Litigation funding is offering increasing opportunities across Africa. Rayne Handley of GRM Intelligence explores the possibilities for investors, lawyers and litigants.
Litigation funding is a rapidly growing industry that has had major traction in the United States, Europe, United Kingdom, Asia and Australia. Litigation funding is born from the nexus of law, finance and commerce. The practice helps those who cannot afford legal fees and acts as a means for corporates to prevent hefty legal fees from eating into profits. In some cases, businesses use legal assets as collateral to secure funding.
Given rising litigation costs, litigation funding provides access to justice for those unable to afford it. This is critical within the African context where many countries have insufficient state-funded or pro bono legal aid. Over the last 10 years, numerous African institutions, including equity funds, insurance companies, large banks and debt recovery groups, among others, have set up litigation funding divisions. Several pure litigation funding groups have also emerged on the continent, often masked under a plethora of different names.
HOW BIG IS LITIGATION FUNDING?
Looking at the global statistics, litigation funding is emerging as a fast-growing, high-return investment vehicle. From discussions with global litigation funders and our own economic analysis, This could reach around USD 250 billion in 5 years and close to USD 500 billion in 10 years. With some international funders boasting profit increases of over USD 200 million year-on-year, double-digit growth, international litigation funders can be seen to have demonstrably succeeded. Despite the global economic downturn and market volatility in 2008, the performance of litigation funds increased.
By 2020 litigation funding will become a mainstream asset class in Africa.
HOW DOES LITIGATION FUNDING WORK?
Financing companies provide non-recourse funding to a litigant in exchange for a share in the proceeds of the potential judgement or settlement. While litigation funding may share characteristics with a loan, it is not considered to be a form of debt, emerging rather as an alternative asset class.
Financing can be arranged at any stage of litigation including where lawsuits have been won but the award has not been recovered. If an individual or business would like to monetise their claim immediately as opposed to waiting for legal outcomes or payments or the outcome of an appeal, litigation funding may be a great solution. This is particularly pertinent for companies whereby the return on investment of the immediate cash injection into their business may outweigh the returns that would go to the litigation funder in the future should the case be successful.
As with most investments, new and innovative ways for various parties to benefit from litigation funding are emerging.
OPPORTUNITIES FOR INSTITUTIONAL AND PRIVATE INVESTORS
Venture capitalists, private equity firms, hedge funds, asset managers, wealth managers, investment banks and other forms of institutional investors globally have begun to use litigation funding as an investment tool. Litigation funding offers a great opportunity for institutional investors to diversify portfolios and invest in an asset-class completely uncorrelated to traditional investments in equities, commodities, foreign exchange, and the like.
Investing in litigation can diversify investment portfolios and litigation investments have the benefit of independence in that investment in one case is not influenced by investment in another. Possibly most importantly, litigation funding is not affected by debt and equity markets or the value of other asset classes. Most of all, depending on the case, the reward can be lucrative.
While returns vary, the capital keeps flowing and litigation funding keeps growing. Some litigation funders are listed entities, creating investment opportunities through the equity market.
In 2014, the first crowd-funding platform, LexShares, opened in the US. Since then, similar platforms have followed, opening the market to private investors. Alternatively, private investors can invest in a litigation funding portfolio through institutional investors or purchase litigation funding shares. The latter can be limiting in terms of investment size and diversity given that most litigation funders are not listed. There have been instances of high-net-worth individuals or family trusts investing large sums of money in litigation funding firms.
OPPORTUNITIES FOR LITIGATION FUNDERS
The litigation funding business is high-risk but high-reward. Litigation funders on average take 30-50% of proceeds, depending on the inherent risk and costs with some funders even happy to accept payment in terms of equity. Given the relatively immature market, the number of litigation funders globally will continue to rise. While most known funders are large companies, increasing numbers of smaller firms are setting up. Several sole practitioners, typically high-net-worth individuals, are also funding litigation. These individuals are typically difficult to identify. With little to no regulations around litigation funding, there is no registration or announcement imposed on sole practitioners. In fact, many do not have a website and do not advertise their funding of litigation.
