Litigation Financing Emerges as Alternative Asset Class for Wealthy Investors

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When shares of AMP Ltd. plunged earlier this year after the firm was engulfed in a fee-for-no-service scandal, the Australian wealth manager was hit within weeks by the first of five separate class action lawsuits.

It wasn’t just the seriousness of the situation — which included an admission that AMP repeatedly misled regulators and charged clients for services they didn’t receive — that prompted the attention of so many law firms. The multiple suits were all supported by external funding bodies, whose coffers have been swelled by a flood of money moving into litigation financing in Australia and elsewhere.

Endowment funds, family offices and other savvy investors have been allocating cash to lawsuits, attracted by juicy payouts and the sense that — similar to private equity and real estate — the returns aren’t necessarily correlated to movements in equity and bond markets.

“We believe there is a large amount of capital looking to enter this market,” said Michael Peet, an analyst at Goldman Sachs Group Inc. in Sydney. “Litigation funding is rapidly emerging as an alternative asset class.”

While there are no good figures for the total amount of money backing litigation in Australia (or globally for that matter), there is plenty of anecdotal evidence that the tide is rising. Connection Capital LLP in London, which invests on behalf of wealthy individuals, has seen a “considerable level of interest from new and existing investors” according to Emma Bewley, the firm’s head of funds. “Returns across a portfolio are similar to private equity but are expected to be generated within a shorter time frame,” she said.

Sydney-based IMF Bentham Ltd., one of the largest publicly traded litigation specialists, has responded by raising its first three external funds during the past 16 months, gathering a total of A$270 million ($198 million). Investors include $40 billion private equity firm Fortress Investment Group LLC and $24 billion outsourced investment office Partners Capital Investment Group LLC, which acts on behalf of endowments, foundations and high-net-worth families.

The interest was so strong that the firm now views its future as “more of a fund manager,” IMF Bentham Chief Executive Officer Andrew Saker said in a phone interview. Two years ago, all lawsuits were financed from the company’s own resources.

The rise of litigation funding globally has been constrained by an old English legal restriction that prevented a third party from sharing in the proceeds of a judgment. Australia was the first major jurisdiction to allow exceptions in the early 1990s, while the U.K. followed suit in the 2000s. In 2017, Singapore and Hong Kong became the latest to permit it, in certain cases.

New Horizons

For IMF Bentham, the new money is helping it expand overseas. The firm is exploring opportunities in the U.S., Singapore, Hong Kong, continental Europe and Canada as it focuses more on corporate litigation, whistle-blower suits and U.S. law firm portfolio funding, Saker said. Australian shareholder class actions now only represent 13 percent of its funded cases versus more than 50 percent three years ago, according to Goldman analysis.

Indeed in Australia — where litigation funding first originated — there are signs of saturation. While the overall number of class action suits is relatively stable, the number of investor and shareholder cases — the ones that tend to attract outside funding — have risen sharply.

More than 60 percent of Australian class actions received funding so far this year, according to law firm King & Wood Mallesons, compared with less than 40 percent four years prior. Over the past five years, 100 percent of shareholder class actions have been funded versus about 30 percent for consumer protection litigation, according to separate data from the Australian Law Reform Commission and Professor Vince Morabito.

“Funders play a critical role in Australian securities class actions,” said Michael Lange, a securities litigation counsel at Financial Recovery Technologies, a U.S. group that helps institutional investors track class actions. “Past settlements have attracted more funders and their numbers have grown in recent years,” he said. That’s now starting to cause a squeeze, with commission rates falling.

It’s just one example of the challenges facing the sector, highlighting the difficulty of delivering the stellar returns that attracted limited partnerships and other investors in the first place.

While the right fund manager can still generate outsized returns, “the real issue that no one talks about is whether there is too much capital chasing this asset class and how does the litigation fund manager find quality of case inventory in a crowded global market,” said Dan Farrell, the chairman and chief executive officer of Privos Capital LLC, a global multi-family office. “In other words, are there enough good litigation cases to go around?”

Copyright 2018 Bloomberg.


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