Litigation report: Boom times entice new third-party funders

Litigation practices across the country are buzzing with excitement as the volume of instructions begins to creep upwards. Nor are they alone in their excitement, with a number of financial institutions looking to make some money out of the sector.

Third-party funding is not a new phenomenon, but it is one that is becoming increasingly common as major corporations look for alternative ways to fund major cases.

In the UK it is a burgeoning market, where it only became possible due to changes in legislation, but in the US, Germany and Australia the sector is well established.

Nevertheless it is not without risks. For the investor, finding an appropriate case to invest in that will provide the 300 per cent return on investment they are looking for is difficult enough. Most funders will want a 70 per cent chance of success –much higher than the 51 per cent expected by after-the-event insurers who cover conditional fee agreements.

For the client, there is the minimal risk that the funders may withdraw if the case is looking unlikely to succeed. Furthermore, that 300 per cent return that will come from the settlement is not always the most attractive proposition.

That has not prevented newcomers from entering the market. Last month, commercial litigation insurance broker ILF and hedgefund consultancy IGS Group announced that they would raise funds to invest in the tidal wave of major litigation anticipated by litigators. The new company will aim to raise up to eight new funds this year, at a cost of £20m, and finance mid-sized corporate litigation cases brought before the UK courts.

In a statement it said: “Significant investors’ losses in most securities, coupled with the collapse of many of the global investment banks that structured and sold these securities, has given rise to an environment where proving the ultimate ownership of underlying loss-making or defunct securities has become imperative.”

The company said it would invest in cases worth between £500,000 and £3m – all of which will be insured against loss. Most cases are expected to last between nine and 18 months and the majority are expected to settle before reaching the High Court.

Meanwhile, Juridica, which raised £74.4m through its Guernsey listing last year, aims to invest in cases worth between $25m and $100m (£17.62m and £70.5m) in return for between $3m and $10m (£2.11m and £7.05m).