THE STORY SO FAR
BEN: The general impression in the market is that people are warming up to the idea of third-party funding. They are becoming more informed and in turn, they seem to be more comfortable with it. What in your view has been the main reason for companies to see this as an option? Why are corporates looking at what you do in a different light? How big a factor is the downturn in the economy over the last few years presumably leading to tighter budgets?
NICK: I think it’s a combination of things. There has always been a huge misconception as to how much budget corporates have to spend on claimant work. The majority of the budget is taken up by defence work and they actually lack appetite for the other side. Although most want to concentrate on their core business, which is not being a litigator, they’re beginning to see the opportunities out there.
If you compare the market to how it was five or six years ago, funding is still hidden, but it’s more common place. I think the difference is that, nowadays, everybody knows what it is, or at least thinks they do. The reality is there is still a lack of awareness of its potential. Their typical view of third-party funding is miles away from the sophisticated bespoke products now on offer. It’s going to take another few years for people to become familiar with it and understand that it is not a panacea for all litigation finance ills. Ultimately, some people are not going to like it and they are never going to want to do it for all sorts of reasons.
BEN: Is there any forum where you speak directly to companies about this or do they mainly learn about this through law firms?
NICK: I think it’s mixed. We spend a lot of time talking to finance and General Counsel (GC) of big corporates. One of the biggest issues we face is that GCs may or may not get it as they tend to be biased against litigation. A lot of GCs in Europe are corporate rather than litigation lawyers. I think you’ll find that in the States we get a different response because they tend to be more focused on litigation. That might be a bit of a generalisation but it feels that way.
BEN: Will the UK be like the US in five years?
NICK: I don’t think it’ll ever get there, despite what you read. The UK doesn’t have a litigation culture in the same way as the US. The biggest reason is that there are no adverse costs in the States, so a lot of cases are being brought in the States rather than in London. If you go up against a firm in the UK and they are quoting £20-£90m in adverse costs, there’s no way you can take that risk as a claimant, a claimant group, or as a funder because there just isn’t enough capacity in the market to put up adverse costs insurance of that nature. Securities litigation is very much looked at from the US side now, because of the adverse costs issue and I don’t think that’ll change. The UK won’t end up like the US, but it will become more sophisticated. I suspect these deals will be going on in the UK finance wise for longer and there will be more of them, but that may not be in the public domain.
UNCOVERING THE MYSTERY OF PORTFOLIO FUNDING
BEN: So, litigation finance and portfolios: What percentage of these are with law firms compared to clients?
NICK: It depends where you are, but I would say that it is probably about 50:50. The portfolios differ whether you are a law firm or the client. One of our big schemes is with insolvency practitioners.
The US is a very different market because contingency fee lawyers are much more active. Contingency fee lawyers in the US tend to want to lay off some of their risk so they will have a lot of cases, and will “sell” part of that to us as part of a portfolio.
In the UK, Damages Based Agreements (DBAs) are not common place, so most of our lawyer portfolios tend to be based on Conditional Fee Agreements (CFAs). In contrast, the uplifts are not massive because they are restricted to the uplift on fees rather than damages. We do both and we do the hybrid DBA schemes as well.
BEN: How does it work in practice?
NICK: I’ll use a law firm scheme as an example. Say we were doing something with you and we wanted to do a five case portfolio of ICC Paris claims and you were acting for the Claimant. You are taking some risk in relation to your fees, whether if you are doing DBA or CFA. The challenge is that you can do more of those cases and take more risk if you lay off some of it to someone else, so you share it with us. If you have a DBA portfolio of five cases where you are going to get paid, if a case wins, out of the proceeds of the litigation or arbitration. DBA rules dictate that you can’t be paid as you go along so we can assist you by making cash flow payments during the case.
In terms of the portfolio and how it works, we advance money across a portfolio of claims and if the first case loses, the amount we have outlaid gets added on to the general amount that has been outstanding. We get repaid from the next case that wins, so if the entire portfolio loses then we lose our money. Clearly we have made a fairly bad investment decision if that happens!
