folks from the litigation finance industry insurance has drawn. From the Lex Ferenda perspective, insurance has proven to be a very expensive option, that ultimately my clients and I don't feel is worth the cost. But the vast majority of our investments - from an insurer's perspective - are probably the least good fit, so that's probably why it's reflecting in the price. JB: I think the insurance aspect of litigation finance is here to stay. There will be growing pains along the way. I think even as recently as last week, there were disclosures in the Affordable Care Act fee dispute where the law firm got an insurance policy related to its fee award. What was interesting there, was the law firm was seeking disclosure about the policy, and in essence how it worked. So not only is it new and here to stay, we're seeing it become public. The risk to early-stage cases is the pricing can be expensive, but what will happen over time, is like anything else, the insurers will be tracking the progress on those cases, and as funders come back as repeat customers, they'll be looking at you and factoring that relationship into their pricing, just like how a bank factors that into a credit score. I think the best path forward is figuring out how to work together and create a level of transparency and trust, because it's not going away. For the full recording of the event, click here.

Tanya Lansky is Managing Director of LionFish and has been working in the disputes finance and insurance industries for close to a decade. After reading law in London Tanya sought to abstain from treading the traditional legal pathways, and instead began her career at TheJudge Global, the then independent specialist broker of litigation insurance and funding. Tanya then joined boutique advisory firm Emissary Partners to leverage her relationships in the market and her economic understanding of disputes as an asset. LionFish is a London-based litigation funder offering financing solutions for litigation and arbitration risks. Founded in 2020 as a subsidiary of listed RBG Holdings Plc, the firm was acquired by funds managed by Foresight Group – the private equity firm with over £12bn AUM – in July 2023. With a core focus on efficient delivery, the firm’s transparent approach is a reflection of its corporate structure as principal investor which in turn also enables it to ensure alignment with its clients and their interests. Below is our LFJ Conversation with Ms. Lansky: Litigation finance has grown exponentially over the past decade, yet the industry is still nascent, with room for innovation and growth. What role does LionFish play in the funding industry's future growth? To-date, our market has often been compared to trends and growth of the legal industry. The reality is, we are a financial services industry which we believe should be our reference point as a market. This is why we encourage, share and apply standards that are commonplace in financial markets, which we believe will help drive further growth as well as a more robust framework with established credibility and transparency from which innovation can flourish. In this context, we frequently vocalise the drivers we believe would help further industry growth. Standardisation or documentation frameworks, as we recently wrote about in Bloomberg Law, is one such example. Another is encouraging market standard processes around the mechanics of how litigation funding agreements work, which naturally delivers greater transparency. Although the list can go on, a third is more coordination with the contingent and dispute risks insurance markets who play a central role in our market and beyond. We appreciate that we are just one of many players in the market and that this will have to be an industry-wide effort, but it must start somewhere. So, our contribution to the industry’s future growth is a starting point that encourages greater engagement and highlights the issues that we see prohibiting growth, all whilst practising the things we preach. Your website states that you are not a traditional litigation funder - how does LionFish differentiate from the competition? We are often asked by funders, insurers and lawyers to talk about “your fund” because many assume that all litigation funders are investment managers using third party capital raised from external investors. LionFish’s core business does not involve managing investor monies; we do not run a fund based on management and performance fees, but instead invest straight off our balance sheet such that if we lose, we are not losing investor monies but our own. Conversely, if we win, we keep those returns instead of paying them to investors. Greater reward but also greater risk, but critically, and in terms of how this translates to our client, this means that the decision-making sits with us and not our investors. This benefits our clients in several other ways. Firstly, we do not waste time looking at cases that may be remotely fundable but unsuitable for our portfolio. We are therefore candid, sincere and swift in our responses. Secondly, given that the decision-making sits solely within LionFish, we deal with opportunities and live investments efficiently and quickly. Thirdly, we are not investing in a defined pool of capital for fees but simply building and sustaining a profitable business. We therefore think in terms of long-term solutions that help forge long-term relationships. Perhaps most importantly though, our model allows us to invest in the £500k to £2m range that most often funders cannot do viably because of their business models. So, while we do compete for and have funded investment tickets considerably larger than £2m, our greater range of investment appetite means that we are more relevant to a wider range of lawyers than most others. How has the Foresight acquisition changed LionFish's strategy and operations? When our previous parent company, RBG Holdings Plc, announced that they were going to sell LionFish, we received significant interest in the business from multiple, differing parties. However, because of the different perspective they had on us as a business Foresight was such a natural fit. From very early on, it was very clear that Foresight recognised the strengths of our model and acknowledged that the issue was that the business was housed in the wrong structure (RBG being listed). Foresight therefore had no want to make changes to our business model but instead sought to enhance it. For example, our previously robust infrastructure became even more resilient and slick. We have also been able to assemble a new Board and panel of advisors, all of whom bring very relevant, heavy-hitting gravitas both in terms of breadth and depth of expertise and experience. So, although our strategy and USP has not changed, the operational tweaks have strengthened the business and improved the ‘user experience’ for our customers, providing them with greater confidence in working with and choosing LionFish as long-term partner. Much is being made about the recent PACCAR ruling in the UK, where the Supreme Court found that litigation funding agreements can be classified as 'DBAs', and may therefore be unenforceable under the 2013 DBA Regulations. What are your thoughts on the implications of this ruling? How impactful will this be on the funding industry in the UK going forward? Six months on from the judgment, we are pleased to see that the recognition of its damaging implications have been widespread and that there is movement and an explicit desire from the government to address it. The Post Office scandal in the UK has highlighted the value of litigation funding; at the height of its widespread media coverage, the lead claimant Alan Bates (after whom a BBC mini-series on the scandal was