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How litigation funding can turn legal claims into financial assets

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Written by Neil Purslow, co-founder, Therium Capital Management


LITIGATION can be a burden for finance directors and is certainly a major distraction from their main jobs.

The financial costs of legal disputes can be massive for a company, especially if a case is lost, with potential adverse impact on financial statements, metrics and competitive positioning – the full extent of which may not be known until the end of the case.

Added to that, litigation can run on for several years and many large corporates have to deal with simultaneous cases, multiplying the drain on resources. Over half of UK respondents in law firm Norton Rose Fulbright’s latest global litigation report said they faced new law suits launched against them in the last year with a fifth defending as many as 50 new claims.

As business becomes ever more global and complex, so too do legal disputes, with the commensurate increase in costs. On top of all this, FDs face the ongoing pressure of needing to cut their legal spend and reduce the amount of cash they have tied up in lengthy litigation.

Litigation funding, or litigation finance as it is increasingly being termed, is a tool that UK FDs are starting to turn to for help. The industry was given a significant boost by Lord Justice Jackson’s approval as part of the reforms of English commercial litigation which came into force in April 2013.

Companies have been using litigation funding as it pays for all costs related to claims against defendants, including the other side’s costs if the case is lost. Funders only receive payment, typically a multiple of their investment, if the case wins. Such off-balance sheet funding has meant that organisations have been able to pursue meritorious claims that they perhaps might not have progressed without the backing of a funder.

From the funders’ point of view they will only take on cases they believe have a strong chance of winning, based on their extensive due diligence and experience. But while most of the cases they back do win, given the complexities and highly variable factors affecting the outcome of litigation, not all funded cases are successful.

That said, many companies, especially multinationals, typically don’t need the financial resources of a funder to pay for their legal claims. But where they can benefit is by using litigation funding as a smart form of corporate finance. This is becoming established practice in the US and generating increasing interest from FDs in the UK and Europe.

A financial asset

The reason why litigation finance is attractive to FDs is that it is able to transform litigation into a financial asset: the funder provides financing against a particular form of contingent asset being the proceeds of the litigation.  Without the burden of financing the litigation and potentially through raising the funds that would have been attributed to the case as working capital, the company can benefit by generating cash flow for other uses and from improved financial metrics.  Companies have been able to raise money not just for the costs of litigation they are bringing but also to defend claims against them or even fund unrelated projects.

For those companies that are managing ongoing multiple legal disputes, FDs are able to raise finance across the portfolio of cases and, in so doing, generate better terms than funding individual matters on a case-by-case basis.

Investment levels

Recent investment levels in litigation funding reflect the market’s momentum: funders in London raised over half a billion sterling in 2015, including £200m by Therium, and fund raising into the sector has continued throughout 2016. Our own research of UK litigation partners at leading law firms we conducted with Just Costs Solicitors also highlights how far funding has come since Jackson’s reforms: 79% of partners said they saw new funded cases in the last year, and most said funding is now a central part of their discussions with clients.

We expect to see this growth trajectory continue as boards use their legal claims as financial assets. This growth is not confined to the UK. The US funding market continues to develop rapidly, continental Europe is busy, and south east Asian jurisdictions like Hong Kong and Singapore are warming up.

There will continue to be considerable litigation in financial services in the aftermath of the Libor and forex scandals and in areas including the mis-selling and mis-valuation of investment products, to companies and financial institutions as well as to individuals. Other stand-out areas that will be a source of many disputes will be the energy industry, much of the litigation relating to the decline in the price of oil, and the mining sector, hit by the collapse of commodity prices.

 

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