Litigation finance is one of many asset types available across the world.
According to a report released by RPC in March 2021, the total value of court cases in the pipeline and cash assets directly held by UK litigation funders hit a record high of £2 billion last year. It indicates continued growth in demand for litigation financing by claimants, hoping that this figure will continue to rise.
As the world becomes more liberalized, litigation financing becomes more prevalent for claimants with genuine domestic lawsuits and international arbitration concerns. Therefore, understanding litigation finance is more important than ever for legal counsel, claimants, and investors. At Investment Owl, we hear many of the same questions from potential investors approaching litigation funding for the first time.
What is Litigation Financing?
Litigation financing entails a third party paying for some or all of the legal fees associated with one or more court cases in exchange for a portion of the settlement revenues.
How does it work?
As mentioned above, litigation financiers usually finance legal cases in exchange for a percentage of the final settlement (costs and damages). With no direct stake in the proceedings, a private commercial litigation funder contributes all or part of the funding to support the litigant’s legal fees. In exchange, if the lawsuit is successful, the funder receives a pre-determined percentage of the claim’s revenues. If the lawsuit is lost, the funder loses their money, and the plaintiff owes nothing. Because the return on a litigation funder’s investment is contingent on the case’s success, funders prefer to invest in legal claims that have a strong chance of succeeding.
At Investment Owl, our litigation financing partners focus on the consumer finance and personal injury sectors, which other investors largely overlook because they are regarded too tiny to assess and monetize. They will only begin the claim procedure if ‘After The Event’ (ATE) insurance has been acquired, connected to each case, assigned blame, and established responsibility. It de-risks the exercise significantly and offers a secure investment proposition to investors in the form of ATE loan notes.
Our litigation finance partners will only fund legal cases that satisfy the conditions listed below to ensure investors do not lose their money.
Before an ATE insurance coverage is granted, litigation claims must have a 51 percent or greater likelihood of success. As a result, each claim financed by our litigation finance partner must fulfill this minimal requirement, as only claims covered by an ATE insurance policy are funded.
- Even if a legal claim is successful, it may be required to enforce the judgment to get money. The most probable cause for enforcement issues in claims of the kind sponsored by our partner is that the defendant cannot pay the judgment due to a lack of finances. However, in nearly every case funded, the defendant is insured, so the judgment is settled by a well-capitalized insurance company, giving a very high chance of successfully enforcing any judgment.
- However, in an unenforceable judgment, the ATE insurance policy will pay out to cover the litigation costs.
- Importantly, when lending to legal firms, the litigation finance partner deducts interest from the principle amount lent upfront, preserving a cash reserve for the length of the loan. It means that the investors will get their agreed-upon interest payments since the finance partner has the funds.
- The finance partner also receives a security interest in the lawsuit claims it finances, allowing the Issuer to have a continuing interest in the case even if the law firm representing the claimant changes.
- Finally, the ATE policy is assigned to the financing partner, allowing the Issuer to file a claim with the insurer directly.
Individuals, companies, and SACCOs can invest in Litigation Financing. However, the success of their investment is contingent on finding a competent litigation finance partner with a proven track record in the field.
To summarize, litigation funding allows conflicts to be settled on the merits rather than who has the most money whilst also making money for investors.
Nelson Mandela is Lead Investment Partner – Investment Owl