Litigation as an asset class: an opportunity out of volatility

The financial crisis of 2008 resulted in a sharp increase in litigation and it is likely that the current market volatility will have a similar effect. Since the publication of the Jackson Report in 2010, the litigation funding market has developed significantly, that development has accelerated in recent years. As a result, we believe that there will be opportunities for investors seeking to invest in litigation arising out of the current volatility, that were not present following the financial crisis of 2008.

In this article we summarise the litigation funding market and considerations for investors seeking to invest in litigation. An introductory guide to litigation funding and other fee arrangements for litigants can be accessed here.

The market

The growth of litigation funding in England and Wales has been driven by the following developments:

1. In 2009, Lord Justice Jackson conducted a review of costs in civil litigation. The Jackson Report that followed gave a favourable view of litigation funders and the role that they could play in promoting access to justice. This raised the profile of litigation funding.

2. In 2011 the Association for Litigation Funders published a code of conduct, giving legitimacy to the industry. Updates were published in 2014 and 2016.

3. In April 2013, the Damages-based agreements (DBA) Regulations were introduced, allowing DBAs in civil litigation. A DBA is a “no win / no fee” agreement between a claimant and a legal representative which entitles the representative to a share in the proceeds of a claim. While this represents an alternative source of funding for litigants, it has introduced the possibility of funders contracting with legal representatives (who themselves are party to a DBA) to fund work in progress in return for a share of proceeds received.

4. In 2017 the government confirmed that it had no plans to introduce regulation to govern the litigation funding market.

5. In 2019, draft revised DBA Regulations were published and consulted on which propose to permit “hybrid” DBAs, whereby legal representatives could receive a reduced hourly rate as the case proceeds (payable irrespective of outcome) plus a share of proceeds if successful. These regulations are yet to come into force.

The litigation funding space has historically been occupied by established funders; companies whose business is to invest in litigation and which have the capability to source and “bookbuild” (in the case of group actions) litigation. In recent years we have seen other parties that do not have this full suite of capabilities seeking to participate in investment.

There has also been an expansion in the types of cases being funded. Funded cases now cover areas as wide-ranging as “bulk” litigation claims (claims brought separately by different claimants on the same issue eg mis-selling claims), investor-state arbitrations, group actions, contractual claims involving sophisticated commercial parties and recovery by liquidators of amounts owed to a company.

Investment structures

Investment in litigation can take many forms: direct investment in litigation, co-investment / participation in investment with an established funder, funding of law firms or claims handlers or investment in a litigation fund or managed account. The appropriate structure for investment will be driven by the priorities of the investor. The following factors are likely to be relevant:

• Capabilities of the investor:
  • Can the investor source or bookbuild cases for funding?
  • Does the investor have the required in-house knowledge for assessing prospective cases for funding?
• Investment portfolio size:
  • How many cases is the investor seeking to fund?
  • Does the investor intend to fund a portfolio of cases for diversification purposes?
• Requirement for control over case selection:
  • Does the investor require the ability to veto or select cases for funding for conflict or other reasons?
• A desire for anonymity:
  • Does the investor require its investments to be non-public?

How we can help

Our team advises investors on all aspects of investment in litigation, from initial structuring of the investment vehicle to selection of cases for investment. Our expertise covers:

• structuring investments, including preparation and negotiation of contractual documentation;
• ensuring that appropriate internal processes are in place for selecting cases for investment; and
• assessing the merits of cases for investment using consistent, objective criteria.

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.