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Commercial Slingshot Capital Special Features

Implications of Portfolio Financings on Litigation Finance Returns

By John Freund |

The following article is the first in an ongoing column titled ‘Investor Insights.’ 

Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance. 

Executive Summary

  • Portfolio financings represent as much as 62% of all US commercial litigation finance investments
  • Strong growth trend for Law Firm and Corporate portfolios
  • Law firms recognize the inherent value in incubating portfolios
  • Not prevalent in non-contingent fee jurisdictions

Investor Insights

  • Potential effect of reducing overall investor returns relative to a portfolio of single case risks
  • Investors benefit from better risk-adjusted returns than single case investing
  • Cross-collateralized nature significantly reduces risk & shifts value to law firm
  • Portfolio financings may limit upside potential for investors
  • Review the portfolio composition (single vs. portfolio), past and future, to set return expectations.

One of the most significant trends in litigation finance for fund managers over the last few years has been the strong trend toward “portfolio financings”. Litigation finance can be broadly segmented between single case investments and portfolio financing investments. Single case is a reference to the provision of litigation finance to a single litigation, the outcome of which is completely dependent on the idiosyncratic case risk and binary litigation process risk.  Portfolio financing is a reference to the aggregation and cross-collateralization (typically) of a portfolio of cases, whether Law Firm or Corporate, whereby the results are determined by the performance of the portfolio as opposed to a single case. The trend has been so significant, that according to WestFleet’s 2019 Buyer’s Guide, Law Firm portfolio financings now account for 47% of capital commitments and Corporate portfolios account for 15% of commitments, for an aggregate of 62% of the commitments of the US industry.

Why is Portfolio Financing Growing So Quickly? 

  1. The primary growth driver of portfolio financings is that the industry, arguably, started in the area of single case financings and is now evolving its offerings into a more complex and larger area of litigation finance. It is typical for an industry to begin with the financings of single exposures, and then as the industry gets more comfortable and gains deeper experience, it evolves into other larger applications like portfolio financing.
  2. The second driver is that as litigation funders have expanded their capital base, they have had to look further afield in terms of where they can effectively invest their capital at scale. To this end, portfolio financings are an ideal way for litigation funders to put large amounts of capital to work quickly and in a better risk-adjusted way than undertaking the laborious task of assembling a series of single case investments into a portfolio.
  3. One of the knocks against litigation finance is a low degree of capital deployment. Managers are motivated to reduce risk by slowly investing capital into the case in a measured way so as to mitigate loss of capital. Unfortunately, this negatively impacts the amount of capital they deploy and is inversely proportional to the effect their management fees have on returns. Portfolio financings, on the other hand, allow litigation funders to commit large amounts of capital and also expedite the deployment of capital, as they typically replace dollars that have been deployed (actual or notional) previously by the law firm. One could view a portfolio as a series of cases that have been ‘incubated’ by the law firm, and are now ready to be invested in by a litigation funder.
  4. Law firms have, astutely, come to realize there is value in (i) originating cases, arguably one of the most difficult and expensive services litigation funders provide, and (ii) applying modern portfolio theory to a series of cases and cross-collateralizing the pool, both to the benefit of the law firm. Progressive law firms married the new availability of large amounts of capital with the value inherent in their incubated portfolios and parlayed that into significant portfolio financings at a reasonable cost of capital, thereby capturing some of the economics for themselves.
  5. As awareness for litigation finance has grown throughout the legal community, awareness has also grown for plaintiff bar firms with large portfolios of cases. This market has also evolved and extended into corporate portfolios (LCM, an Australian litigation finance manager, is actively pursuing corporate portfolios). Accordingly, the increased awareness of the industry in general has also increased awareness for portfolio financing opportunities.

What Does it All Mean for Investors in the Asset Class?

The following quote from Burford’s 2018 capital markets event sums it up nicely:

“When we moved from single cases to portfolio investments, people wondered whether returns would decline, but they went up”

This statement suggests that on a risk-adjusted basis, portfolio financings deliver superior outcomes. However, when you look at Burford’s return profile over a long period of time, you will see that relatively few single case investments contributed to their overall multiple of capital, with the Pedersen & Teinver claims being considerable contributors. In fact, the size of the gross dollar returns of these single case investments dwarfs the rest of the portfolio and skews the overall results. Burford makes the point in their disclosures that removing these outliers disrupts the core of their strategy, which is more akin to venture capital. As with all portfolios, one needs to assess the outliers. Yet having witnessed a large number of portfolio results, I would suggest the return profile of a portfolio is more aligned to the approach, strategy, size and nature of cases in which the manager has chosen to invest, as opposed to the notion that portfolio financings produce inherently superior results than investing in a cross-section of single cases. Some funders produce very consistent results in terms of returns and duration, whereas other strategies are more volatile; it just depends on what risk profile you are willing to accept (i.e. are you looking for venture capital or leveraged buy-out type returns).