named) wrote a piece in the Financial Times regarding his views on reversing the PACCAR judgment given that justice would not have been served following one of the greatest domestic injustices of the 21st century to-date. This brought the consequences of the PACCAR judgment to the fore. Against this backdrop, Justice Secretary Alex Chalk MP told the Financial Times that litigation funders should be protected from the PACCAR judgment and that the Government would remedy the issue across the board at the earliest possible opportunity. The Digital Markets, Competition and Consumer bill is working its way through parliament and if it is passed into law, LFAs in opt-out competition claims (where DBAs are not permissible) will not be deemed to be DBAs (which would of course apply retrospectively). The latest Parliamentary debate surrounding the bill has been quite telling and reflective of the Lord Chancellor’s statement regards the intention to remedy what some Lords described as the “mistaken decision” and for this to be achieved across the justice system. Although the latest Parliamentary debate suggests that the bill will not go further than the CAT, Lord Offord of Garvel emphasised government’s policy to return to the pre-PACCAR position at the earliest opportunity. It is worth noting the long-term support of this point, in that as early as 2015, the Ministry of Justice has stated that LFAs should not be considered DBAs and the DBA Regulations should be clarified to reflect this. If nothing changes, the impact will continue to be damaging to the detriment of some claimants and more generally to access to justice – despite the fact that the industry would (as it has already done) adapt. That said, at the time of writing, we are encouraged by the drive and determination at the legislative and parliamentary levels to address the consequences of the PACCAR judgment. What are the key trends to watch out for as the litigation finance industry continues to evolve over the coming years? Consolidation and sophistication are probably the two key trends to watch out for. That said, the elements that drive these trends are what we think are the most interesting to watch. The first is that the institutional capital involved in the market is more experienced than ever and is sharpening in terms of appetites and investment profiles. This will inevitably continue to propel the industry forward and see it evolve in a Darwinistic way, with institutional capital focusing on the stronger players. Another, and a sign that the market is maturing, is the recognition of the various subsets of the litigation funding asset class – in the same way that real estate investing has long been recognised as a combination of many subsets of investing (e.g., residential, commercial, etc.). This is because funders are developing more targeted investment strategies. For example, the rise of law firm portfolio lending, which is very different from single case investing, appears to have driven funders to hire former bankers rather than lawyers. While some focus on group actions and mega-value claims, others focus on specialist claim types such as intellectual property or high-volume mass tort consumer claims. And, within single case investing, some are even redefining their strategies around philosophies such as ESG, or size (as we are). Fundamentally, with greater focus and specialisations, the feel of the litigation funding market will become more comparable to other established financial markets. The biggest trend-setting-element though is the increasing financial sophistication of the industry. To date, the industry has been dominated by ex-litigators but with the interplay of litigation insurance and funding, it is clear that beyond the underlying investment is a need to understand the structure it sits in. With funders increasingly hiring beyond the litigation sphere, we can only see this as a beneficial element which will allow for the market to continue evolving and maturing.

Consumers for Fair Legal Funding (CFLF) — a coalition of community groups, social justice organizations, and business interests across New York — today announced the relaunch of its push for commonsense reform of the unregulated and predatory lawsuit lending industry.  The coalition’s founding members have been joined by two of the best-known ride-hailing companies — Uber and Lyft. Uber is the nation’s largest insurance consumer and is committed to ensuring both affordable coverage and safety for drivers and riders alike.  “Uber drivers operate in every corner of the state and are critical to helping New Yorkers get around, while also playing an important role in supporting the local economy,” said Hayley Prim, Senior Policy Manager at Uber. “The unchecked lawsuit lending industry is driving insurance costs up, consuming an ever-larger share of fares, and making it harder for drivers to earn a living. Lawmakers need to establish some simple rules to reign in lenders and protect hardworking individuals statewide.”  “Steadily rising insurance costs are the biggest hurdle to keeping rides affordable and paying drivers more,” said Megan Sirjane-Samples, Director of Public Policy at Lyft. “If we can curb — or better yet, reduce — these costs, the savings are going to go directly back into drivers’ pockets and help lower fares. Without putting in place some commonsense regulations, the lawsuit lending industry will continue to boom, and consumers and hardworking New Yorkers will pay the price.”  Over the past decade, lawsuit lending — also known as third-party litigation funding, litigation financing, or car accident loans — has grown into a multibillion-dollar global industry, with lenders funded by deep-pocketed hedge funds and foreign interests. A 2022 study found that increased litigation, fueled by unchecked and unregulated lawsuit lending, contributes to rising insurance costs. That’s something New York, with the nation’s second-highest average insurance premiums, can’t afford.  CFLF was launched in 2022 to push for lawsuit lending reform that would preserve an important funding stream for vulnerable individuals in need of funds — often to cover medical bills or living expenses as they await the outcome of legal action — while protecting them from unscrupulous lenders. CFLF supports both an interest rate cap on lawsuit loans and transparency in the lawsuit lending process to expose conflicts of interest and create a level playing field for all.  Unbanked and underbanked individuals — frequently members of communities of color — are often targeted by lenders who promise them fast cash by borrowing against expected legal settlements. With no limit on interest rate caps, lenders can charge up to 100 percent — or more — and borrowers can end up owing most or all of their eventual settlement or jury award to a lender, ending up with very little of their settlement or even in debt.  “If the governor and lawmakers are truly committed to a robust and equitable consumer protection agenda this session, they will pass lawsuit lending reform,” said the Rev. Kirsten John Foy, faith leader and founder of CFLF member Arc of Justice, who is himself a lawsuit lending victim. “At a time when New Yorkers are struggling and the state faces a budget deficit, this issue is an easy way to protect vulnerable individuals — at no additional cost to the taxpayers.”  Lawsuit lending firms are expanding in New York — one of the four most attractive states for those looking to invest in the industry. Unprincipled lenders have been known to pursue anyone without a financial safety net, even taking advantage of unhoused and wrongly convicted New Yorkers.  To learn more about CFLF and efforts to enact commonsense reforms on lawsuit lending, visit https://fairlegalfunding.org/.

