Where are the rich putting their money now? They are backing major corporate legal cases.
Some 5,700 private shareholders and 300 pension and investment funds are bringing a class action against Lloyds banking group and its former directors over its acquisition of HBOS. It is one of the highest-profile litigation cases to come out of the financial crisis.
It is also one of the first large-scale claims in Britain to benefit from third-party litigation funding – also known as litigation finance. This is where money is invested in litigation or arbitration cases in return for a share of the proceeds of any successful claim. The claimant, who is backed by the investment, doesn’t have to put in their own money and offsets their liability, should they lose.
It is not only those fighting cases who stand to benefit from this form of finance – the Lloyds case probably wouldn’t have gone ahead without it – but also investors who are putting their money into this emerging asset class.
This month private investors put £5.8 million into third-party litigation funding through Connection Capital, a private client investment business. The fund will be run by Therium Capital Management, which is financing the Lloyds case. It is one of the few chances individual investors have to invest in litigation finance.
It is a fast-growing area; a survey by Therium and Just Costs Solicitors of 101 commercial litigation partners found that 79 per cent of partners had new funded litigation cases in the past year, with 70 per cent reporting more client discussions about this form of finance.
Neil Purslow, the co-founder of Therium, says that investment is restricted to big commercial cases – many in the financial services, energy and telecoms sectors – and the cases typically involve intellectual property disputes, international arbitration, anti-trust and competition claims.
Mr Purslow says he expects to win about 70 per cent of the company’s invested cases and that he hopes to make profits of up to 300 per cent. Admittedly, that is a favourable upside, but the downside is that you risk losing all your money if you invest in unsuccessful cases.
It is worth noting that this type of funding isn’t regulated by the Financial Conduct Authority but the companies involved abide by the Association of Litigation Funders’ code of conduct.
Litigation funding was given the seal of approval by the Jackson legal reforms of 2013, when Lord Justice Rupert Jackson, the lord justice of appeal, ruled that it was legal – previously it was thought that such third-party interference in law cases might not be. Since then this kind of funding has grown in popularity with lawyers, claimants and, recently, with investors.
Claire Madden, a partner at Connection Capital, says: “A clear need for litigation funding exists because the prohibitive and uncertain costs can often deter claimants from pursuing claims. Law firms are not always able to take on cases on a no-win, no-fee basis.”
For a minimum investment of £25,000, Connection Capital allowed private investors to become directly involved in a market traditionally dominated by institutions, large investment funds and private offices.
Ms Madden says: “The returns that our investors expect are certainly comparable to private equity, and net of everything, there is certainly potential to double your money and beyond, but there is an inherent risk.You could lose all of your money.”
The Connection Capital investors’ money will be in a variety of commercial and corporate legal cases. If a case is lost, the money is lost, but if the case is won then the investor will get their money back plus a proportion of the proceeds. If a case goes to court then only about half are successful.
However, the life of the fund is shorter than most in private equity. “Returns start to come towards the end of the second year, with the remainder by the end of year five. It takes about five years for all the cases to be played out. That’s one of the advantages – it’s a relatively short play,” Ms Madden says.
The other advantage is that it is an uncorrelated asset – the outcome of cases in the porfolio are independent of each other, of the markets and of the wider economy.
Connection Capital says it expects to raise further litigation funds but in the meantime the only other way to invest in the sector – other than launching your own litigation fund – is to buy shares in a large listed company such as Burford Capital.
Burford raised £100 million this month through a retail corporate bond with an interest rate of 6.1 per cent. It is also backed by fund managers such as Invesco Perpetual, Woodford, Fidelity and Aberdeen. BT has reportedly struck a deal with Burford Capital for £31.6 million in litigation finance in return for giving up a proportion of the successful case awards. This is thought to be the first time a litigation financier has invested in impending lawsuits for a leading UK corporation.
Chris Bogart, the chief executive of Burford Capital, says: “Litigation cases come with much bigger settlement values and litigation is more expected. Chief executives and finance directors want access to the same kinds of alternative finance they are used to having elsewhere in the corporate world – and law firms don’t have their own balance sheets, so they can’t do it.”
Mr Bogart says that the company has invested £238 million in completed cases, generating a net return of 70 per cent; a further £479 million is invested in ongoing cases. Burford says that, including dividends, its shareholders have received a 157 per cent return since the company floated six years ago.
John Kingston, the head of investments at Vannin Capital and a director of the Association of Litigation Funders, says: “It is a difficult asset class to invest in unless you invest in a fund-of-funds or put private equity into the sector. However, I think it might become easier for personal investors because it is a growth industry.”
It’s not only shareholders, solicitors and investors who can benefit from litigation funding. Novitas Loans lends to individuals – via their solicitors – to help fund divorce, probate, clinical negligence and personal injury cases.
Jason Reeve, the managing director, says: “There was a need for a fund for those fighting divorce cases who had assets but no immediate source of funding – and lawyers, unfortunately, cannot wait until the end of a case to be paid.”
The average loan to help cover legal costs is £30,000. Interest is charged at 1.5 per cent a month and it is repaid, by the solicitors, from the proceeds of the case.