I think it is fair to say that the public domain lacks enough data to determine whether portfolio financings are better risk-adjusted returns than a diversified portfolio of single cases. However, when you consider that most portfolio financings are cross-collateralized, this single feature does have a significant impact on risk. The question then becomes how much return does the Law Firm or Corporation extract for delivering a fully originated portfolio with cross-collateralization features.

I would expect that over a large portfolio of transactions, portfolio financings will outperform in terms of returns in relation to volatility, and that single cases will outperform in terms of returns, but at the expense of higher volatility. The other aspect that is difficult to control in comparing results of two sets of portfolios is whether the nature of the cases (case type, life cycle, jurisdiction, size, etc.) are common across the single case control group and the portfolio financings group.

We may never know the answer, but logic dictates that portfolio financings should be lower returning, lower volatility investments, as compared to a portfolio of single cases – the key difference being the cross-collateralization feature.

Investor Insights

When reviewing fund manager results one should look closely at the composition of the portfolio to understand what portion is being derived from portfolios compared to single cases.  It will also be important to note the trending in these case types.  If the manager is scaling its operations, as many currently are, their motivations are to deploy large amounts of capital quickly in large portfolios with lower risk.  While this is a prudent approach for the manager, one then has to determine whether the historic return profile based on a portfolio of single case exposures is indicative of a future portfolio which will be mainly comprised of portfolio financings.  The portfolio financings will have a different risk-reward dynamic and so investors will need to model their return expectations accordingly.  Either way, I expect the return profile for litigation finance to remain robust both in the areas of single cases and portfolios and continue to believe that diversification is a key success factor to prudent investing in the commercial litigation finance asset class.

Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.

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Commercial Regulatory Issues

The CJC’s Review of Litigation Funding Will Have Far-Reaching Effects

By John Freund |

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

Reform is on its way for the UK’s litigation funding sector, with the Civil Justice Council firing the starting gun on its review of litigation funding on 23 April.

The advisory body set out the terms of reference for its review, commissioned by lord chancellor Alex Chalk, and revealed the members of its core working group.

The review is working to an ambitious timetable with the aim of publishing an interim report by this summer, and a full report by summer 2025. It will be based on the CJC’s function of making civil justice ‘more accessible, fair and efficient’.

The CJC said it will set out ‘clear recommendations’ for reform in some areas. This includes consideration of a number of issues that could prove very significant for funders and clients. These include:

  • Whether the sector should be regulated, and if so, how and by whom;
  • Whether funders’ returns should be subject to a cap; and if so, to what extent;
  • The relationship between third party funding and litigation costs;
  • The court’s role in controlling the conduct of funded litigation, including the protection of claimants and ‘the interaction between pre-action and post-commencement funding of disputes’;
  • Duties relating to the provision of funding, including potential conflicts of interest between funders, lawyers and clients;
  • Whether funding encourages ‘specific litigation behaviour’ such as collective action.

The review’s core working group will be co-chaired by CJC members Mr Justice Simon Picken, a Commercial Court judge, and barrister Dr John Sorabji. The four other members are:

  • High Court judge Mrs Justice Sara Cockerill, who was judge in charge of the commercial court 2020 – 2022, and who is currently involved in a project on third party funding for the European Law Institute;
  • Academic and former City lawyer Prof Chris Hodges, chair of independent body the Regulatory Horizons Council which was set up to ensure that UK regulation keeps pace with innovation;
  • Lucy Castledine, Director of Consumer Investments at the Financial Conduct Authority; and
  • Nick Bacon KC, a prominent barrister and funding expert who acts for both claimants and defendants

The CJC had said that it may also bring in a consumer representative, as well as a solicitor experienced in group litigation.

In a sign that the review seeks to be informed by a wide range of views, the CJC has also extended an invitation for experts to join a broader consultation group, which will directly inform the work of the review and provide a larger forum for expert discussion. Meanwhile the advisory body has said there will also be further chance ‘for all to engage formally with this review’ later this year.

Given the broad remit of the review and significant impact that its recommendations may have on the litigation funding industry, litigation funders, lawyers and clients would be well advised to make the most of these opportunities to contribute to the review.

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Case Developments Commercial

Balancing Risk and Reward in Litigation Finance: Lessons from High-Profile Case

By John Freund |

The following is a contributed piece by Jeff Manley, Chief Operating Officer of Armadillo Litigation Funding.

The allure of substantial returns from mass tort litigation has historically tempted law firms and their third-party financiers to commit resources to speculative cases. While investing strongly in speculative torts certainly has its time and place, prevailing trends highlight the necessity of certain risk management practices. The unpredictable outcomes of high-profile cases, like the Camp LeJeune water contamination lawsuits, accentuate the imperative for a discerning approach to case selection and the strategic diversification of portfolios.

Balancing Opportunity and Prudence in Speculative Torts

Early-stage speculative torts like the Zantac litigation represent a blend of potential and caution. (In re Zantac (Ranitidine) Products Liability Litigation, 2021). Initially, Zantac cases drew significant attention from law firms with projections of substantial compensation figures. However, the legal complexities and subsequent valuation adjustments highlighted the disparity between initial projections and actual compensation figures realized, reinforcing the need for meticulous risk assessment in speculative torts. While similar cases have captivated law firms and financiers with their substantial projections, they also underscore the importance of an exhaustive risk assessment—demonstrating how initial excitement must be tempered with diligent legal analysis and realistic valuation adjustments.