The following is an article contributed by Ed Truant, founder of Slingshot Capital, Executive Summary

• Gross v. Net return dispersion needs to be considered by investors & fund managers
• While present in many private equity classes, managers that can limit dispersion can attract more capital for a given return profile
• Wide dispersion prevents many institutional investors from considering investing in the asset class

Slingshot Insights:

• Fund performance reporting can help address the appearance of wide dispersion in gross to net returns
• The valuation of litigation assets is very difficult due to a combination of idiosyncratic case risk and binary outcome risk
• Fund managers need to ensure that they are obtaining returns on their undrawn capital to reflect the opportunity cost of undrawn capital

In my recent set of articles, I discussed the concept of managing duration risk as this is often a topic that comes up in conversation with institutional investors.  The other topic that invariably comes up in discussions is the common case of wide dispersion between gross and net returns in commercial litigation finance (this is not typically an issue within consumer litigation finance).  It’s a problem that is somewhat unavoidable and somewhat explainable! I have been privy to fund manager returns that start off with cases that have gross internal rates of return in the hundreds to thousands of percent range that ultimately turn into negative IRRs at the fund level (albeit in the first few years of the fund) – hence the gross v. net return dispersion dilemma.  The problem with this dynamic for fund managers is that it undermines the entire investment thesis because it leaves the investor wondering how such a high performing strategy at the case level ultimately yields low net returns at the fund level as the same does not necessarily hold true for many other alternative asset classes.  In turn, this dissuades investors from investing in the asset class because the return profile does not match the risk profile or, in other words, they can either get better returns for the same risk profile or commensurate returns with a lower risk profile, so why invest in commercial litigation finance? Let’s start with the basics. The term ‘gross’ typically refers to the raw return of a given investment or portfolio of investments.  Simply, this is the rate of return that was produced on the realization of the investment (i.e. money received) for a given dollar of investment (i.e. money invested or drawn), whether expressed as a Multiple of Invested Capital (“MOIC”) or as an Internal Rate of Return (“IRR”) before considering any of the costs of the manager (management fees, expenses or carried interest) or the investment vehicle (administrative costs for legal, audit and reporting) (collectively, the “Costs”).  It is very common for commercial litigation finance managers to refer to the gross returns of their realized cases and these, sometimes sexy, returns have been used to generate interest in the asset class and the manager, but it may not all be as it seems. Conversely, most other private equity asset classes (Leveraged Buy Out (“LBO”), Venture Capital (“VC”), Private Credit, Real Estate, etc.) refer to the valuation of their entire portfolio when they refer to gross returns.  The problem with referring to returns that stem from only the realized portion of the portfolio in commercial litigation finance is that it is often the case that the early cases produce strong IRRs and few losses which means that they represent an overly optimistic view relative to the reality of the entire portfolio. Investors can expect that a typical commercial litigation finance fund will ultimately have a few losses (20-40%) and a few cases with longer durations, depending on the nature of its strategy, both of which have a significant negative impact on the portfolio’s overall return profile. The challenge that litigation finance has when valuing its entire portfolio is that it is extreme difficulty to establish credible valuations (so called ‘fair value’ or ‘mark-to-market’ valuations) for the unrealized portion of their portfolio.  Other private equity asset classes have the benefit of being able to point to well defined and accepted valuation methodologies and metrics (Enterprise Value (EV) / Earnings Before Interest Taxes & Amortization (EBITA) in the case of LBO and multiples of Annual Recurring Revenue (ARR) in the cases of ‘Software-as-a-Service” VC investments).  These well-defined and accepted metrics allow managers to publish credible fair value estimates on a quarterly basis and, while not perfect, the investor can then adjust the valuations based on their perspective on market valuations as the industry metrics are fairly transparent and available.  The same cannot be said for litigation finance investments as each case has its own idiosyncratic characteristics and risks and each dispute has its own unique resolution, which are two variables that I would argue are virtually impossible to value with any accuracy.  I will agree though that it may be possible to come up with a reasonable estimate of the value of a portfolio of investments but to estimate a single case with reasonable accuracy is nearly impossible.  Further, any portfolio estimate would only be possible if the portfolio was relatively diversified and had a number of equal weighted investments which is also nearly impossible to create due to single case deployment risk. Portfolios of cross-collateralized law firm portfolios or corporate portfolios would be good candidates for this approach. The term ‘net’ typically refers to the returns that the investors in the fund will receive after taking into consideration all of the Costs involved in producing those returns which applies equally to MOIC and IRR.  While some investors like to focus on MOIC as it gives them a sense of the multiplier effect of the investment, I think a better measure in this asset class is to focus on IRR as duration risk is real in this asset class and this is a metric on which most investors get measured and compensated. The other critically important concept to understand is what has been termed the “J-Curve” effect as this can have a significant impact in commercial litigation finance, especially in the early years of a fund.  The J-Curve effect is a description of the tendency of net returns to first decline in the early years of an investment fund’s life when costs are high and valuation are relatively stagnant and then strongly produce returns (or so investors hope) as the fund matures and when value creation within the portfolio is at its peak.  When you plot time and returns on a chart, the curve resembles a “J”, hence the term.  The reason this happens is that in the early days of a fund’s life, there is money being spent to originate opportunities and make investments, including ‘broken deal’ costs associated with the failure to secure investments after investing some diligence capital to pursue the opportunity.  