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Ignite Specialty Risk Launches in the US with Litigation Capital Protection Insurance

By John Freund |

 Ignite Specialty Risk, a leading provider of litigation risk insurance, announced today the US launch of its Litigation Capital Protection Insurance offering and the appointment of litigation finance expert and former litigator, Nicole Silver as Lead Underwriter and Head of US Operations.

Ignite’s Litigation Capital Protection Insurance enables litigation funders and law firms to deploy capital across a portfolio of litigation assets with the assurance that their underlying investment will be protected even if the portfolio does not perform as expected. It is backed by a panel of AM Best A- (Excellent) rated capacity.

Ignite was founded in the UK in 2022 by a team with deep experience in both litigation funding and insurance. Following the company’s London market success offering the most extensive range of litigation insurance products among UK providers, Ignite is now bringing its Litigation Capital Protection Insurance product to the US market.

“Litigation Capital Protection Insurance is a relatively new concept to many funders and law firms, but it is quickly gaining popularity for its ability to protect a litigation asset portfolio investment and, as a result, facilitate a more efficient and robust capital structure within the asset class,” said Byron Sumner, Ignite CEO and Co-founder. “Ignite’s US team has significant experience in the structuring of these policies, having been at the forefront of their design for several years. We are excited to bring this expertise to the US market to help litigation funders and law firms benefit from a meaningful risk-transfer in the context of litigation, and ultimately secure access to justice for claimants with meritorious disputes.”

Silver, head of Ignite’s US operations, brings a 20-year track record litigating complex disputes. She has worked at Winston & Strawn and Greenberg Traurig and has appeared before numerous courts and tribunals including the US Supreme Court, various appellate and district courts, as well as the ICDR, ICC, ICSID, UNCITRAL, and the USTR. Silver’s experience in litigation finance includes work at Validity Finance, where she supervised and advised on litigation matters including performing due diligence and underwriting portfolios of cases. As a funder, she has had exposure to all aspects of litigation insurance, including ATE, judgment protection, and litigation capital protection insurance.

“Not only is Nicole considered to be a highly skilled attorney, she brings along an excellent track record of success litigating complex disputes, and her work as a funder has given her an insider’s view on all aspects of litigation insurance,” said Sumner. “Her extensive expertise within the insurance, investment, and legal communities will be invaluable to Ignite in the US market, and we could not be more delighted to be launching here with Nicole leading the charge.”

About Ignite:

Ignite Specialty Risk provides an extensive range of insurance products to meet the growing demands of the commercial litigation marketplace. Founded in March 2022 Ignite provides litigation risk insurance with AM Best Financial Strength Rating of A- (Excellent) capacity to a range of clients including litigation funders, law firms, and other lenders.

For a full list of licenses, visit ignitespecialty.com.

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Florida Litigation Finance Bill Stalls in House Without Committee Support

By John Freund |
As LFJ reported in recent weeks, the Florida state legislature has been the latest venue to see bills introduced which seek to impose a greater array of restrictions on the use of third-party litigation funding. Whilst the Senate saw success with its draft legislation at the committee stage, the House version of the bill has now failed to move forward twice. Reporting from Florida Politics provides an update on HB 1179, the ‘Litigation Investment Safeguards and Transparency Act’, which once again had its committee vote deferred and failed to progress past the House Justice Appropriations Subcommittee. The vote on the bill was deferred due to it failing to garner the support of Republican Representatives Mike Beltran, Mike Redondo and Paula Stark, along with the absence of Rep. Wayne Duggan.  With one absentee and three Republicans remaining opposed to the bill, the vote was deferred rather than face defeat by the Democrat representatives on the committee who would constitute a majority and are also opposed to the draft legislation. In an attempt to move the bill forward, Rep. Tyler Sirois has proposed an amendment that would soften disclosure requirements around financing agreements, by excluding the amount of funding provided and details of attorney’s fees and costs from any disclosure. It is unknown whether such an amendment will be sufficient to win majority support from the committee members, and if it is, when the committee could schedule a third attempt at a vote.

Music Royalty Claimant Points the Finger at Litigation Funder

By John Freund |
When large companies are targeted by lawsuits supported by third-party litigation funders, it is not uncommon for these defendants to draw public attention to the presence of these funders to raise questions about the nature of the claim itself. A press release from one such corporate defendant appears to show this same tactic being used, with the company positioning the information as part of its response to ‘media commentary’ on the lawsuit. An article in Proactive Investors covers an announcement from Hipgnosis Songs Fund (SONG), a music royalty group, related to the ongoing legal claims being brought against it in the High Court. The litigation was filed last year by Hipgnosis Music Limited, who accused SONG, its founder Merck Mercuriadis, and the company’s investment adviser Hipgnosis Songs Management (HSM), of ‘diverting business opportunities to the trust and HSM.’ The company announcement largely focused on SONG’s appointment of commercial litigation specialists, Kastle Solicitors, ‘to review the claim’, and its intention to ‘seek to secure an indemnity from Mr Mercuriadis and Hipgnosis Songs Management against any liability that might be incurred.’  However, the announcement also revealed that SONG ‘has recently become aware that Hipgnosis Music Limited has secured litigation funding’, as the plaintiff is looking to ‘recover a substantial but as yet unquantified sum under the claim’. The announcement did not reveal the identity of the litigation funder or how the company has discovered the involvement of a third-party financier.

Gordon Legal Exploring Funded Class Action Against Magnis Energy Technologies

By John Freund |
Class actions representing investors who lost money due to the failings or fraudulent behaviour of corporate directors are a top target for litigation funders, with Australia being a prime jurisdiction for these claims. The appetite for these class actions has been highlighted once again as an Australian law firm has stated that it is exploring a claim, supported by litigation funding, against a battery manufacturing company. Reporting by The Australian reveals that Gordon Legal is investigating a potential class action against Magnis Energy Technologies, which would represent both current and former Magnis investors who suffered financial losses. The claim would primarily focus on Magnis’ actions from 2021 onwards, with the law firm exploring potential wrongdoing around the company’s directors ‘providing market sensitive information to shareholders, while the market remained uninformed.’ Speaking with The Australian, Andrew Grech, partner at Gordon Legal, emphasised that the law firm was “at the beginning, not the end, of our investigations,” but explained that the scope of the claim could include “the conduct of the directors, officers, and (Magnis’) auditors Hall Chadwick.” He also revealed that the firm had already made progress towards securing third-party funding for any potential claim, saying, “The discussions with funders are proceeding as we would hope and like us they want to get to all the facts and circumstances before any decision is made.”