Navigating the Complex Terrain of Camp Lejeune Litigation

The Camp Lejeune water contamination lawsuits represent promising ventures for financiers and mass tort firms to affirm their moral duty by advocating for those who served our country. However, these cases also carry lessons on the pitfalls of overzealous investment without careful scrutiny. The drawn-out nature of the litigation serves as a reminder that while the pursuit of justice is noble, it must be balanced with sound risk management to ensure long term firm stability.

Endurance in Talc Litigation: A Testament to Long-Term Vision

The protracted legal battles surrounding talcum powder’s health risks underscore the necessity for long-term strategic planning in mass tort litigation. Firms must factor in the operational demands and the financial foresight to manage compounded interest on borrowed capital over extensive periods. Simultaneously, it’s critical to sustain investment in new torts, ensuring a balanced portfolio that accommodates both ongoing cases and emerging opportunities. This balanced approach underpins the stamina needed to endure through a decade-long commitment, as exemplified by the talc litigation.

Understanding Returns in the 3M Earplug Litigation

The 3M earplug litigation concluded within a standard timeframe, yet the distribution of settlements spans several years, offering more modest financial returns than many anticipated. This outcome serves as a pragmatic reminder of the nuanced nature of mass tort settlements, where significant payouts are not always immediate or as substantial as predicted. Nonetheless, this reinforces the value of prudent risk management strategies that account for longer payout terms, ensuring a stable financial forecast and the firm's resilience in the face of lower-than-expected returns.

Strategic Portfolio Diversification

Given these varied experiences, it is imperative that law firm owners and financial backers craft a robust case portfolio strategy. By balancing the mix of cases from speculative to those with a more established settlement trajectory, firms can better manage risk and ensure operational stability. Strategic diversification is not just wise—it’s a vital tactic to maintain resilience in the evolving landscape of the mass tort industry.

The Value of Expert Financial Partnerships

Choosing a reputable and experienced litigation finance partner is essential for law firms aiming to effectively balance their case portfolios. A seasoned funding partner provides invaluable guidance in evaluating potential cases, assessing financial risks, and optimizing investment strategies. Their expertise in navigating the nuanced terrain of litigation finance is a critical asset.

Adopting a balanced portfolio strategy—carefully curated to include a variety of torts at different development stages—provides a more stable foundation than pursuing an "all-in" strategy on a single high-potential tort. This method not only reduces dependency on the success of any single case but also positions the firm more favorably in the eyes of prudent lenders.

Recent high-profile cases in the mass tort arena, like those mentioned above, serve as potent reminders of the inherent uncertainties in litigation finance. For law firm owners and their financial backers, the path forward demands a nuanced view of risk, underscored by strategic portfolio diversification and the cultivation of partnerships with experienced financing entities. By adopting these principles, stakeholders can safeguard their investments against the capricious nature of mass litigation, securing a resilient and prosperous future in the challenging yet rewarding domain of legal finance.

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Announcements Commercial People Moves

Westfleet Advisors Announces James Batson as New Chief Operating Officer

By John Freund |

Westfleet Advisors, the premier U.S. litigation finance advisory firm, is delighted to announce the appointment of James "Jim" Batson as its new Chief Operating Officer. Mr. Batson, widely recognized as a leader in litigation finance, brings an extensive portfolio of expertise, including nearly a decade at Omni Bridgeway, most recently as its US Co-CIO, and a former partnership at Liddle & Robinson.

"We are thrilled to welcome Jim to Westfleet," said Charles Agee, Founder and CEO of Westfleet Advisors. "His impressive track record and deep industry knowledge align perfectly with our strategic goals. Jim's leadership is set to drive significant growth, reinforcing Westfleet's role as an essential advisor in the increasingly complex litigation finance market."

"At a time when the litigation finance industry has reached a critical juncture, requiring sophisticated understanding to navigate its complexities, I am excited to join Westfleet Advisors," said Mr. Batson. "The industry's growth and the diversification of funding options have made it imperative for clients to seek knowledgeable and experienced advisors. Westfleet's long-established expertise in advising on deal structures, pricing, and market trends positions us uniquely to guide our clients to the most advantageous outcomes. I look forward to advancing our mission to deliver unmatched advisory services in this dynamic sector."

Mr. Batson's prior roles have honed his skills in developing growth strategies and enhancing client services, with a strong focus on operational excellence and strategic advisory for complex legal disputes.

"Jim's deep understanding of the industry's needs and his proven leadership abilities will be instrumental as we expand our advisory services and deepen our engagement with the market," added Agee.

About Westfleet Advisors

Westfleet Advisors is the leading litigation finance advisor in the United States. Founded in 2013, the company has been instrumental in promoting transparency and efficiency in the litigation finance market. With a team of seasoned experts active since 1998, Westfleet provides clients and their attorneys with essential resources and insights necessary for navigating successful litigation financing.

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