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.
Trust funds, family offices and other conscientious investors are allocating cash for the actions taken by liquid payments and means that returns – such as private equity and real estate – are not necessarily related to movements in equities and bond markets.

“We believe this is a large amount of capital waiting to enter the market,” says Goldman Sachs Group Inc. in Sydney. Michael Peet, an analyst. “Case financing is rapidly developing as an alternative asset class.”

Although there are not good numbers for the total amount of money support cases in Australia (or globally for it), there is a lot of evidence about the ups and downs. The Link Capital LLP in London, which invests on behalf of rich individuals, said, “It attracts a great deal of attention from new and existing investors,” according to the company’s fund manager, Emma Bewley. “Returns against a portfolio are similar to private capital, but are expected to be produced within a shorter time frame,” he said.

The Sydney-based IMF Bentham Ltd., one of the largest public case experts, responded by increasing its first three external funds over the past 16 months, totaling A $ 270 million ($ 198 million). Among the investors are Fortress Investment Group LLC, a $ 40 billion private equity firm, and Partners Capital Investment Group LLC, a $ 24 billion outsourced investment office. They act on behalf of foundations, foundations and high net worth families.

IMF Bentham Executive Board Chairman Andrew Saker said in a telephone interview that it was very powerful for the company to see its future as “more a fund manager”. Two years ago, all cases were financed from the company’s own resources.

The global increase in litigation funds is limited to an old UK legal restriction that prevents a third party from taking a share of the income of a decision. Australia is the first major jurisdiction to allow exceptional cases in the early 1990s. In 2017, Singapore and Hong Kong became the last person to allow it in some 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?”

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