The company’s general counsel walks into your office and says, “Boy, have I got a deal for you. We can make a legal claim against Company X, we’re almost certain to win the case, the litigation costs will be only $5 million and our recovery will be three or four times that much.”
The response by you, the CFO, likely is something like this: “Get the hell out of my office! I don’t have budget for $5 million in litigation costs. I don’t care if there might be a profit three years from now.”
You could hire a law firm to pursue the claim on a contingency basis, under which it would collect legal fees only if you win the case. But complex corporate litigation typically requires hiring expert witnesses, conducting electronic discovery and other costly steps that are not included in legal fees. Again it comes back to: Do I want to lay out that cash?
That scenario is, in essence, what’s behind the fairly recent emergence of “litigation finance.” A litigation-finance firm, usually composed of former corporate attorneys, seeks investor funding just as a venture-capital firm does. In turn it provides funding to plaintiff companies (usually) that are attracted by the prospect of lowering their litigation risk and the opportunity to fund lawsuits off the balance sheet.
If the plaintiff loses the case, under most arrangements the litigation-finance firm loses the cash it extended. That makes it imperative for the firm to invest strictly in cases with a high probability of success. As with any investment of venture capital, thorough due diligence is mandatory. If the case is successful, the financing firm takes an agreed-upon share of the plaintiff’s recovery amount.
Litigation financing took hold first some years ago in countries that prohibit contingency-fee arrangements, like Australia, the United Kingdom and Canada. Activity in the United States generally began just three or four years ago, and only now is it becoming more than a tiny niche in the area of corporate litigation strategy.
Research quantifying the growth rate of litigation funding is hard to come by, but signs point north. Several new financing firms have started up operations over the past couple years, including Gerchen Keller Capital, which has raised about $360 million in venture funding. Another fairly new firm, Parabellum Capital, was formed as a spinoff from Credit Suisse in 2012 for purposes of funding litigation in the United States.
The best-known names in the space are Burford Capital — generally considered the world’s largest litigation financing firm — and Juridica Investments, both of which are listed on the London Stock Exchange. Now, though, a “significant majority” of Burford’s business is in the United States, says CEO Christopher Bogart. And it appears to be an almost bizarrely successful business; last September the firm reported that through mid-2013, it had enjoyed a 46 percent return on invested capital since its inception in 2009.