The beauty of portfolio claims, whether you are acting for an insolvency practitioner or a corporate client, is that they have a range of litigation cases. They might have ten cases: five as a Claimant, three as a Defendant and a few cases which are no hopers that they are running to settle. In a portfolio you have the ability to fund them all as long as there is enough value in the likely, Claimant, winning cases. You look at it in the same way as a property portfolio, so by that I mean you value a property and you lend the amount of money up to a particular ratio; it might be 1:4 or 1:10 across that portfolio. What you are doing is using the likely quantum receipts from the winning Claimant cases to fund the rest of the portfolio and that is how you fund the defence cases. So as long as across the entire scheme there is a value we will advance money against that value. All we are doing is looking at an asset, whether it be a piece of litigation, or a property, and using our skills to value that asset. It just happens that our skills are in valuing litigation, not property.
BEN: That sounds like a real benefit of portfolio funding. What are the benefits to the clients?
NICK: In accounting principles litigation is expensive, whether you win or lose. Let’s say that you are a client who we are funding. If you choose to pay your legal fees today, there is a present day hit in your P&L which affects your EBITDA. We significantly differ from other funders or financiers as we don’t necessarily require you to use our money to pay the legal fees. From our perspective, we are monetising an asset and we can even give you cash to monetise a potential judgment. If you want to then bring it into your account, you can do it when you want to, instead of when the court dictates it. A problem with accounting is that there is a negative effect on your EBITDA whether you win or lose because, when the money comes back in, it is a special item and not recorded as profit. If we monetise the claim, that cash gets recorded as income but goes into the P&L. The other side of that is there is no contingent risk anywhere, no contingent liability recorded, because the amount of money that’s being spent on legal fees is transferred to us. It’s an off balance sheet transaction because it’s a non-recourse loan. The Rurelec v Bolivia case, which is in the public domain, is an example of an arbitration where we didn’t fund the legal fees, we provided them with money to run their business.
Third-party funding has moved on a lot since the days of one off claims. We do recourse and non-recourse funding, we do WIP-funding, cost advance schemes. There are many different ways, it’s really just finance.
BEN: That’s an interesting point. Could you talk about the specific hybrid products like litigation finance plus CFAs and DBAs?
NICK: The DBA has had a lot of press because Regulation 4 of the DBA Regulations says you can’t have a hybrid DBA. The answer to that is we don’t provide a hybrid DBA. The client enters into a DBA with the law firm, so the law firm receives a percentage of the damages as per the agreement if the case wins. In the meantime, somebody has to fund disbursements and keep the lights on at the law firm, so the law firm is entitled to enter into a contract with us, or even a bank, to pay overheads and disbursements during the case. The firm will agree with us that we will pay them an amount of money, up to a budget, during the course of the case. If the case wins they share their uplift of their DBA fee with us. The client may or may not know about it. They probably do, but they don’t have to. If the case loses, we write off our investment. Of course if the firm goes through a bank, then they will be paying the money borrowed back.
CURRENT TRENDS ACROSS THE GLOBE
BEN: Let’s discuss international arbitration specifically. Are there any key trends which you are noticing? Hot regions perhaps? Or industries?
NICK: Generally it’s busy! The Middle East remains busy while Asia is growing in its interest, and there is a lot of talk around funding despite being slightly restricted by regulation. There’s a lot of construction work coming out of Eastern Europe too.
We are even starting to see governments and large corporates looking at options around funding portfolios because of the high value nature of some of the claims. That’s not common place, but it’s happening.
BEN: Are you seeing a rise in the number of Energy Charter Treaty and investment treaty cases?
NICK: Yes – there is a lot of that. Some funders really like the investment treaty disputes as they are very expensive and the returns are big. The downside is that they take a long time and I don’t think it suits everyone, depending on your structure as a funder. For example, if you’re a five year closed-end fund and you pick up a big claim half way through, will you be able to fund it all the way until the end?
BEN: That is an interesting point. Looking at current news, we saw that you have struck up an eight figure deal with a major FTSE 100 company to fund their litigation. Is that something that we are going to see more of?
NICK: Well, the slight issue I have with that is we are not allowed to talk about who we did that deal with. It would be lovely to be able to explain what that particular deal was because what’s in the press bears no resemblance to the reality and it’s a much more sophisticated product than it appears. I can say that we were approached directly. There are lawyers involved because they need to make sure everything is being done as would be expected, but yes, it’s a decision by a major corporate to say “I don’t want to keep paying this and would like someone else to pay it.”
We do lots of those sorts of deals. The one we released was the biggest one that we’ve done recently and it took a lot of hard work. Those sorts of deals are more prevalent than people would suggest. Not necessarily with big FTSE companies, but those sorts of deals are happening all the time, and I think they’ll continue, as that’s where we do most of our work.