Hedge funds turn lawsuit betting into $ 39 billion industry

Hedge funds, private equity funds and sovereign wealth funds are racking up billions in the outcome of high-stakes court cases at a faster rate than ever.

Litigation financing – the practice of paying legal fees up front with a promise to share any eventual payment – has skyrocketed to a $ 39 billion global industry in 2019, according to law firm Brown Rudnick . It is used to fund everything from divorces of Russian oligarchs to banks to fraud suits. And now regulators are asking if there is enough oversight.

“More companies than ever are exploring how legal finance can improve their bottom line,” said Jack Neumark, head of legal assets business at Fortress Investment Fund LLC. “We lose money if the claims we fund fail, so we only fund claims that are supported by solid evidence and the law. “

In the UK, the industry saw record cash flows of £ 2bn last year, up from just over £ 500m ($ 669m) in 2016, according to data from the firm. PRC lawyers. And this growth shows no signs of slowing down. The reality, however, is that the true size of the market is not known due to a lack of transparency and disclosure across the industry. Omni Bridgeway Ltd., an Australian public funder, estimates a global “addressable market” of $ 100 billion.

DE Shaw & Co., Elliott Management Corp. and TowerBrook Capital Partners are among those who have jumped into the action. Litigation financier Burford Capital Ltd. scored a big blow with a return of $ 103million from a divorce after supporting the ex-wife of a Russian oligarch after seeking to recover £ 450million which ended in a settlement of 135 million pounds.

Burford, another publicly traded lender, has a current investment portfolio of $ 4.8 billion, up from $ 4.5 billion at the end of 2020. Last year it took in $ 758 million in new commitments for commercial legal assets, according to a client update. The stock is up 15TK% this year.

In addition to the Russian divorce settlement, litigation funding was used in the UK to fund Amanda Staveley’s losing bid to recover £ 660million from Barclays Plc and a failed class action lawsuit against Google d ‘Alphabet Inc. In the United States, Bench Walk Advisors LLC has been linked in cases including the dating app Tinder against its parent company Match Group Inc., and also funds Jay Edelson, founder and CEO of the firm of lawyers Edelson, in his divorce.

“There is a lot of money available through hedge funds for the right opportunity,” said Malcolm Hitching, partner at London law firm Macfarlanes LLP. “Hedge funds love it because it’s uncorrelated – they can get around the risk. “

Proponents of litigation funding say it’s an important way to ensure lawyers are paid and helps enable individuals or businesses with fewer resources to be able to afford expensive lawsuits.

But critics say it may leave investors with a bigger slice of the pie than applicants. EU lawmakers are examining the need for rules for third party litigation funding, while in the UK the industry is self-regulating.

In the United States, the Justice Department said last year it was investigating the disclosure of third-party litigation funding in some cases in response to the legislation. The department has laid criminal charges this year against several litigation financiers, including one who pledged investor funds and one who allegedly recruited defendants for fall-and-fall cases.

Litigation funding is seen as a smart way to diversify investments away from volatile stock markets, especially during difficult times like the Covid-19 pandemic. On average, backers receive about 3 to 4 times their invested capital plus the recovery of legal costs if the case is won, according to Brown Rudnick.

Since establishing its litigation finance arm in 2013, Fortress has deployed more than $ 4 billion in a “diverse pool” of legal assets globally. It currently has 20 employees within a dedicated team.

Despite the obvious benefits, if an investment pays off, the risks abound.

Investments are hard to sell, cases often take years to resolve, and the risk of losing a lawsuit is high. If a case doesn’t go through, investors often get nothing in return and have to pay millions in legal fees, sometimes for the other party as well. Even if a case is won, the amount awarded by the court can often be lower than expected.

The call is “partly the return profile because overall returns are attractive” but “this is not a cookie-cutter asset class – cases can go wrong,” said Neil Purslow, co-founder of the financial backer Therium.

That’s why backers build a diverse portfolio of cases to spread risk, much like how private equity works, he said. One of the company’s investors includes a sovereign wealth fund.

A survey of 46 US-based funders from brokerage firm Westfleet Advisors showed they had total assets under management of $ 11.3 billion in 2020, an 18% increase from the previous year.

Litigation funding is expected to grow rapidly over the next five years, the market will see “even more new types of lenders, new types of claims funded and the development of a secondary market,” said Elena S. Rey , partner at Brown Rudnick. .

–With help from Roy Strom.

Copyright 2021 Bloomberg.

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