Litigation funding: A profitable portfolio alternative during Brexit?

Advertisement feature from AxiaFunder, the litigation funding platform.

Napoleon famously said that ‘England is a Nation of Shopkeepers’. Under duress, he would perhaps have admitted ‘and of Magna Carta’. Britain’s common law legal system, very different from the Napoleonic Code, is arguably the best in the world, explaining why so many international commercial agreements are executed here.  

In the current Brexit-dominated environment, the UK should play to its strengths and continue to grow and export its legal system, currently worth c.£36bn annually to the national economy.

AxiaFunder is a litigation funding platform offering high net worth and sophisticated retail investors access to commercial litigation investments that typically would only be available to large private equity institutions such as Harbour or Therium.

Global data show that (unsurprisingly) economic prosperity correlates very closely with good rule of law, according to data from the most recent World Justice Project (2019). Venezuela, for example, scores at the worst end on both metrics and at the other extreme Scandinavia is close to the top, China being a (potentially temporary) anomaly. Commercial litigation funding, helping to protect property rights, has a significant positive social impact and almost invariably has a tangible net benefit to the claimant in question when they most need financial support.

With yields at close to multi-century lows, equities valuations stretched, and Brexit dominating the headlines, attractive alternatives to cash are arguably limited. In this context, the double-digit returns offered by litigation funding, with no correlation to macro or political risk are potentially attractive to qualified investors.

Until 1967, litigation funding had been illegal for 700 years (due to excessive frivolous litigation being funded in medieval times). In the face of rising costs of litigation and as the legal aid budget was steadily cut, to improve access to justice, about a decade ago regulators turned strongly supportive of litigation funding, creating a potential windfall opportunity for investors. 

The logic behind litigation funding is straightforward: the claimant is willing to pay back a multiple on capital of around 3.5x if the case wins, in exchange for no liability if the case loses. Data from Solomonic shows that over 80 per cent of cases settle before trial, which means the funder generally gets paid their principal and return in full. In the 20 per cennt or so of cases where the case goes to trial the results are more mixed with the claimant winning c.55-60 per cent of the time (depending on how witnesses perform in court etc). Add it all together and the claimant and funder are likely to win more than 75 per cent of the time. On that basis, it’s realistic to expect that investors will earn potential portfolio returns of c.30 per cent per annum net of fees and other expenses.

AxiaFunder’s model has the advantage that capital is only raised when needed for a particular case and is then returned immediately (with profit) if a case is resolved favourably. This eliminates upfront cash drag and also creates a natural exit after typically two to three years. Some of our investments can also be made IFISA eligible. 

Case Selection on the AxiaFunder platform (named from the Greek for merit) is selective with only 1 out of 20 cases reviewed being presented to investors. Cases must have strong legal and moral merits; enforceability; a sufficiently large claim value and a strong legal team running the case. 

Every case presented to investors on the platform has already been aggressively filtered: vetted by the engaged-solicitor (often working on a partially or fully contingent basis); independently reviewed by a barrister; assessed and approved by an adverse cost insurer and also been approved by AxiaFunder’s own experienced case assessment team (90%+ ‘win’ case-assessment track record). 

While AxiaFunder is a new entrant, we have already reviewed over 135 cases and funded 3 cases, with one win generating a 43 per cent return after 8 months and no losses to date.

We currently have an investment-ready case on the platform funding a case regarding an (alleged) misappropriation of a construction development opportunity, breaching a director’s duties to a company, enabled by a joint enterprise unlawful means conspiracy. 

The case, which has been separately vetted by 2 Queen’s Counsel barristers, has a potential IRR for investors of up to 100 per cent per annum (depending on when the case settles) and is IFISA eligible. Of course, with this and other cases on the platform, investors should bear in mind that their capital is at risk and returns are not guaranteed. 

Of course, there are also some general platform-related risks for investors. Investors are reliant, for example, on AxiaFunder managing the considerable operational risk. AxiaFunder is an appointed representative of FCA regulated ShareIn and uses ShareIn’s tried and tested technology solution which helps in this respect. In addition, investors face adverse cost risk if a case fails. AxiaFunder ensures that A-rated ATE insurance is in place to eliminate this risk.

We’ve seen time and again how big profits are made in finance when ‘the rules change’. However, in 2016, the UK’s Competition and Markets Authority (diplomatically) found that “the overall rate of innovation in the [legal] sector does not appear fast compared to rates of innovation in other sectors”. Therein lies the potential opportunity for alternative finance investors via www.AxiaFunder.com .

Capital is at risk and returns are not guaranteed. You potentially could lose more than you invested. These investments are illiquid and not covered by the FSCS scheme. This article does not constitute investment advice.

This article was provided by AxiaFunder and does not necessarily reflect the views of AltFi.