What Is Litigation Funding, And Why Should I Consider Investing?
Litigation funding itself is very straightforward – a third party provides the financial resources to enable costly litigation cases to continue, often where the litigant has run out of funds to continue the case themselves.
The litigant obtains the financing from a private litigation funder, who has no direct interest in the proceedings. In return, if the case is won, the funder receives an agreed share of the proceeds of the claim. If the case is unsuccessful, the funder loses its money and nothing is owed by the litigant.
Investment in litigation funding often takes the form of peer-to-peer lending, and those wishing to provide private funds have several different avenues through which they can invest – from the bond offerings of Just ISA to direct cash investment schemes.
Because the litigation funders return is tied to the success of the case, funders often look to fund cases with good prospects of success. The funders’ share of the proceeds of a successful case is negotiated with the litigant at the outset – protecting the interests of all concerned parties.
To balance the risk of investment, the funder’s interests are usually fully aligned with those of the claimant – the funder will only receive a return on investment if the claimant recovers proceeds from the litigation, so the offer of investment must come from a funder who wants the case to succeed.
Why Should I Consider Litigation Funding?
There are a number of reasons why investors would consider using their funds to invest in Litigation Funding. For one thing, traditional forms of investment or savings like cash ISAs and savings accounts are producing very low returns, leading naturally to a push into new industries to find more profitable opportunities. The push has also led to new products becoming available to invest through, like IFISAs and bond-based investments.
A second consideration is that litigation is often unconnected to wider economic forces – whilst a standard investment may be subject to changes in the markets, currency strength and so on, the outcome of a litigation case is usually dependent on the merits of the case. By somewhat avoiding the usual dependence on wider market movements or trends, provides litigation funding investment with more stability than other funding options.
The Litigation Funding industry appears to be growing steadily – which suggests that options for investors will also grow as time goes on. Statistics published by the Reynolds Porter Chamberlain law firm in 2017 estimate the amount of cash funders committed to UK litigation at £723 million in 2017 – a rise of 25 percent on previous years. Meanwhile funders are finding it easier than ever to attract investors, with recent groups like Calunius LLP launching funds and Just ISA issuing their new bond offering.
What Issues Could Arise?
While the above paints a rosy picture for investors, there are intrinsic considerations that potential investors should be aware of.
Litigation is intrinsically risky, even when you have full control over a case as a client or solicitor. Investing as a third party in that process is doubly so, given the rules about how much control you can have over the proceedings as a litigation funder.
Lack of diversification could also be problematic for litigation investors – Diversification is a common means of reducing overall risk to your investment portfolio. By focusing your investment on litigation funding, all monies invested will be in the same sector and commonly through the same asset class. To mitigate the inherent risk in this practice, investors should consider spreading or diversifying their investment and seek independent advice if they have any doubts.
As with all investments, your capital will be at risk.
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