Litigation Funders See ‘Incredible Opportunity’ in Impact Investing

By John Freund |
Whilst there is much debate about what constitutes ESG investing and to what extent it is driven by a desire to achieve positive outcomes rather than increase financial returns, there can be no doubt that the litigation funding industry is increasingly focused on impact investments. An article in Bloomberg Law looks at the ongoing trend of litigation funders focusing their investments on cases with a positive social impact, with ESG issues at the forefront of many funders’ investment strategies. The article highlights several examples of new funders launching their businesses with an explicitly stated focus on impact investing, including the likes of Aristata Capital, Vallecito Capital, and Flashlight Capital. For Aristata Capital’s chief executive, Rob Ryan, the interest from funders in social impact cases is a clear result of the “recognition from investors that this is an incredible opportunity to generate impact and some significant returns.” Will Zerhouni, managing director at Flashlight Capital, argues that it speaks to the reason why legal professionals take on their vocation in the first place: “it wasn’t because this was the fastest way to money, but this was the fastest way to justice.” Looking at the trend from an outside perspective, Richard Wiles, president of the Center for Climate Integrity, acknowledges that whilst “hedge funds are going to bring a profit motive and will have a narrower set of cases that they’ll want to get involved in,” they can still offer a helping hand to plaintiffs who lack the financial resources to bring a claim.  Michael Gerrard, founder and faculty director at the Sabin Center for Climate Change Law, argues that the true test for the longevity of funders’ interest in social impact “is which of these cases will yield money.” Gerrard points out that, to date, “there hasn’t been a single court decision anywhere in the world awarding money damages against fossil fuel companies because of climate change.”  

An LFJ Conversation with Tanya Lansky, Managing Director of LionFish

By John Freund |
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.
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Member Spotlight: Steven Weisbrot

By John Freund |

Steven Weisbrot is an internationally recognised class action expert who is known for innovative data-based media and bookbuilding plans as well as class and collective action claims administration and distributions. He regularly writes and lectures on class action notice and is a widely sought out speaker to address industry conferences across the globe, as well as bar associations and private law firms, on the best methodologies to communicate with large audiences and driving them to act.

Steven is often hired for his expertise where local norms require cultural nuance or where comprehensive messaging is at the heart of case communication requirements. He is the only class action notice expert currently running notice programmes in five different European countries, in addition to the thousands of integrated notice plans that he has successfully implemented in the United States.

Steven received his J.D. degree from Rutgers University School of Law and holds a bachelor’s in Professional Writing from Rowan University.

Company Name and Description:  Angeion Group provides comprehensive settlement management services for class and collective actions, including notice, distribution and claims administration.

Company Website: www.AngeionGroup.com

Year Founded:  2014

Headquarters:  Philadelphia, PA

Areas of Focus: Class and Collective Actions including Bookbuilds, Claim Rate Estimates, Notice Programs and Distribution of Proceeds.

Member Quote: I see our role as notice and claims administrator as an essential element of providing access to justice in the truest sense of the phrase, which in large part, is what the funding mechanism is designed to do.  By notifying and then verifying claimants, we make sure that the monies are distributed to as many legitimate claimants as possible.  We also assure the justice or judge that all reasonable steps are being taken to reach claimants, which is of heightened importance in an opt-out situation since claimants will be bound by the judgment whether they see the notice of settlement or not.  We work with funders to help estimate the take up rates and redemption rate as part of their due diligence.

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Using Litigation Funding for Shareholder Disputes and Claims Against Directors

By John Freund |
As litigation funders continue to try and grow their offering for corporate entities, they are looking to engage in a wide variety of cases, such as shareholder disputes. A new blog post from a UK law firm looks at the different ways third-party funding can support both companies and shareholders to pursue meritorious claims, helping them offset costs and reduce risk. An insights post from Damian Carter and Jessica Kraja at Weightmans highlights the different use cases for litigation funding in company and shareholder disputes, examining how third-party financing can achieve successful outcomes whilst reducing risk levels. Analysing shareholder disputes, Carter and Kraja acknowledge that shareholders looking to pursue a case against the company may find it ‘difficult to find the funds personally to pay for legal costs to bring such a claim’, especially when faced with the prospect of having to pay adverse costs if the claim is unsuccessful.  Similarly, the authors highlight an example where majority shareholders may face a claim from a group of disgruntled minority shareholders, and are unable to use company funds to finance their defence. In both situations, third-party funding may provide an avenue for shareholders to cover the costs of litigation without adding to their own risk portfolio. Carter and Kraja also raise the possibility of companies wanting to bring claims against directors who breach their fiduciary duties, thereby creating a dispute that the company’s legal department may not have accounted for in their budget and planning. Once again, litigation funding can enable the company to pursue such a claim against a director, without further straining internal legal costs. The article also highlights Weightmans’ own all-in-one litigation funding solution: Enable. The firm’s litigation funding service provides clients with a streamlined process for securing outside financing for their disputes, with Weightmans bringing together the funder, insurer, and broker, to craft a bespoke funding solution. The Enable service aims to complete the funding and insurance process within 18-21 days, and includes a review of the funding terms by a specialist broker to ensure the client receives a competitive offer.

Judgement Preservation Insurance in the Spotlight in Health Insurers’ Dispute with Quinn Emanuel

By John Freund |
Alongside the growth of the litigation finance market, the proliferation of litigation insurance services has also experienced its own boom through the provision of a variety of policies, including after the event and judgement preservation insurance. A new court order in a dispute between a law firm and its clients over fees may now shed some light on the world of litigation insurance, which has as similar a reputation for limited transparency as litigation funding. An article in Bloomberg Law covers a new development in the dispute between Quinn Emanuel Urquhart & Sullivan and the health insurers which it represented in a case brought against the federal government over unfulfilled payments under Obamacare. The law firm has been ordered to disclose its judgement preservation insurance (JPI) policy documents, which it obtained on its $185 million fee to represent the insurers. Last year, an appeals court overturned the nine-figure fee and then ordered a federal court to recalculate the fee. US District Judge Kathryn Davis ordered Quinn Emanuel to hand over the details of the JPI policy, after the insurers argued that it was necessary to ensure they would receive an equitable payment if the recalculation of the fee resulted in a reduced amount.  Explaining her reasoning for ordering Quinn Emanuel to hand over the policy documents, Judge Davis said that “the JPI’s terms may be relevant to the court’s task on remand if the policy provisions are inconsistent with the court’s objective ‘to ensure an overall fee that is fair for counsel and equitable within the class.’”

