Litigation finance: a genuine diversifier

Court cases, particularly corporate ones, can be costly. Providers of litigation finance carry the expenses of bringing carefully selected cases to trial, in return for a percentage of the damages or awards paid to the complainant, should they win their case. If the complainant loses, the financing company bears the legal costs. Finance providers therefore seek to fund the cases with the best chances of being won.

It is important to distinguish between such companies and the ‘no win, no fee’ division of the legal sector. Burford Capital, the litigation finance provider that we hold in our multi-asset portfolios, operates on a much larger scale, dealing with wide-ranging and complex corporate cases as opposed to personal injury claims for individuals.

The third-party finance model is attractive on two levels. First, it appeals to claimants for whom the costs of a long or complicated trial may be unaffordable or present unattractive accounting complexities. This may be the case even for large corporations. Second, it can be an attractive option for claimants’ legal firms. Typically, these operate under a partnership structure, which means they lack the working capital needed to fund lengthy and complicated trials while they are ongoing.

How it works

Although the cases or trials involved may be complex, the litigation finance process itself is relatively straightforward.

Although the cases or trials involved may be complex, the litigation finance process itself is relatively straightforward. Usually, a funding provider will be approached by a law firm acting on behalf of a client, although it is becoming more common for the client/complainant to make the initial approach on their own behalf. At this stage, the litigation company will make a decision as to whether it should fund the case, having vetted it thoroughly. This due diligence includes, but is not limited to: assessing the likelihood of the case being won; considering the creditworthiness of the defendant; and, of course, gauging how attractive a potential funding deal would be from a financial perspective.

The fee to be paid to the litigation finance company may be a percentage of the final damages awarded (assuming the client wins its case), a multiple of the funding figure provided, or a combination of these.

Burford Capital is the largest provider of litigation finance. Its shares listed on the London Stock Exchange in 2009 and it now has a team of over 100 legal and finance professionals. Most of its clients are in the United States, but it is increasingly working with others around the world. Since launch, litigators financed by Burford have won a sizeable proportion of the cases concerned. This has resulted in Burford earning a return on its investments of well over 20% per annum.

Diversification benefits

The returns generated by litigation finance are based on the outcomes of legal cases and therefore should be almost entirely independent of factors such as the economic and financial market background and interest-rate cycles. As a result, litigation finance can be an excellent source of diversification for investors.

Recent developments

Knowledge, understanding and experience of litigation finance have increased in recent years, allowing it to grow substantially as an industry. Burford commissions an annual survey which highlights the growth in familiarity, importance and use of litigation finance. While Burford notes that the legal profession is conservative in nature and takes time to embrace change, growth in the company’s funding commitments shows how this is changing. In 2017, Burford made new commitments of $1.3 billion. This was more than triple the amount made in 2016 and more than 30 times the amount made in 2013.

As at June 2018, the combined total of Burford’s assets either invested in or available for legal finance was $3.3 billion. This is underpinned by over 900 claims through 89 ongoing investments. At the end of 2018, the company announced new funding arrangements, allowing a further $1.6 billion in litigation finance investments from a range of investors, including a sovereign wealth fund.

Case study: YPF/Petersen

Although little is generally known to outsiders about the cases the firm is currently funding, one that has featured in the media is the pursuit of damages from Argentina by Petersen, a Spanish investment group. Petersen was an investor in YPF, an oil company which was allegedly illegally appropriated by Argentina in 2012. Burford invested $18 million in the case and announced in June 2017, after a successful initial ruling, that it had sold 25% of its portion of the claim to third-party investors for a total of $106 million. In the summer of 2018, Burford sold a further small stake in the case, which valued the initial investment at £800 million. Burford still owns over 70% of the investment in a case which has been running since 2015, but may yet run for several more years.

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.

The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the "Owner") and is licensed for use by Standard Life Aberdeen**. Third Party Data may not be copied or distributed. Third Party Data is provided "as is" and is not warranted to be accurate, complete or timely.

To the extent permitted by applicable law, none of the Owner, Standard Life Aberdeen** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

**Standard Life Aberdeen means the relevant member of Standard Life Aberdeen group, being Standard Life Aberdeen plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time.

Risk warning

Risk Warning

The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.