In addition, the investments that have been made will take some time to start producing a return that more than compensates for the costs incurred. In short, the fund produces a negative return in its early years which brings the return curve into negative territory before it rebounds into positive territory as the fund matures. However, keep in mind that the J-Curve is and should be a temporary phenomenon the effect of which will dissipate with time as the portfolio produces returns and so it tends to explain large differences between gross and net returns in the early years of the fund. If you don’t have the benefit of fair valuing your portfolio, the J-curve effect will likely last longer which is the case in litigation finance.  If the J-Curve is still having a significant negative impact after three to four years then there are likely larger issues at play and probably some unhappy investors. What is different about Commercial Litigation Finance as regards Gross v. Net? Double Deployment Risk & ‘Effective’ Management Fees In most private equity asset classes, a ‘2/20’ fee model is fairly common, although it is increasingly under pressure. The “2” is a reference to the management fee of two-percent that gets charged on committed capital and the “20” is a reference to the twenty-percent carried interest that accrues to the General Partner, typically once the investors’ principal and hurdle have been achieved.  In most private equity asset classes, there is a lag between when the commitment is made by the investor and when the fund manager invests the committed capital during the investment period (usually two to three years) and this similarly holds true for commercial litigation finance. However, in commercial litigation finance there is a second deployment risk in that the commitments fund managers make to cases or portfolios of cases may not ultimately get drawn which means that if the manager is not able to recycle and redeploy those same committed (but undrawn) dollars, then the effective cost of management fees will be higher than what is found in other private equity funds,  which in turn represents a larger drag on returns and increases the gap between gross and net returns.  Accordingly, fund managers can find themselves in a position where the overall costs of a fund that was designed to deploy say $100 million in fact only deploys say $67 million which then distorts the effective management fee cost. For example, the 2% management fee on $100 million commitment becomes a 3% management fee on a fund that only deployed $67 million, which negatively impact returns and increases the gross to net return differential. For this reason, fund managers need to start obtaining a return on any unused capital commitment in order to help bridge the gap between gross and net, but this can only be achieved by educating their customers that there is an opportunity cost of not utilizing their capital for which they must obtain a de minimis return.  The fact that competing managers are not separately factoring in their cost of undrawn capital makes it difficult to achieve in a competitive environment, but my view is that the industry needs to reflect this cost separately in their funding agreements to drive home the message that their capital, whether drawn or not, comes with a cost.  Similarly, the fund manager would be justified in obtaining a minimum level of overall economics in cases where the resolution happens much quicker than anyone expected and so there should be a floor to the economics a fund manager receives to compensate them for time spent on diligence and approvals. The other fee related phenomenon I have been noticing that also helps to address the gross to net dispersion is having the management fees applied to deployed capital and not committed capital.  Some fund managers are choosing, likely under pressure from their investors, to structure their management fees in part based on committed fund capital and in part based on either deployed capital or capital committed to underlying investments.  This will help reduce the drag that management fees have on net returns, but it goes without saying this means less upfront economics to fund managers to run their funds and may only be relevant for larger fund managers. Litigation Capital Management (“LCM”), has gone one step further and has eliminated management fees entirely in lieu of a larger carried interest.  On the one hand, this illustrates to investors their confidence in their ability to generate returns in excess of their hurdle rate (and they have done so handily) and on the other hand they will get compensated handsomely for foregoing those early management fees.  It is a very good example of strong alignment of interests between the investor and the manager and the investor generally doesn’t mind giving up more on the back-end because they feel that the manager has earned it by assuming risk on the front-end. This has the side benefit of not contributing to the J-Curve effect, although a higher carry will not help with the gross to net dispersion but then investors don’t mind when the dispersion is created through performance.  Of course, having an entity (publicly listed in the case of LCM) with its own balance sheet to fund the operations is necessary to propose this type of economic structure. Portfolio Valuation In a typical LBO fund, the manager will make say 5 investments during a 3-year investment period and then exit those investments around the 5-year hold period for each investment.  Assuming the investing happens evenly over the 3-year investment period, the first 3 years will see a high level of Costs.  Yet, the portfolio will not have had enough time to produce sufficient returns to offset all of the costs despite the fact that LBO fund managers typically revalue their investments on a quarterly basis (with a possible exception of the first year) to reflect their estimations of the fair market value of their investments. However, the same cannot be said for the portfolios of most litigation funders who typically hold their investments at the lesser of realizable value and cost unless they have received proceeds from a realization or recognized a write-off.  The reason they do so is in part due to a lack of accepted valuation methodologies for litigation assets, which is in turn a reflection of the difficulty inherent in valuing a piece of litigation that has idiosyncratic risks and a quasi-binary outcome.  While recent efforts have been made by Burford Capital in conjunction with the Securities and Exchange Commission to create an accepted valuation methodology under Accounting Standards Codification 820 for litigation assets, this is mainly for the purposes of publicly listed companies that utilize a certain set of reporting standards.  