Portfolio Funding for Law Firms in the Energy Sector

By John Freund |
Whilst single case funding remains the bedrock of the litigation finance market, portfolio funding for law firms has continued to grow in popularity, thanks to its ability to offer a source of capital that can be deployed in a variety of ways. A new article suggests that the energy sector may be a prime candidate for the expansion of portfolio funding. In a guest editorial for the February issue of Inside Energy, Peter Petyt, CEO of 4 Rivers Services, examines the opportunities for third-party dispute funding in the energy sector. In particular, Petyt focuses on the opportunities for law firms who specialise in energy litigation, and how portfolio funding can be used to enhance their offerings to clients across the sector. Petyt provides a detailed overview of the different aspects of portfolio funding, explaining how law firms can use the capital in different ways: ‘to pay the (often significant) disbursements of a case (including court and arbitration fees, experts, e-disclosure etc); and potentially to fund other initiatives such as acquisitions, recruitment, marketing and IT.’ Petyt goes on to highlight that the portfolio funding model ‘allows for the law firm to draw capital more flexibly than in a single case funding scenario’, and has the benefit of avoiding ‘much of the often complex and torturous nature of single-case funding.’ Petyt points out that for law firms assessing energy sector claims with a variety of strength and viability, portfolio funding can enable the law firm to pursue some of these less sure claims as ‘the funder’s return is collateralised by all cases within the funder’s portfolio.’ He also draws specific focus to the current state of the energy sector, noting that ‘increased globalisation of the energy sector has made dispute avoidance and resolution strategies increasingly important for mitigating risk’. In this environment, third-party portfolio funding can allow law firms to offer their energy clients bespoke fee solutions that maximise positive litigation opportunities whilst downsizing their risk profile.

CFLF Announces Relaunch of Campaign to Reform Consumer Lawsuit Lending 

By John Freund |
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/.
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Gross v. Net Return Dispersion in Commercial Litigation Finance

By John Freund |
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.
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Florida House Subcommittee Defers Vote on Litigation Funding Transparency Bill

By John Freund |
As LFJ reported last week, efforts in state legislatures to enforce tighter regulations on third-party litigation funding have started the year strong, as the Florida State Senate moved forward with its ‘Litigation Investment Safeguards and Transparency Act’. However, it appears that the state legislature’s two chambers are not moving entirely in lockstep with one another, as a House committee has delayed a vote on its own version of the bill. Reporting by Florida Politics revealed that the House Justice Appropriations Subcommittee had deferred its vote on HB 1179, also titled as the ‘Litigation Investment Safeguards and Transparency Act’. The decision to defer the vote followed a request from the bill’s co-sponsor, House Judiciary Committee Chairman Tommy Gregory. No explanation was provided as to why Rep. Gregory had requested the delay. Whilst the bill is paused in the House, the Senate’s Criminal Justice Committee is scheduled for a hearing today on SB 1276, the Senate’s companion bill. As LFJ’s reporting covered last week, the draft legislation seeks to impose several new restrictions on litigation funding, most notably by enhancing disclosure requirements and giving the courts the ability to consider the details of funding agreements when evaluating conflicts of interest. The bill also lays out restrictions on funders involvement and control of cases, as well as prohibiting funders from assigning or securitizing any part of the funding agreement.

CAT Hearing Begins in Harbour-Funded Class Action Against BT

By John Freund |
Despite the issues caused by the Supreme Court’s judgement in PACCAR, UK class actions backed by third-party funders continue to gain momentum in the courts. This week has marked the beginning of a trial for one of these funded cases, as BT finds itself defending allegations of anti-competitive behaviour and overcharging customers, in a case backed by one of the world’s leading funders. An article in the Financial Times highlights the start of the trial in the class action brought against BT over charging consumers excessive prices for their landline services, with the case being financed by Harbour Litigation Funding. The hearing in the Competition Appeal Tribunal (CAT) began on Monday and is scheduled to continue for the next eight weeks, with the class action representing BT customers on an opt-out basis.  The case’s significance is heightened due to its position as the first to reach trial following the implementation of the 2015 Consumer Rights Act. Given the class action’s proximity to last year’s Supreme Court ruling in PACCAR, observers are watching closely to see how any potential financial returns for the funder will be structured. Anna Morfey, antitrust partner at Ashurst, explained that the case “will be instructive to see how any damages awarded are distributed to the class members — and how much ends up in the pockets of the lawyers and funders.” In response to the litigation, BT denied the allegations and stated, “We do not accept that our pricing was anti-competitive back then, and as such are committed to robustly defending our position at trial.” Harbour revealed that it has “committed an eight-figure amount to cover the costs associated with bringing the claim”, with chief investment officer, Ellora McPherson describing their involvement as a “reminder of the important role that litigation funders can play in ensuring consumer claims can be pursued to conclusion”.

BMW Seeks Disclosure of Funding Documents amid Arigna Technology’s Dispute with Longford Capital

By John Freund |
The role of patent monetization firms and their intersection with litigation funders has been the subject of significant scrutiny over the last year, with corporate defendants arguing that funders are using these monetization firms to file frivolous lawsuits to make a profit. Arigna Technology, one of these prominent patent firms, is now firmly in the spotlight after its dispute with Longford Capital has prompted defendants to seek further disclosure of its litigation finance agreements. Reporting by Bloomberg Law covers BMW’s efforts to force the disclosure of documents detailing litigation funding arrangements between Arigna Technology and Longford Capital, as part of the patent infringement lawsuit brought against the German automaker by Arigna. BMW’s push for disclosure comes after Arigna’s relationship with Longford came to light in a Delaware Court late last year, where Arigna sued its funder over proceeds from various patent infringement cases. Last week, BMW filed an opposition to a motion to withdraw, after law firm Susman Godfrey had sought to withdraw from the patent infringement lawsuit brought by Arigna against BMW in the Eastern District of Virginia. Susman Godfrey has represented Arigna across its patent litigation efforts and has received direct funding from Longford for the cases. However, the law firm had filed its motion to withdraw from the case in Virginia, arguing that Arigna’s lawsuit against Longford had created a conflict of interest. In its filing, BMW argued that “documents related to the perceived value of Arigna’s portfolio are relevant to damages, and documents regarding the scope, strength, or content of the patent-in-suit are relevant to non-infringement and invalidity.” Due to the relevance of these funding arrangements and the possibility that BMW may seek recovery from Susman Godfrey at a later date, BMW argued that the law firm “should not be permitted to withdraw at least until the discoverability of the ‘Funding’ and ‘Engagement’ Agreements is resolved”.

