Third-party commercial litigation funding – an investor’s view

As a provider of alternative investments for our high-net-worth investors, I am always on the lookout for new and innovative opportunities that our clients may find difficult to source and assess themselves.

The current investment environment has created a dilemma for those who want a return on their money but are wary of issues of liquidity and the current state of the domestic and global economy. While cash products and more traditional stock market related assets make up the bulk of each investor’s portfolio, there is always an element upon which they are prepared to accept greater risk and lower liquidity in order to generate higher returns.

Until recently, I had never heard of third-party litigation funding as a service let alone an investment asset class. Neither had most of my clients. Although still relatively new in the UK, third-party litigation funding provides investors with an opportunity to invest in an alternative asset class that targets above-normal returns over a relatively modest period. At a time when returns on cash and other more mainstream investments are so depressed, this is an attractive proposition.

The acceptability of third-party funding as a method for funding claims has been clarified by the Master of the Rolls as well as in the 2007 Civil Justice Council report and Lord Justice Jackson’s Review of Litigation Costs in 2009. There has been growing acceptance of the role of third-party funding in enabling access to the judicial system for cases that otherwise could not be afforded. Several commercial claims have now been successfully resolved that were financed by third parties, validating the funding model in the UK.

Unlike most asset classes, which rise and fall with the markets, returns from third-party litigation funding are uncorrelated, since cases will be resolved by the court system irrespective of what is happening to asset prices in the wider economy. For an investor, this is one of the most appealing aspects of investing in litigation funding. As long as you invest with an experienced team capable of attracting and assessing the right cases, risk can be managed with a clear investment policy on diversification including number, size and type of case.

As awareness of the availability of commercial litigation funding increases, the asset class will become more mainstream and in time probably become the preserve of institutional investors. For now, experienced private investors still have the opportunity to gain exposure to the asset class at a time when the market is still in its infancy.

However, minimum entry levels to funds are high as are the risks, so direct investment in a third-party litigation fund is unlikely to be suitable for ordinary retail investors, although there are quoted alternatives such as Burford.

Claire Madden is founding partner at Connection Capital