One would think that if the standards are good enough for retail investors, they should be sufficient for investors in private litigation finance funds, but for right now it seems that investors are more comfortable holding investments at lesser of cost and market until there is either a realization that suggests otherwise (i.e. a receipt of proceeds, or a write-off). So, what does this have to do with litigation finance returns?  Well, if you don’t have the ability to mark your investments to fair market value (assuming the portfolio is increasing in value), the impact of all of those Costs that are incurred early in the fund’s life are going to more negatively impact the fund’s early returns unless the fund was lucky enough to have some significant realizations.  Even with early litigation finance fund returns, while they can tend to create very strong IRRs, they typically are not meaningful to the overall fund because they tend not to draw a lot of capital and when your returns are predicated on a return on drawn capital, they end up being not meaningful in terms of their dollar impact on cashflows and hence not meaningful contributors to overall returns. In short, unless the fund had an investment that drew a large commitment and then had a realization shortly after the launch of the fund, the early realizations tend not to contribute strongly to offsetting the J-Curve effect and any early losses exacerbate the J-Curve effect. As an example, if you raised a $100 million litigation finance fund and it had 2 investments that realized in the first year and each of those investments drew $1 million of their $5 million commitment and then doubled in value at the end of the year, you would have created $2 million in gains in the fund in the first year but that would only offset the $2 million in fund management fees you charged your investors and so you would still be in a loss position when you factor in your other operating costs. So, your gross results at the case level would look great at 100% IRR, but the J Curve would cause your net returns to be negative because the dollar value of those gains was not material relative to the costs that have been incurred.  This dynamic is especially true for the early stage part of a commercial litigation finance fund’s life cycle. Loss Profile of Litigation Finance The loss profile of litigation finance also doesn’t help matters.  In LBO investing, a manager would typically target to generate no losses in their portfolio.  Sometimes LBO funds can see up to 20% of their portfolio creating losses but they may not always be complete losses – equity value is not binary (although it can be when too much leverage is applied).  In litigation finance, the average fund manager loses about 30% of their cases and unfortunately with litigation finance the loss is usually complete (although it is possible to have a partial loss). With complete losses, you are now counting on the remaining 70% of the portfolio to not only generate a return for its own capital but it also has to generate a return on the portion of the portfolio that suffered losses.  This is why despite litigation funding contracts having funding terms that might yield 3+ times their investment, the actual math when you factor in the losses results in fund multiples closer to 2 times and then you have situations which either over-perform or underperform the underwritten expectations and so most of the completed funds I have seen (of which there are surprisingly few on a global basis) produce multiples that range anywhere from 1.4 to 2.5 times.  You can then have outliers that result in very large MOICs, but they are few and far between and as an investor you can’t rely on outliers to recur, and so they are dismissed even when the investor benefits from them.  Some people have likened litigation finance to venture capital investing because of the loss profile, but I disagree with that characterization (VC losses are much higher, but they also have the ability to create huge returns to carry the fund which is generally missing in commercial litigation finance), and I think the reality is that it sits somewhere between LBO and VC in terms of its loss profile but significantly different in terms of its overall return profile. As a consequence of the loss profile inherent in litigation finance and the fact that the losses tend to be complete losses, there is a significant negative impact on net returns especially if the losses tend to happen at the end of the life of the portfolio. If the losses happen later in the life of the fund, they can also be larger because more time has elapsed to draw down larger amounts of capital with more invested dollars to lose and thus have a more significant impact on the portfolio. Fixed(ish) Returns In LBO and VC investing your returns aren’t fixed.  If your business grows beyond your wildest dreams your upside is almost unlimited (just ask the early backers of Google).  In litigation finance, your upside tends to be capped or tied to time.  For example, many funding contracts will cap returns at 3 times their investment in 3 years, 4 times in 4 years and 5 times in excess of 4 years.  The reason for capping returns is to ensure there is economic alignment of interests between the funder and the plaintiff (and the lawyer if they are working on a contingent basis) so that all parties remain motivated throughout the case as their involvement may be critical to the outcome of the case. The implication of the somewhat fixed return profile means that you cannot expect that really well performing cases will translate into strong returns for investors and thus the overall return profile of the asset class is somewhat muted (Industry participants may point to Burford’s ‘Petersen’ case as an example of unlimited upside but my experience is that this type of outcome is a statistical outlier in the litigation finance market). Accordingly, with a somewhat fixed return profile time tends to work against commercial litigation finance fund managers in that it reduces their net IRRs thereby increasing the gross v. net return spread. Implications for Measuring Management Performance For investors the question remains, “if all of this noise is in the numbers and there are different ways to present returns with wildly different outcomes how do I know if my fund manager is performing and whether I should keep allocating to the sector?”.  For fund managers, the question is “how do I present my results in a way that balances the reality of my investments without being overly optimistic or overly pessimistic and thereby give investors a reasonable estimate of their expected returns so they can rely on the return estimates?”. First, you can’t manipulate cash-on-cash results.  So, the safest route for an investor is to assess performance based on IRRs that use cash-in and cash-out (this includes the realized investments and the actual Costs incurred) as the measurement mechanism, but this is only really appropriate for fully realized funds.  