Highlights from Burford Capital’s 2023 Research Reports

By John Freund |
A post from Burford Capital’s chief marketing officer, Liz Bigham, looks back at the trio of research reports that the funder commissioned in 2023, picking out the key insights uncovered from the surveys. In all three reports, Burford surveyed GCs and senior in-house counsel, looking at their attitudes, priorities, and concerns across commercial litigation and arbitration. In the litigation economics survey, Burford found that 74% of the in-house lawyers surveyed expected ‘an increase in the volume of disputes over the next two years because of the current geopolitical, economic and regulatory environment.’ In the face of the increasing financial burden from these disputes, 62% of respondents expressed their desire for ‘law firms to offer more creative pricing solutions, such as alternative fees.’ Burford’s commercial dispute & enforcement economics survey switched focus to examine how these legal teams were ‘optimizing the value of pending claims, judgments and unenforced awards without adding cost to their legal budgets.’ Judgement enforcement and collection proved to be a major pain point for these lawyers, with 2% of those surveyed reporting that ‘they recovered 100% of the value of their judgments and awards over the last five years.’ Encouragingly for litigation funders, when in-house counsel were asked what they were looking for in outside law firms, 69% included ‘familiarity with legal finance’ as a key attribute. Finally, Burford’s survey on ‘the commercial disputes leadership diversity gap’ explored the work that in-house lawyers are doing to improve diversity in the profession. The results showed an interesting gap between expectations and formal guidelines around diversity, with only 44% of respondents confirming that ‘they apply formal requirements for diversity to the law firm teams that represent them in court.’ In terms of making progress on this issue, 76% said ‘they would benefit from being exposed to recommended female and racially diverse litigation and arbitration lawyers from a trusted source.’

The Potential Benefits of Standardizing Litigation Funding Agreements

By John Freund |
As the size and influence of the global litigation finance industry has grown, so too has the frequency and intensity of criticism leveled at the practice. To combat these critiques, litigation finance leaders continue to explore different avenues to reinforce the credibility of third-party funding. In an opinion piece published on Bloomberg Law, Tets Ishikawa, managing director at LionFish Litigation Finance, has suggested that implementing some form of standardization across litigation funding contracts could bolster these efforts to improve the industry’s reputation. He argues that ‘standardized agreements can play a pivotal role in improving transparency in litigation funding,’ thereby offering a solution to one of the most commonly voiced critiques of third-party funding. Ishikawa begins his piece by comparing litigation finance to the derivatives market, explaining how the introduction of a master agreement by the International Swaps and Derivatives Association (ISDA) ‘reaped enormous gains in market efficiency and transparency.’ He argues that for documentation used in both litigation funding and litigation insurance, introducing some form of standardization could ‘enhance the market’s global credibility, legitimacy, and transparency.’ Looking at what areas of litigation funding documents could be standardized, Ishikawa identifies several ‘key basic concepts’ that could benefit from global uniformity. These concepts include proceedings, funder profits, termination events and default provisions, drawdown processes, and waterfalls/priorities agreements. As Ishikawa points out, ‘as the market evolves, more concepts will become obvious candidates for standardization.’ As for the specific benefits that standardization of litigation funding agreements could offer, Ishikawa argues that it would immediately result in ‘execution efficiencies’, with the ‘savings passed onto plaintiffs.’ He also suggests that another important upside from standardization would be its encouragement of ‘openness and transparency’, which Ishikawa believes could be ‘a major tool in removing rogue funders.’ An additional benefit identified is that standardization would ‘bring a level of maturity that brings the market structurally closer to other financial markets’, something that Ishikawa highlights as one way to tackle fears of foreign interference through litigation funding.

Omni Bridgeway Releases Investment Portfolio Report at 31 December 2023

By John Freund |
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.
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Member Spotlight: Nick Wood

By John Freund |
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 Websitewww.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.
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An LFJ Conversation with Chris Baildon, Co-Founder and Chief Operating Officer of Lex Ferenda

By John Freund |
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.
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White & Case Advises on Burford’s Upsized $275 Million Senior Notes Offering

By John Freund |
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).
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An Overview of Dispute Funding Regulations in Hong Kong

By John Freund |
Whilst regulations that govern litigation funding in the industry’s major jurisdictions are continually evolving, the established rules for countries such as Australia, the UK and US are well understood. For those funders looking to expand their footprint to other territories, such as Asia, it is important that newcomers to these markets understand the boundaries in which they can operate. An article in Financier Worldwide gives a detailed overview of the current state of third-party dispute funding in Hong Kong, with the insights provided by Brian Gilchrist, Elaine Chen, and Alex Wong from Gibson, Dunn & Crutcher. The authors begin by establishing the overriding principle that Hong Kong is still a jurisdiction that broadly prohibits the use of third-party funding, apart from three categories of disputes where its use is permitted. As the article explains, two of these categories are more simply defined. The first is described as ‘common interest’ cases, “where a third party has a legitimate interest in the outcome of someone else’s lawsuit, and is therefore justified in supporting it.” This is illustrated by the example of a vehicle rental company funding claims who had suffered accidents whilst driving the rented vehicles. The second category includes cases ‘where access to justice will be obstructed if a claimant is prevented from obtaining third-party funding’, such as situations where a plaintiff “has rightful title to property” but lacks the financial means to pursue the claim. Moving to the broader final category of cases where outside funding is permitted, the article’s authors outline the types of cases where third-party funding has been recognised as permissible either by the courts or through specific regulations. This includes funding for insolvency litigation and arbitration cases, with the latter group of disputes governed by the outcome-related fee structures arrangements (ORFSA) rules introduced in 2022. The full article then provides a detailed requirement of the types of fee arrangements permitted under ORFSA, as well as the requirements that funders must adhere to. As the experts from Gibson, Dunn & Crutcher summarise, whilst third-party funding for court litigation in Hong Kong is “generally unavailable, save in exceptional circumstances”, the rules for arbitration proceedings are much more receptive and allow for “various funding solutions.”