OPPORTUNITIES FOR LAW FIRMS
Law firms are using litigation funding to enable higher numbers of contingency fee or ‘no win, no fee’ arrangements with clients. Bypassing the risk onto litigation funders, law firms are able to pursue a higher number of contingency fee cases without compromising cash flow. The practice has grown rapidly with some law firms partnering with litigation funders. Global law firm HFW recently signed a GBP 25 million litigation funding deal with top-ranking global litigation funder Augusta. Augusta signed a GBP 25 million deal with top UK law firm Pinsent Masons in August 2019. Clyde & Co also signed a deal with Litigation Capital Management (LCM).
The mutually beneficial relationship between law firms and litigation funders is further evidenced by Burford Capital starting a law firm in 2016, called Burford Law. Clients have access to funding through Burford Capital as well as judgement enforcement assistance (with or without funding) through Burford Law. Elsewhere, law firms are launching litigation funds. Fieldfisher launched litigation funding service FeeSolve. The relationship between litigation funders and law firms working together to identify and capture highly profitable disputes is mutually beneficial. Both parties have a lot to learn from each other in terms of the sectors and jurisdictions that prove to be the most lucrative and least risky.
OPPORTUNITIES FOR BUSINESSES AND CORPORATES
Corporates are increasingly using litigation funding to mitigate cash flow risks associated with hefty legal expenses, reduce legal spend and keep arbitration costs off the books to protect reported profits and expenses. Even if they can afford the litigation, a rising number of unlisted small and medium sized firms are using litigation funding to mitigate risk, improve budgeting and protect cash flow. Cash flow management is vital for smaller firms without deep coffers during tough times. Additionally, corporates are increasingly bundling meritorious and unmeritorious claims in a portfolio and securing funding for the entire portfolio to mitigate the risk. Relieving legal budgets of highly costly litigation allows budgets to be redirected towards innovation and transformation of and within legal departments.
OPPORTUNITIES IN THE BURGEONING SECONDARY MARKET
The secondary markets refers to funders selling their stake in an ongoing matter. In 2018, Burford Capital sold a successful arbitration stake for GBP 77 million following an initial investment of only GBP 9.3 million. They chose to pass on the time and risk involved in recovering the award. Although this practice is still relatively novel, funders are beginning to hedge risk by selling investments in a secondary market. One of the golden rules of investment of any kind is to diversify risk. By utilising portfolio stratification in terms of sectors, jurisdiction, dispute resolution type, risk profile, dispute size, dispute lifecycle stage and so on, funders are able to maximise profits by selling parts of a portfolio to other funders who may be interested in purchasing the dispute in order to maximise their own portfolios. Over time it is predicted that syndication will occur and funders will sell tranches of risk to individual or institutional investors.
OPPORTUNITIES FOR SUPPLIERS AND RELATED INDUSTRIES
A rising number of emerging businesses and industries are benefiting from litigation funding. From assisting litigation funders with deal origination to offering claimants after-the-event (ATE) insurance, outsourcing and related service providers are taking advantage of the rising litigation funding industry. Including, but not limited to; Litigation funding brokers, ATE or legal cost insurers, and asset tracing, e-discovery and asset recovery.
HOW CAN AFRICA CAPITALISE ON THESE OPPORTUNITIES?
The deregulation of champerty and maintenance and a clear stance towards litigation funding as being lawful. Many legal and judicial systems in Africa are widely regarded as open to multiple interpretations, inconsistent in their application and highly politicised. Steps need to be put in place to address the lack of access to information which heavily undermines due diligence and risk analysis for investing in claims handled in African courts.
Permitting contingency fee arrangements tends to be associated to receptiveness to adopting litigation funding agreements. Further to this, cases are more likely to secure funding where the dispute will be resolved through arbitration in a trusted tribunal.
Recovery and enforceability are problematic even where the case is meritorious and will be resolved in a trusted court or tribunal. Exploring recovery issues is however beyond the scope of this article.
Despite the barriers, by 2015 the size of the litigation funding market in Africa will be around USD 100 million with ample room for growth. The general sentiment from global litigation funders and brokers is that once the market hits a billion, it will skyrocket. Litigation funders thrive during litigation booms. Regulated or not, they will be found in litigious countries and arbitration hubs.
Rayne Handley is head of research and analytics at GRM Intelligence