It has been an incredibly important development in the legal market, levelling the playing field between the Davids and the Goliaths of this world.
Putting some money behind the weaker litigation party completely changes the dynamics of the gameReaders will be familiar with the kind of bully boy tactics that large corporates can play in the courtroom, eg delaying proceedings, adding extra steps into the litigation process, racking up legal costs, all designed to put pressure on smaller opponents to settle early and for less – or even to drop cases altogether.
Putting some money behind the weaker litigation party completely changes the dynamics of the game.
However the development of the litigation funding market took a significant hit recently when one of its most high-profile players, Burford Capital, was accused by a short seller of overinflating its figures and of suspect accounting practices generally.
Counter claims were then made by Burford that their accusers were trying to manipulate the market.
Even though it is very particularly Burford’s working practices that are under the spotlight, the whole sorry saga has threatened to ‘muddy’ the reputation of the industry as a whole.
But the reality is that litigation funding run well has a big part to play in achieving parity between litigating parties, so it’s an important access to justice point, for individuals and for smaller businesses.
It’s time now for some perspective! Let’s take a look at some of the big questions around the litigation funding market, the questions thrown up by the Muddy Waters / Burford spat and provide some clarity, so readers can be equipped to discern between the good, the bad and the ugly of the litigation funding and finance world.
It's all about sound management
It goes without saying, (or should do at least), that rigorous accounting practices and prudent risk management need to be a primary focus for any players looking to succeed long term in this new market.
A critical calculation for litigation funders is the balance of risk across their entire case portfolio, because they will have to bear adverse costs orders on cases lost and off-set these against wins.
This will be central to managing client and stakeholder confidence.
That said, there is a clear segmentation beginning to develop within the industry which provides for different funding strategies and propositions.
An alternative is the introduction of interest based lending where both client and lender have absolute clarity on the cost of providing the finance at the outset and can therefore make risk based decisions accordingly.
Take the SME market for example.
Typically the requirement for litigation support is for loans between £250k-£2.5m.
This is markedly different from that required for the big-ticket cases generated by big businesses, which are the primary focus of the global litigation funders.
Products for the SME market are best approached pragmatically, using a blend of finance and insurance products focused on a realistic assessment of likely case outcomes.
This spreads the risk, and the impacts of case losses, with multiple parties and it also ensures there is alignment between them all (because they all have skin in the game).
This is important when those key decisions need to be made at different points in the journey of a case, whether to continue fighting, whether and at what level to settle, or even whether to pull the plug and cut losses.
It makes a big difference if there is a common will between all involved, so everyone moves as one in the same direction throughout the case lifecycle.
A key lesson of the Burford Capital debacle is how exposed funders can be if they place all their eggs in one basket, and one massive case dominates the portfolio.
This is obviously unwise when it comes to spreading risk as it upsets the balance.
Far better for a litigation funder to be selective about the cases it takes on and ensure a broad spread of similarly sized cases, and prudent funders will do exactly this.
At Quanta Capital we would even go so far as to say it is better to deploy capital resources on lower value cases which have a more predicable profile, so the determination of case merits and therefore likely revenue returns is easier (and so more accurate).
Otherwise the risk is the funder is building a ‘house of cards’; if the marque case fails, the impact on client, shareholder, and fund confidence could be irrevocably negative.
Litigation funding is here to stay - it's too important a tool in levelling the ground between litigating parties to be allowed to fail. The key for this industry's success will be in tightening up its systems and management.
For anyone looking to take advantage of this type of litigation support, they should be advised to check how well the business is managed and the risk spread.
Simon Dawson is a managing director at Quanta Capital