Florida’s Senate Judiciary Committee Offers Unanimous Support for Increased Regulation of Litigation Funding

By John Freund |
A trend in the US litigation finance industry over the past year has been the introduction and passage of bills in state legislatures designed to curtail the use of third-party funding through the imposition of more stringent rules governing its use. The beginning of 2024 indicates that this trend is not slowing down, as a bill that lays down a swathe of new rules for litigation funding has received unanimous support at the committee stage in the Florida State Senate.  An article in Insurance Journal covers the unanimous vote by Florida’s Senate Judiciary Committee to endorse and move forward with SB 1276: the ‘Litigation Investment Safeguards and Transparency Act’. The bill, which was sponsored by Sen. Jay Collins, looks to increase disclosure requirements for third-party litigation funding and codify limits on the level of control that funders can exert on a lawsuit. The current draft text of the bill requires: claimants and lawyers to disclose any financing agreements, funders to indemnify their clients against adverse costs, and allows courts to take funding arrangements into consideration when assessing any potential conflicts of interest. Furthermore, it lays out prohibitions on funders: taking control of decision-making during lawsuits, receiving a larger share of any award than the claimants, paying commissions or referral fees to other parties, assigning or securitizing any part of the funding agreement. The bill’s progress through the Florida Senate received praise from the American Property Casualty Insurance Association and the U.S. Chamber of Commerce Institute for Legal Reform. Critiquing the extent of the bill’s rules on the use of third-party funding, Rebecca Timmons from the Florida Justice Association, emphasized that Floridians “can’t go toe to toe when the other side has millions to spend on lawyers,” without the use of litigation financing.

Tets Ishikawa: Post Office Scandal Should Trigger Debate Over Recoverability of Costs and Exemplary Damages

By John Freund |
Attention drawn to the UK Post Office scandal over recent weeks has brought conversation around the importance of litigation funding to the foreground, with funders highlighting it as yet another example of third-party funding promoting access to justice. In a recent op-ed, Lionfish’s Tets Ishikawa not only highlights the crucial role that funding played in the case, but uses it to argue for a wider re-examination of the issues of recoverability and exemplary damages. In an opinion piece for The Law Society Gazette, Tets Ishikawa, managing director of LionFish, looks at the Post Office scandal both as an example of the value of litigation funding, and as an important reminder that the issue of recoverability is overdue for further debate and potential reform. As Ishikawa puts it, the central issue that the litigation highlighted was not ‘the cost of litigation’, it was actually ‘that the cost of funding is a tax that impecunious claimants have to pay to access justice.’  He expands on this idea by suggesting that the courts should be given ‘discretion to allow for the recoverability of success fees, ATE premiums and litigation funding costs.’ Ishikawa notes that ‘recoverability is not a flatly rejected notion,’ highlighting the cases of Essar Oilfields Services v Norscot Rig Management and Tenke Fungurume Mining SA v Katanga Contracting Services SAS, where the High Court ‘refused to deem the award of funder costs as erroneous.’  Beyond the financial burden, Ishikawa also argues that the Post Office demonstrates that ‘there is not enough deterrence to stop these kinds of injustices happening in the first place.’ Looking at other historical precedents, Ishikawa raises the Law Commission’s 1997 report on Aggravated, Exemplary and Restitutionary Damages, in which the future Supreme Court Justice Lady Arden of Heswall supported the idea of allowing courts ‘to award exemplary damages to discourage corporate wrongdoing.’

UK Lawyers Call for Broader Scope in Government’s Commitment to Reverse PACCAR

By John Freund |
As LFJ recently reported, the British government has continued to offer encouraging statements that suggest it will take legislative actions to reduce or even negate the impact of the Supreme Court’s PACCAR ruling. However, as a new article highlights, senior figures across the UK’s legal industry are cautioning that however encouraging these proclamations might be, the effectiveness of these measures must be assessed by their details. Reporting by City A.M. provides insight into the attitudes of legal professionals in the wake of the Justice Secretary’s announcement that the government would move quickly to offer a legislative fix to “the damaging effects” of PACCAR. The article first highlights positive reactions to the statement, such as Luke Tucker Harrison, partner at Keidan Harrison, who praised the Justice Secretary’s comments and said that it “ensures litigation financing can continue to be offered in a flexible manner maximising its commercial availability to parties.” Daniel Gore, senior associate at Withers, also offered praise for the government’s statement of intent, but noted that “there might be questions over the true motivation of the government to act now, and potentially in conflict with the general constitutional idea of a separation of powers.” Speaking to the narrow focus of the government’s current efforts in their amendment to the DMCC bill, Andrew Leitch, partner at Bryan Cave Leighton Paisner, said that the if the government truly wanted to protect the use of funding in cases similar to the Post Office litigation, “then such an across-the-board reversal may be necessary.” Martyn Day, co-president of The Collective Redress Lawyers Association (CORLA), noted that whilst the government’s commitment was “very welcome”, the current version of the DMCC amendment would have a limited impact, and “there is no reason why the amendment should apply simply to competition claims.”

Ramco Shares Report on Litigation Financing in Spain

By John Freund |
Among the individual country jurisdictions within Europe, Spain has been identified by many law firms and funders as a market with a strong potential for adoption of litigation finance services. A new survey published by Ramco Litigation Funding provides further evidence to support this idea, with Spanish legal professionals overwhelmingly reporting a ‘keen interest’ in litigation finance services. An article in Iberian Lawyer provides key takeaways from the inaugural Ramco – Esade Forum, which was held last week as part of the ongoing partnership between Ramco Litigation Funding and the Esade Law School in Madrid. The event saw the unveiling of the first edition of ‘Informe Sobre La Financiación De Litigios En España’, a report focused on litigation funding in Spain, which surveyed Spanish legal professionals about their attitudes towards the practice. The survey found an overwhelmingly positive attitude towards litigation funding in the country, with 90% of respondents expressing ‘a keen interest in understanding Litigation Financing solutions.’ Furthermore, 75% of those surveyed said that they saw litigation funding as ‘a viable alternative, considering it a key tool for risk management in the current economic landscape.’ In the most encouraging sign for litigation funders in Spain, 90% of respondents who had already accessed litigation finance services reported ‘high satisfaction levels’ and expressed ‘a willingness to repeat the experience.’  The report was produced in conjunction with LOIS (Legal Operations Institute Studies), and involved the surveying of 106 legal professionals through 30 separate questions, and eight in-depth interviews with experts. The full report (in Spanish) can be accessed through Ramco’s website.

