A New Class of Investment?

In today’s ultra-low interest rate environment, money managers are keeping a close eye on litigation finance.
WHEN IT COMES TO THIRD-PARTY litigation financing, there are some interesting new trends to watch out for. The area is being seen as a new asset class, which is attracting interest in capital markets. In the US, that’s creating new entrants in the form of insurers and pension funds looking to go beyond traditional equity markets in the quest for diversification. Before being acquired by Burford Capital LLP last year, for example, Gerchen Keller had received over US$1.4 billion from investors including the Michigan Municipal Employees Retirement System and the Employees Retirement System of Texas.

Litigation finance may even evolve into a separate asset class. In its 2016 annual report, Burford, which trades on the London Stock Exchange, announced it had US$2.3 billion “invested in and available for legal finance.” The world’s largest global funder, Burford announced at the end of June this year it has closed a new US$500-million fund that will invest in complex litigation-related strategies. It will not invest in filed cases, the company stressed, but rather “assets that Burford believes are mispriced and where value can be realized through recourse to litigation and regulatory processes. As such, Burford, through this new fund, generally will act as a principal as opposed to financier.”

Myriam Seers of Torys LLP in Toronto points to Balmoral Wood, a Toronto-based fund of funds that invests in established global litigation firms around the world, and says “there are also private-equity firms with capital to deploy. There are a couple of private-equity funds based out of New York … that are getting into this area.”

Naomi Loewith, investment manager in Bentham IMF’s Toronto office, says one of the next big trends she sees coming to this country is litigation funders buying portfolios of litigation, ideally four unrelated cases, from a law firm. “We haven’t done this in Canada yet, but we’re in discussions with a few law firms, and we’ve done 13 of these arrangements in the United States, where we will invest in a portfolio of cases and advance money to a law firm to run those cases on a contingency basis.

“Running those cases might mean hiring new associates, expert fees, new carpets, partners’ draws –– whatever they need to actually run those cases through to the end. Then we would cross-collateralize, so we could take our return from any of the cases that are successful.”