Loans against lawsuits conjure the image of late-night televi- sion ads haranguing the luckless with offers of money now if they get lucky at the casino that is the court system. “Cash
now, win later!” is the pitch.
The same basic offer, considerably tidied and formalized, is
catching the attention of asset managers interested in returns untethered to economic trends. The concept is simple, even when scaled up:
it takes a lot of money to manage a complicated, high-stakes legal
tussle between two huge companies. But at some point, one side or
the other will win, or the matter will settle out of court. How and
when the case concludes is only a matter of process and time… and
law firms are willing to pay double-digit, even triple-digit, returns for
investors to tide them over in the meantime.
The concept of litigation finance is long established in England
and Australia, where the two largest publicly held litigation
firms—Burford Capital and Bentham IMF—are respectively based.
During the recession, litigation finance grew in the US as corporate
law clients began to press for reduced fees and creative financing
arrangements from big law firms. The recession faded, but clients
haven’t eased their demands for extracting more legal services for
less money, or at least less money up front. The opportunity for inves-
tors lies in the gap between cash needed today and cash available if
the suit wins.
Asset managers are rapidly building the infrastructure that
enables investors to buy stakes in corporate litigation at various
points in the process, and through several models, ranging from the
equivalent of an equity stake to the equivalent of factoring. Documents filed with the Senate Judiciary Committee in 2015 indicate
that asset management firms had channeled $3 billion to US large-scale, third-party litigation finance—triple the 2011 total.
Law firms are willing to pay investors triple-digit returns.
Reported by Joanne Cleaver / Art by Jon Han