POLARIC PARTNERS Launches as a Litigation Funder in Germany

By John Freund |
POLARIC PARTNERS GmbH is opening its doors under the management of longstanding litigation funding specialist Markus Glaser. The company provides litigation financing in return for a success-based share of the litigation proceeds. Litigation funding has established itself in the market for legal disputes as part of risk management. Companies, consumer groups, lawyers and insolvency administrators in particular make use of this opportunity to mitigate their own cost risks and those of their clients. Court costs, lawyers' fees and expensive expert opinions are a burden in any legal dispute, even at the planning stage. Litigation funders cover these costs from the outset, making it easier for their clients to plan upcoming disputes in a way that conserves liquidity. Clients only pay the funder if they are successful - from the proceeds they recover from the defendant. POLARIC PARTNERS GmbH presents itself with a network of funding and service experts and offers its clients tailor-made solutions for entrepreneurially sensible legal disputes. Its partner-focused approach sets it apart from many other offers on the market. Litigation is just as much a part of its repertoire as cases that clients prefer to keep out of court. In suitable cases, the company offers to take over claims in full so that the customer does not have to take legal action themselves. "The market for litigation funding has been dynamic for years and still has a lot of potential for development from the customer's point of view," Glaser is convinced: "Over 90% of all funding requests are unsuccessful. We want to support customers with their individual funding requirements in a more tailored way - as a strategic partner, in long-term business relationships, for our mutual benefit". About POLARIC PARTNERS:  POLARIC PARTNERS GmbH is a litigation funder for companies, consumers, lawyers and insolvency administrators. As a specialized service provider for legal disputes, it assumes the costs of court proceedings, from the advance on court costs and statutory and contractual lawyers' fees to expert witness fees - and if the customer is unsuccessful in the legal dispute, also the opponent's costs. In addition to the exemption from costs, even advances on the principal claim are possible as monetization. POLARIC PARTNERS has a network of partners in Germany and abroad that enables it to handle legal disputes worldwide, regardless of the amount of the claim. At the heart of every case is a partnershipbased understanding of cooperation and intensive individual support for the client.
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Member Spotlight: Marc Grossman

By John Freund |
Marc D. Grossman is a highly accomplished attorney and businessman with an impressive track record of success. Over the course of his career, he has consistently demonstrated his exceptional legal skills and business acumen, earning him billions of dollars across various ventures. With decades of experience under his belt, Mr. Grossman stands out as a true leader in his field. His legal career began after graduating from the University of Michigan in 1989. He then went on to further his education by completing the prestigious JD/MBA program at both Brooklyn Law School and Baruch Business School. During this time, he also interned at the Law Department of the United Nations, gaining valuable experience in international law. Since then, Mr. Grossman has made a name for himself as a Partner and Founding Partner at multiple law firms including Sanders Phillips Grossman LLC, Sanders Aronova Grossman Woycik Viener & Kalant PLLC, Sanders Grossman Aronova PLLC, Aronova & Associates PLLC, and Milberg Coleman Bryson Phillips Grossman PLLC. Throughout his career, he has been involved in high-profile product liability cases and has represented large groups of plaintiffs against major corporate defendants. His expertise extends beyond the legal world as he also serves as a member of the Board of Directors for Shay Capital and Esquire Bank. Additionally, he is a Broadway producer and proud owner of a professional basketball team. With such diverse interests and achievements, it's clear that Mr. Grossman is not only a talented attorney but also a well-rounded individual. In summary, Marc D. Grossman is an accomplished attorney and businessman who continues to make an impact in various industries through his hard work, dedication, and impressive skillset. His passion for justice and pursuit of excellence have solidified his reputation as one of the most successful professionals in his field. Company Name and Description:    Milberg Coleman Bryson Phillips Grossman, LLC Company Website: milberg.com Year Founded:  1965 Headquarters:  1311 Ponce de Leon Avenue, San Juan, Puerto Rico 00907 Area of Focus:  Mass Torts Litigation, Commercial Litigation, Defective Products, Environmental & Toxic Torts Litigation Member Quote: "Victims' rights are human rights. We must never forget that behind every corporate injustice, there are real people who have been hurt and deserve access to justice."
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Managing Duration Risk in Litigation Finance (Part 2 of 2)

