5th May 2020
About 6 months ago I considered litigation funding for the first time and decided to invest. The case has been concluded and I am pleased to report it was such a remarkable success that I probably could not reasonably expect to repeat it.
Despite having post graduate degrees in law (postgraduate LLB and MBL) and having practiced as a solicitor, albeit many years ago, I had not previously considered litigation funding. I should have, it is worth considering.
The return one could reasonably expect in relation to the level of risk is, in my humble opinion, very attractive. That’s because one can find opportunities to get a return equating to 3 to 5 times one’s investment where an independent expert has opined that the plaintiff (the party whose case one is funding) has a 70% prospect winning the case and being awarded damages. That (70%) is the highest prospect of success one can expect from the independent expert, a senior barrister specialising in the area of law concerned.
There is still a risk that the court might find in the defendant’s favour, in which case one will lose one’s entire investment. There is also a risk that the court might decide in favour of the plaintiff but award far less in damages than was claimed, in which case one would get a lower return. That should be mitigated to some extent by the funding contract providing that the investors get their money back before the plaintiff receives any damages. Another risk is that legal costs are higher than those budgeted for, which will adversely affect one’s return on investment – so it is important that a tight rein be placed on the lawyers, whose fees one is paying for. This is realistic as at lot of work done by lawyers could be done by others at a much lower cost. The cost of an appeal – by either the plaintiff or by the defendant – will increase costs and may require additional funding from the investors or capital being secured from new investors.
There are clearly risks associated with investing in litigation as there are with all other investments, some higher some lower. Investments carrying higher risks should command higher expected returns, and vice versa. So, the real question is whether the potential returns adequately compensate one for taking on the associated risks. The risk of losing all one’s investment in funding a litigation is, for example, much higher than the risk of losing all one’s capital from an investment in the ordinary shares of a ‘blue-chip’ company but the returns one could reasonably expect are much higher, multiples higher. In the case of a start-up or early stage business, I would also argue the risks for a litigation funder are generally far lower and the potential return far more certain.
Given the risk profile on funding litigation, it is particularly important to have a very well diversified investment portfolio. One could invest a portion of one’s investment portfolio in a diversified litigation fund. My preference is to invest on a case-by-case basis in a syndicate that includes a litigation fund. Anyone keen to consider investing alongside us, is welcome to let me know of their interest.
Written by – Mark M.J. Morris of Rogers Morris Pty Limited, an investment business focused on unlisted securities