Of course, this approach is the most conservative but it may inadvertently penalize the fund manager as discussed earlier, especially if applied to funds that have many unrealized positions in their portfolios and some upfront losses. In the absence of a fully realized fund, the default then becomes assessing the performance of realized cases and ensuring that the unrealized cases should not otherwise be written off (managers love to hold on to their ‘losers’ to avoid the inevitable write-off so you will have to diligence whether a dated unrealized case continues to have value).  In this scenario, trying to develop a methodology that is reasonably accurate to assess value of the unrealized portion of the portfolio is critical. Fund managers and investors alike may want to interpolate how the remainder of the fund could perform based on the performance of the realized portion of the fund or the manager’s past performance in other funds, although each fund and fund manager is unique and each case has its own idiosyncrasies and binary outcome risk. So, instead of looking at a discrete outcome, I would assess a probability weighted range of outcomes. Although one needs to keep in mind that the tail of any commercial litigation finance fund will certainly perform differently than the front-end of the fund and so adjustment will need to be made accordingly if you are using interim results as a basis to forecast full fund performance. For investors, another valuation methodology would be to approach valuation from a macro perspective.  This might entail accumulating as much data as possible about realized transactions and fund performance in the commercial litigation finance industry, apply the relevant data to the strategy of the manager (for example, data that includes small financings in plain vanilla commercial disputes would be irrelevant for a manager that focuses exclusively on patent disputes), incorporate the data of the manager’s performance to date in predecessor funds (if available) and develop your own model on how you believe this fund should perform in a few different scenarios (involving differing rates of return and durations) to try and triangulate to a series of potential fund returns and then determine whether the series of outcomes fits with the risk/reward profile of the investment.  This approach could also be relevant for fund managers, especially those that are either new to the industry or have yet to establish a sufficient track record although it may be more difficult for fund managers to get data about their competitors’ returns. I would also be cautious about attributing realized results that come from secondary transactions to the manager under consideration. Just because the manager was able to convince a third party of the value doesn’t mean that is how the portfolio will necessarily perform had the manager kept those investments on their books until they realized and ultimately that is what you are trying to underwrite as an investor because you can’t count on secondaries as an exit.  Reliance on secondary transaction values in commercial litigation finance is different than other areas of private equity where it is easier to more accurately determine fair market value using accepted methodologies and metrics. Litigation Finance valuations for secondary transactions will always be theoretical in nature and ultimately dependent on some form of probability weighting to estimate values which may not bear any resemblance to the ultimate reality and could be fraught with bias.  This is not to say that you don’t give any credit to a manager that sells into the secondary market as that may be the best outcome for their fund and they can be viewed as astute capital allocators by deciding that the best outcome for their investors is to de-risk their investors at a decent return rather than continue to assume the risk.  A prime example of an astute secondary sale is the multiple secondary sales that Burford undertook of its ‘Petersen’ case which allowed it to realize hundreds of millions in profits, even though the case had significant litigation risk at the time of the secondaries and it continues to have significant enforcement/collection risk. The promise of a valuation methodology blessed by the SEC is potentially an interesting development, but ‘the devil is in the details’ and I hope to explore those details in an upcoming article concerning valuation in litigation finance. Slingshot Insights Commercial litigation finance is one of the more difficult private equity asset classes in which to perform well, consistently.  The reason for this difficulty lies in a great degree of subjectivity in the issues in dispute, the people that dispute and resolve them, and the judiciary that decides the case, if necessary. The loss ratio coupled with the relatively fixed nature of damages and the need for a fair sharing of proceeds across multiple parties also presents issues in terms of maximizing returns for investors that ultimately places a ceiling on returns (relative to other asset classes). The average single case size is USD$4.3 million according to Westfleet Advisors’ most recent survey, and so this means that it is also a difficult asset class to scale as there are relatively few cases requiring large amounts of financing which in turn means that the manager requires more people to originate and underwrite cases as compared to other private equity asset classes which also means managers need full management fees to fund their operations.  All of this results in an asset class that will inherently have a higher-than-average gross to net return spread, especially in the earlier years of the fund’s life.  Managers would be well advised to not only report their returns based on a conservative cash-on-cash basis, but also look to alternative approaches (including ASC 820) to provide investors with a view as to the likely fund returns if even by illustrating a matrix with several potential return outcomes. After all, investing is nothing if not uncertain. I also firmly believe that the litigation finance industry really needs to start charging appropriately for its capital, specifically the portion of their undrawn capital that has been committed and set aside for potential deployment – there is a cost to having this capital on the sidelines and it should be factored into the terms of the funding agreement.  Similarly, quick realizations require a minimum return on capital that should be factored into the terms of their litigation funding agreements. As always, I welcome your comments and counterpoints to those raised in this article.  Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.  Slingshot Capital inc. is involved in the origination and design of unique opportunities in legal finance markets, globally, advising and investing with and alongside institutional investors.

