Partner Daniel Spendlove comments in Private Debt Investor in relation to litigation funding as part of the publication’s special report on distressed debt and special situations investments.
Daniel’s comments on litigation funding were published in Private Debt Investor, 3 June 2019. The full article can be read on the Private Debt Investor website here.
“As investors assess lesser-known assets to meet their investment needs, litigation funders are witnessing a surge of interest. But how appealing are the returns, given the risks in this developing market?
Institutional investors have been increasingly looking for asset classes uncorrelated with equities or bonds in recent years as they seek strong, diversified returns that will meet their liabilities or cashflow requirements.
This search has led some alternative asset classes to become crowded, with large groups of investors seeking non-traditional options in the ongoing low-yield environment, and where mainstream asset classes are now widely considered ‘fully valued’.
“The high returns reflect the inherent risk and unpredictability of outcome in litigation,” explains Daniel Spendlove, a partner at Signature Litigation.
“Investment decisions are typically made very early in the life cycle of a case, when, in most cases, the full evidential picture is unavailable. Funders price this risk into the returns sought.””
In relation to what has driven the emergence of new funds that specialise in financing lawsuits, debt claims and arbitration cases, Daniel commented: “Investors will inevitably be attracted by the high rates of return that can potentially be achieved through investing in litigation, particularly at a time when investment performance elsewhere may be underwhelming. Funders typically look for returns of at least 2.5/3 times the amount invested (plus principal), or a percentage of damages, 25 / 30% seems commonplace, whichever is greater.”
Commenting on what investors must be aware of when considering funding a litigation, Daniel said: “Funders must ensure that they do not control the litigation, as this would offend the common law rules of champerty and maintenance. The law does, however, recognise that providing finance is not in and of itself “control”. Potential funders should also be aware of the risks of being liable for the opponent’s costs if the litigation fails. To address this risk, funders typically require specialist insurance cover, known as After The Event insurance, to be in place alongside the funding package in order to meet any potential adverse costs orders.”