By John Freund |
The following is the second of a two-part series (Part 1 can be found here), contributed by Ed Truant, founder of Slingshot Capital, Executive Summary
  • Duration risk is one of the top risks in litigation finance
  • Duration is impossible to determine, even for litigation experts
  • Risk management tools are available and investors should make themselves aware of the tools and their costs prior to making their first investment
  • Diversification is critical in litigation finance
Slingshot Insights:
  • Duration management begins prior to making an investment by determining which areas of litigation finance have attractive duration risks
  • Avoidance can be more powerful than management when it comes to duration in litigation finance
  • There is likely a correlation between duration risk and binary risk (i.e. the longer a case proceeds, the higher the likelihood of binary risk associated with a judicial/arbitral outcome)
In the first article of this two-part series, I provided an overview of some of the issues related to duration in the litigation finance asset class.  In this article, I discuss some of the ways in which investors can manage duration risk, both before they invest and after they have invested. Managing Duration Risk The good news is that there are many ways to manage duration risk in litigation finance and you can use the various alternatives in combination to create your own portfolio to mitigate the risk. Before we look at how we can manage duration through an exit of an investment, let’s first explore how we can avoid duration risk before we even start investing.  That is to say which investments have lower levels of duration risk to begin with so we can avoid duration risk going into an investment. Case Type Selection On the commercial side, post-settlement cases have a low degree of duration risk as the litigation risk has mainly been dealt with through the settlement agreement and the resulting risks relate to procedural (generally timing) and collection risk.  Similarly, appeals finance is generally involved with cases that have less litigation risk as the issue at play is usually a specific point of law and the timeline for appeals tends to be relatively certain and short while the costs are fairly well defined. Consumer litigation cases (think personal injury cases, other than mass torts) tend to have relatively dependable timelines and so this can be a very attractive area in which to invest with less duration uncertainty, but it does come with some ‘headline’ and regulatory risk.  Mass tort cases, which technically are consumer cases, have different dynamics because of the sheer size of the claims and the complexity of the multi-jurisdictional process which require test cases to prove out the merits and values of the cases.  So, I would view these as being similar to large commercial cases in terms of their dynamics with respect to duration. Other case types such as international arbitration and intellectual property disputes tend to have much longer durations in general and so avoiding these case types is a way to mitigate duration risk within a portfolio. Case Sizes Based on some statistical analysis I had prepared from funder results (my demarcation point between small and large was based on one million in financing) and on review of a large number of case outcomes of different sizes, there appears to be some correlation between the size of the financing and the duration of the case. Smaller financings (and presumably, but not necessarily, smaller cases) tend to have shorter durations than larger financings.  The correlation could result from the fact that litigation finance is more effective in smaller cases or that there is generally less at risk in smaller cases and hence rational parties tend to resolve things more quickly when there is less to squabble over.  The exact reason will never be known, but there does appear to be some statistical correlation to support the finding.  Accordingly, one way to manage duration risk would be to focus on smaller sized cases. Case Jurisdiction Selection Not all jurisdictions are created equal in terms of speed to resolution.  Accordingly, one might want to investigate the best venue for their cases given their portfolio attributes to ensure they are in jurisdictions where duration risk is lower than others.  Of course, jurisdictions don’t offer duration risk in isolation and so you will need to know what you are trading off by investing in cases in jurisdictions with a faster resolution mechanism as there will likely be trade-offs with economic consequences.  This could involve different countries, different states within a given country, and different judicial venues (arbitration vs. court).  There are even certain judges that progress through cases at a quicker clip and are less prone to allow for unnecessary delays.  Of course, you may not be able to pick your judge and even if you can there is no guarantee you will end up with the same one you started. Case Entry Point  If you are a fund manager, another way to manage duration risk on the front end, aside from case type selection, is to focus on those cases that are already in progress and therefore should have a shorter life cycle because you are entering them later in their life cycle.  While this doesn’t deal with the situation where the case goes on longer than anticipated, it does decrease the overall length of the case by deciding to enter it at a later stage, but then you don’t always have a choice when you enter a case as it may be presented to you at a particular point in time and then you may never get the opportunity to invest in it again.  In this sense you could suffer from adverse selection if you only selected late-stage cases as you are only investing into a subset of the broader market of available cases. Liquid Investments Another way to mitigate duration risk is to focus on a liquid alternative that provides similar exposure through the publicly-listed markets, which is a topic I covered recently in a two-part article which can be found here and here under the heading of Event Driven Litigation Centric (“EDLC”) investing.  EDLC has the distinct advantage of being liquid through a hedge fund structure that provides redemption rights which allows the investor to somewhat control duration although ultimate duration is typically dictated by the timing of the event itself.  Of course, as investors move into the public markets, they start to add correlation to their portfolio which may be at odds with your duration/liquidity objectives. While it is beneficial to deal with duration risk on the front end through the case selection options outlined above, once an investor has concluded their investments, there are some options still available to deal with duration risk as outlined below. Secondary Sales  As the litigation finance industry has evolved, so to have the number of solutions in the marketplace.  While secondaries have been taking place informally for years (hedge funds, litigation funders, family offices, etc.) there has only recently been a formalizing of the secondary market and I am very keen to see how the early market entrant, Gerchen Capital, ultimately performs. Nevertheless, for managers and investors seeking liquidity and an end to duration risk entering into a secondary transaction may be a very viable solution. I believe it will be more economically viable in the context of a portfolio sale than a single case investment, but I am sure there will be some level of appetite and valuation for both.  It may be the case that the investor does not obtain 100% liquidity for their position but rather risk shares alongside another investor who doesn’t want to suffer from adverse selection and thus makes it a condition of their secondary offer that the primary investor retain an ownership position.  Other situations may allow for complete liquidity, but that will likely come at an economic cost.  And there are even other times when the case is moving along exactly as planned and the primary investor is able to sell a portion of its investment at such a high valuation that it produces a return on its entire investment, which is the case with Burford and its Petersen/Eton Park claims, despite the fact that no money has exchanged hands between the plaintiff and the defendant and there is still no clear path to liquidity. While selling a portion of an investment allows the manager to obtain some liquidity for its investors, it also serves to validate the value of the investment/portfolio to its own investors, which may in turn allow that manager to write-up its portfolio to the value inherent in the secondary sale transaction (again, this assumes that the transaction is completed with a third party investor).  As an investor, you really need to assess whether any secondary transaction is being undertaken for the intended purpose (liquidity or duration management) or whether there are alternative motivations at play (i.e. for the manager to post good return numbers to allow them to increase their chances of success at raising another fund).  And while third party validation may be comforting, too much comfort should not be derived by someone’s ability to sell an investment to another party, it could have more to do with sales acumen than the value of the underlying investment. Insurance Any discussion regarding litigation finance wouldn’t be complete without mentioning its close cousin, insurance.  In the early days of applying insurance to litigation finance, the focus was more on offsetting the risk of loss.  While that is still true today, there is an increasing focus being put on insurance as a way to deal with duration.  The thinking is that investors don’t want to get stuck in funds that take years beyond their original term to pay out and so they are prepared to accept the duration risk if there is a safety valve in place. The safety valve is the insurance which will pay out at the end of a defined term, which provides the investor with assurances that they will at the very least get their original principal repaid (and possibly a nominal return).  In essence, the insurance functions as a risk transfer mechanism between investor and insurer until the case is finally resolved. While it is more common to put insurance in place on making the investment, one could place insurance after the fact as well. Slingshot Insights   Duration management in litigation finance is almost as critical as manager selection and case selection.  I believe duration management starts prior to making any investments by pairing your investment strategy and its inherent duration expectations with the duration characteristics of your investments.  From there, you should ensure your portfolio is diversified and you should be actively assessing duration and liquidity throughout your hold period.  You should also assess the various tools available to you both on entry and along the hold period to determine your optimum exit point. 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.
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Member Spotlight: Lumenci

By John Freund |

Lumenci is a renowned full-service IP consulting firm dedicated to extracting maximum value from IP assets and providing technical, valuation, and strategic advice to patent owners and law firms to drive successful results.

With a global footprint spanning Austin, New York, San Francisco Bay Area, and New Delhi, India, Lumenci gathers over 100 technical and valuation/damages experts under one roof. This full-service IP consulting firm empowers companies to maximize the value of their IP assets through a blend of domain expertise and advanced automation technologies. A prolific team of Patent Monetization Strategists, Due Diligence Technologists, and Litigation Discovery Experts enables Lumenci to assist clients as a comprehensive global partner in high-stakes patent monetization and IP litigation campaigns.

Lumenci's expertise lies in understanding complex technology, analyzing patent claims and identifying underlying technological nuances. With a successful track record, Lumenci has analyzed over 60,000 patents, meticulously tested 900+ products, and investigated more than 175 litigations across ten global regions, from the US and UK to China and India. Their dedication extends to both plaintiffs and defendants, consistently securing favorable outcomes like settlements and verdicts. Lumenci's work has saved clients a staggering $3 billion in verdicts, settlements, and cost savings. The firm's team of experts possesses deep domain knowledge in various complex technology areas, including software, cloud computing, codecs, artificial intelligence, telecommunications, and hardware.

Among its technological clients, Lumenci stands out as a reliable partner looking to maximize the value of their intellectual property portfolios. The firm's commitment to delivering customized solutions, leveraging cutting-edge technology, and maintaining a deep understanding of the IP landscape has resulted in successful customer outcomes.