Omni Bridgeway Limited (ASX: OBL) (Omni Bridgeway, OBL, Group) announces its investment performance for the three months ended 31 December 2023 (2Q24, Quarter) and for the financial year to date (FYTD, 1H24). Summary:

• First close of Fund 4 and Fund 5 series II capital raise on improved cost coverage terms.
• Investment income of A$187 million in 1H24; A$32 million provisionally attributable to OBL.
• 10 full completions, 4 partial completions, and a secondary market transaction with an overall
• MOIC of 2.2x, and an IRR of 56% in 2Q24.
• A$260 million of new commitments in 1H24 with a corresponding A$4.5 billion in new EPV.
• Materially improved pricing on new commitments; 38% up on FY23.
• Strong pipeline of new investment opportunities.
• OBL cash and receivables of A$121 million plus A$60 million in undrawn debt.
• A$5.1 billion of possible EPV completions over the next 12 months.
• Review and simplification of communications and disclosures; working towards replacing EPV with a Fair Value measure.

The full investment portfolio report can be read here.

Nick Wood has 30+ years of private client advisory investment management and private equity experience, including implementation of tax planning strategies for a wide range of globally mobile clients. He has successfully built several specialist advisory and consulting businesses. Nick's first involvement in Litigation Finance in 2016; establishing, building, and successfully sourcing finance for a high-profile and high-value case against a global bank for fraudulent misrepresentation (see Upham & Others v HSBC UK Bank PLC). He was involved in establishing many similar projects since; acting for claimants, law firms, and investors with funding placed for over £1 billion of claims in 8 years. Company Name and Description:  Audley Capital Ltd. In its short life, Audley has created and developed a rapidly growing advisory, consulting, and broking business, utilising and developing groundbreaking technology. Audley aims to disrupt historic litigation finance and legal processes, ensuring investment capital, legal expertise, and claimants benefit from Audley’s experience, expertise, legal tech, and AI offerings. Audley is focused on facilitating access to justice for those unable or too risk-averse to fund it themselves. Utilising our in-depth knowledge of litigation funding, technology, and our ever-growing network of key players we aim to make the process efficient, cost-effective, and swift, facilitating successful outcomes for our mutual clients. InvestorHub, LawfirmHub, and IntroducerHub are focused on specific service provision via our website. AudleyHub+ gives access to a wide (and rapidly growing) range of AI tools and consulting services. Company Website: www.audleycapital.co.uk Contact Information: nick@audleycap.com Year Founded:  2023 Headquarters:  Notionally London, in practice Global. Area of Focus:  Case funding, strategy, legal consulting, risk analysis, claims valuation and management consulting, secondary market valuation strategies, AI consulting, and bespoke program provision. Member Quote: Litigation finance is the cornerstone of access to justice; however, the process can be cumbersome, unfocused, opaque, and too often frustrating. Through a combination of knowledge, experience, networking, and the implementation of technology Audley aims to reduce timescales, improve communication, and monitor performance; ultimately providing much-needed efficiencies and ensuring that money, legal expertise, and deal flow dynamically converge to create exceptional outcomes for all concerned. Our team is growing rapidly and we are actively seeking to build further our network of like-minded people and organisations in the investment, legal, and origination space.