Company Website:  www.lumenci.com

HQ - Austin: 901 South Mopac Expressway, Building 1, Suite 300, Austin, TX 78746, USA

Member Bios

Harish Daiya is the Co-Founder and Chief Executive Officer of Lumenci. He is based out of Austin, Texas and oversees the company’s operation across all global offices. With over 15 years of industry experience in technical consulting in IP litigation and licensing, Harish has been a part of $2B+ in IP value creation. He is also a member of the Forbes Business Council, where he regularly writes Thought Leadership pieces and shares ideas on global impact. Harish has also been a serial entrepreneur and angel investor for several successful startups. As the CEO, Harish is elemental in driving Lumenci’s vision, goals, sales, and revenue. He oversees organizational growth, business strategy, people culture, client relationships, business development, strategic partnerships, and launching new businesses. Kalyan Banerjee is the Co-Founder and Chief Growth Officer of Lumenci and operates out of Lumenci’s head office in Austin, Texas. Kalyan is a thought leader to reckon with for patent, source code analysis, and blockchain issues, where he is regularly invited as a speaker in several US universities and industry panels. He is also a testifying expert in source code matters at ITC, District Courts, and Arbitration and has been a part of IP litigation and licensing outcomes amounting to $2B+. He is instrumental in shaping the fundamental mission and principles at Lumenci. As the Chief Growth Officer, he is involved in growth strategy, technical delivery and consulting, business development, key partnerships, and organizational culture. He has been a mentor to several startups and has successfully built and scaled many consulting teams.

Deepak Patnala is the Senior Vice President and Head of Corporate Practice at Lumenci, operating out of San Francisco Bay Area Office. Deepak oversees Patent Monetization and M&A practice at Lumenci and is a trusted advisor to clients, helping them navigate complex intellectual property matters. He is a world-class technical expert in IP licensing and litigation matters and an upcoming testifying expert. He has 12+ years of experience providing technical support in high-stakes IP litigation and monetization matters. He has assisted various organizations, from corporations and law firms to high-growth emerging companies, in solving issues, creating value, maximizing growth, and improving business performance for their intangible assets. He has experience working across multiple technology domains such as cloud, OTT, cryptography, enterprise software, computer security, artificial intelligence, virtual and augmented reality, internet technologies, telecom, networking, etc.

Vamsi Krishna is Senior Vice President & Head of Litigation Practice at Lumenci and operates out of Lumenci's head office in Austin, Texas. He oversees Lumenci's IP Litigation practice and is responsible for customer relationship management, account growth, and elite delivery in high-stakes patent monetization and litigation matters. He has 12+ years of experience in IP consulting, technical discovery, and leading technology consulting teams in major patent litigations in the US. He is a world-class technical expert in IP litigation matters and an upcoming testifying expert in Telecom, Networking, Hardware, and Software. He has extensive source code review and expert report drafting experience in major litigations. He is proficient in navigation, mapping, mobile, user interfaces, streaming, security, DRM, databases, and other technologies. Vamsi has also provided a declaration in the EDTX patent litigation matter.

Areas of Focus:  Monetizing IP assets

Over the years, Lumenci has showcased its proficiency and added value in crafting multiyear, multi-geography, and high-opportunity patent monetization campaigns through adept capabilities in technology analysis, valuation, and business strategy domains for its clients.

Lumenci is proud to have a multi-faceted team skilled in diverse areas such as - reverse engineering, product testing, and EoU creation. Lumenci empowers clients to navigate the complex patent landscape confidently, prioritizing empowerment over mere numbers.

Lumenci tailors monetization strategies for inventors and companies with portfolios of any size, from solo innovators with five patents to industry giants with 30k+ Patents. Their expertise has driven impactful results of multi-million-dollar licensing deals for their clients. Whether through licensing, sale, or litigation, Lumenci illuminates the path to maximizing patent value for each client. The team utilizes proven techniques to uncover high-value patents, build comprehensive evidence for campaigns, and provide strategic insights. With a track record of 20,000+ patents mined, 25,000+ EoUs created, and $3 billion+ in client outcomes, Lumenci delivers tangible results.

Underlining Lumenci's impact and value, one of the leaders of a software technology patent portfolio holding firm mentioned - "I recently had the pleasure of working with Lumenci, and their technical patent support was outstanding. We are monetizing a networking-based patent portfolio, and Lumenci's expertise and guidance were crucial to our success. They helped us to identify the most promising infringement reads, provided valuable insight into the patent landscape, and were always available to answer our questions and offer advice."

End to End Support for IP Litigation

Lumenci stands out as an end-to-end partner for patent litigators, offering a potent blend of expertise and strategic support throughout the litigation. Lumenci's dedicated team of specialists delves deep into the technical complexities, particularly excelling in the high-stakes arena of code review matters, covering a spectrum from UI code to hardware code. Lumenci's expertise in different aspects of litigation-related activities enables legal teams with strategic insights and technical acumen critical for navigating the dynamic realm of IP litigation.

The company's proficiency extends to product testing, reverse engineering (in domains such as semiconductors), and meticulous research in creating high-quality Evidence of Use (EoUs) that maximize patent value. Lumenci assists in the pre-filing stage by valuing patent assets, conducting venue analysis, and offering a turnkey solution to satisfy Rule 11 requirements, and also works towards providing technical support to damages valuation such as testing, non-in figment alternatives, apportionment, etc. Lumenci is a strong technology partner during the discovery process, handling end-to-end source code discovery, product testing, and updating contentions with the most recent technical evidence. But the journey doesn't end there. Lumenci provides real-time technical assistance during Markman hearings, depositions, and trials to maximize your chances of securing favorable judgments.

As a testimony to Lumenci's high-quality support in IP litigation, one of the counsel members of a US law firm mentioned - "We recently wrapped up the deposition, and I am thrilled with the valuable testimony we from your team. As we gear up for numerous depositions over the next three weeks, I am eager to designate you as our preferred drafter for several of similar requests. Kudos to the Lumenci team for a job well done!"

Connect with Litigation Funders

Lumenci transcends litigation support, offering additional avenues for maximizing the value of patents. The company's patent purchase network connects patent stakeholders with potential buyers, pools, and licensees, opening up alternative monetization pathways. For those seeking financial leverage, Lumenci's financing solutions tap into their established network of financing entities, crafting innovative strategies to unlock the full potential of the patent portfolio.

Through a cooperative exchange, Lumenci offers valuable advice on opportunities around seeking trusted funders while taking a proactive stance in pinpointing avenues for value generation. Lumenci's consultative methodology extends beyond traditional client-firm interactions, nurturing a flexible and responsive association that adjusts to the ever-evolving demands of its clients within the dynamic domains of patent law and intellectual property.

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