Lex Ferenda is latin for “the law as it should be”. The firm includes a team of seasoned lawyers, financiers, general counsel, and retired jurists who bring value to every aspect of the cases they commit to, resulting in better outcomes for all. Below is our LFJ Conversation with Chris Baildon, Co-Founder and Chief Operating Officer of Lex Ferenda: Lex Ferenda recently announced the launch of its first fund. Tell us a little about the company, its focus, and what you’re investing in.  Lex Ferenda Litigation Funding’s (“LF²’s”) investment mandate is primarily geared towards commercial claims in the United States, with funding available for cases at any point in the dispute resolution timeline. We typically target funding towards single commercial cases averaging $1-10 million per investment, however the firm has the resources and capital to make substantially larger investments in a broad range of single cases, portfolio investments, and law firm financing. Our team consists of seasoned litigation funders, lawyers, and investors with substantial legal and financial expertise. LF² was founded by Michael German and Chris Baildon. Michael is an experienced litigator, trial lawyer, and litigation funder with more than a decade of experience litigating, resolving, and investing in complex commercial litigation and arbitration matters. Chris has three decades of global investment banking and finance experience, with substantial capabilities in management, business development, and capital raising across investment verticals, including litigation finance. LF²’s investment underwriting is directed by Andrew Kelley, who has more than two decades of complex commercial litigation experience, both as head of commercial litigation for a large publicly traded company and as an external advisor at international law firms, where he created and led programs that resulted in recoveries of almost $1 billion for his clients. The Advisory Board consists of Honorable Vanessa Gilmore, who recently retired after serving over 25 years on the federal bench, and Scott Mozarsky, who is a former GC to a public company and former President of a major legal technology outfit, and as such adds substantial legal and technology expertise. Litigation Finance is quickly maturing into a mainstream alternative asset class. Where do you see the evolution of the industry from here?    The market for litigation finance is seeing a rapid expansion in both the number of active funds as well as the amount of committed capital from institutional investors. Additionally, the penetration of third-party funding in the US is still low compared to other global markets. Recent research from Westfleet Advisors and Research Nester predicts that cases funded in the U.S. will grow by 17% year over year to 2035. As the asset class matures, I believe you’ll see a far greater volume of high profile/high value lawsuits financed through litigation funding. Similarly, I believe you’ll continue to see increasing commitments from large asset managers who are weary of market volatility and attracted to impressive returns in an uncorrelated asset class. What makes Lex Ferenda different from other funds operating in this space? What can the industry expect to see from the firm going forward? LF² is unique in that it’s anchored by institutional-grade capital from a leading global investment manager, with the discretion to invest within its target based on good judgment without the delay of seeking investor approval. This structure allows the firm to be incredibly nimble while still operating an investment platform and system of controls of the highest standard to satisfy all of our different investor groups. Our market focus on domestic commercial litigation/arbitration (within our investment target of $1-10 million per case) has allowed the firm to seize upon attractive funding opportunities with a growing pipeline. LF² adds value before and after investment with strategic case advice available from experienced legal and finance professionals with a best-in-class track record. LF² tries to live up to its exponent so-to-speak – we use the broad experience and capabilities of our day-to-day employees and the Advisory Board to offer insight and experience as the dispute resolution process progresses so that our clients can secure (hopefully exponentially) better outcomes. Of course, LF² maintains the highest level of ethical standards in funding, and our clients retain control over the litigations they fund with us. The industry can expect to see LF² make major advances in medium to large commercial case investments, while also serving as a thought leader in the litigation finance space through education and philanthropic initiatives. Speaking of those initiatives, you recently launched a pair of them—LF² University and LF² Gives.  Can you provide some background on each?   LF² University is a first-of-its kind educational initiative that aims to provide a greater understanding of the litigation finance industry. The program offers educational seminars to law firms, attorneys, businesses, students, and individuals interested in learning more about this growing field. Recently, we’ve launched Lit Finance 101 which covers the fundamentals of legal finance, and we’ll soon be launching a seminar on Litigation Finance Ethics which will cover the rules and ethical considerations involved in litigation funding. We’re equally excited about LF²’s new philanthropic initiative, LF² Gives, which seeks to make positive impacts in the communities in which LF² operates through community action programs and legal service offerings. During multi-annual “Action Days”, LF² personnel partner with local organizations to participate in various volunteer services. This past Summer, LF² Gives had its first Action Day where LF² members volunteered their time with the Food Brigade in New Jersey as well as the Food Bank of the Rockies. For those interested in learning more about (or participating in) these initiatives, we encourage you to visit our website (LF-2.com). We look forward to further collaborations with those who share our dedication to service and education as we grow.

Global law firm White & Case LLP has advised a syndicate of leading financial institutions on an upsized offering by Burford Capital Global Finance LLC, an indirect wholly-owned subsidiary of Burford Capital Limited, of US$275 million aggregate principal amount of tack-on 9.250% senior notes due 2031. White & Case previously advised a syndicate of leading financial institutions on Burford Capital Global Finance's initial issuance of US$400 million aggregate principal amount of such senior notes due 2031 in June 2023. Burford intends to use the proceeds from the offering for general corporate purposes. The closing of the offering is expected to occur on January 30, 2024, subject to customary closing conditions. Burford is the leading global finance and asset management firm focused on law. Its businesses include litigation finance and risk management, asset recovery and a wide range of legal finance and advisory activities. Burford is publicly traded on the New York Stock Exchange (NYSE: BUR) and the London Stock Exchange (LSE: BUR). The White & Case team was led by partner Jonathan Michels, associates Elizabeth Mapelli, Joanna Heinz and Jacob Manzoor, and law clerk Heidi Ahmed (all in New York).