A practice, which was until recently outlawed in most countries, is gradually catching pace. And how..The first part of the Third Party Funding (TPF) series served as a brief primer on it’s applicability to India and some other countries, the second was a no-holds barred interview with Selvyn Seidel, one of the first to set up a Third Party Funding company, and perhaps the only one to set up a second one as well. And now, in the third and final piece, we try to assimilate ten interesting questions about this maturing industry..1. How big is the Third Party Funding market?.In one word, billions..Cumulatively, TPFs have deployed billions of dollars in the market. Burford and Gerchen Keller have together deployed over $2 billion, Fulbrook by itself has deployed close to a $1 billion, Harbour has deployed over £400million and Bentham IMF over $1.6 billion..2. Third Party Funding as an investing exercise.TPFs view funding of lawsuits as an investment exercise, wherein funders are happy to invest in a ‘portfolio of lawsuits’. Like every other investment decision, a decision to fund a certain lawsuit will influence their next decision; so for instance, if a TPF funds a patent case, they might choose a commercial arbitration as their next pick instead of going for another patent case..3. Do TPF’s specialise? .All TPFs don’t fund all types of claims. Just like law firms, Third Party Funding also focus on certain fields. Augusta Ventures, for example, funds a wide range of claims including insurance disputes, marine disputes, shareholder disputes and commercial agency disputes and; Burford, on the other hand, commits its capital to cases involving international arbitration, antitrust, patents, insolvency..4. What are the different kinds of funders?.Three types of investors have been identified viz. conventional, situational and lender..A “conventional funder” is one whose investors have devoted certain capital and all their time to investing in commercial claims..A situational funder is a party who invests only part of their total capital into commercial claims, depending on the situation..As to “lenders”, they are more akin to “creditors”. They’re putting out a newer product which can be describe as “credit investing”. They will review cases with a similar criteria that a lender might use, and if that claim qualifies, they advance the money with a return more like a junk bond or a hard money loan, charging an IRR of 18-22%..5. Is there any Code of Conduct for TPF’s?.Applicable to Members of The Association of Litigation Funders of England & Wales, is a voluntary code which sets out standards of practice and behaviour to be observed by TPFs..Among other things, members have to pledge to have enough capital to fund all disputes on their books and all liabilities for 36 months; not to leave a dispute without good reason; and not to seek to control litigation tactics..6. Blurring of line between law firms and TPF’s.In the UK, the Legal Services Act, 2007 permits non-lawyer individuals and entities- Like TPFs- to have partial ownership of law firms..As a result, Burford Capital, which is listed on the London Stock Exchange, has launched a new legal arm dedicated to helping clients enforcing their arbitral award, called ‘Burford Law’ that is described as an ‘alternative business structure’..7. Do TPF’s and law firms work together? .In the US, law firms and TPFs are increasingly cooperating with one another, since such an arrangement allows them to share the risks and rewards of the underlying claim..A contingency law firm would, for example, be funded 50% of its fee by the TPF, and the remaining would depend on the outcome of the litigation..8. How do TPF’s function in the derivatives market.The ‘claims’ that arise out of funding a lawsuit are being treated in a way many other assets are i.e. being traded as ‘derivatives’. Parties (other than the funders of course) are betting on these claims, and taking ‘long’ or ‘short’ positions. It is being predicted that down the road, this will become a publicly traded market..9. Do broker’s exist in the Third Party Funding space? .Brokers and expert advisors have emerged in this space. They serve as a link between claims and capital, helping either to find the other. They attract claims, evaluate them, identify worthy ones, package and present them to potential investors, and negotiate the financing agreement. They are also available to monitor the prosecution..10. Are TPF’s listed? .While several fund houses exist, only two are being traded publicly. Burford Capital, which was listed on the London Stock Exchange nearly seven years ago, has more than quadrupled its share price in the last two years..The other one being, Bentham IMF whose shares are listed on the Australian Securities Exchange..Bentham IMF has had a historical success rate of 78% over the past five years, with an RoI of 2.3.
A practice, which was until recently outlawed in most countries, is gradually catching pace. And how..The first part of the Third Party Funding (TPF) series served as a brief primer on it’s applicability to India and some other countries, the second was a no-holds barred interview with Selvyn Seidel, one of the first to set up a Third Party Funding company, and perhaps the only one to set up a second one as well. And now, in the third and final piece, we try to assimilate ten interesting questions about this maturing industry..1. How big is the Third Party Funding market?.In one word, billions..Cumulatively, TPFs have deployed billions of dollars in the market. Burford and Gerchen Keller have together deployed over $2 billion, Fulbrook by itself has deployed close to a $1 billion, Harbour has deployed over £400million and Bentham IMF over $1.6 billion..2. Third Party Funding as an investing exercise.TPFs view funding of lawsuits as an investment exercise, wherein funders are happy to invest in a ‘portfolio of lawsuits’. Like every other investment decision, a decision to fund a certain lawsuit will influence their next decision; so for instance, if a TPF funds a patent case, they might choose a commercial arbitration as their next pick instead of going for another patent case..3. Do TPF’s specialise? .All TPFs don’t fund all types of claims. Just like law firms, Third Party Funding also focus on certain fields. Augusta Ventures, for example, funds a wide range of claims including insurance disputes, marine disputes, shareholder disputes and commercial agency disputes and; Burford, on the other hand, commits its capital to cases involving international arbitration, antitrust, patents, insolvency..4. What are the different kinds of funders?.Three types of investors have been identified viz. conventional, situational and lender..A “conventional funder” is one whose investors have devoted certain capital and all their time to investing in commercial claims..A situational funder is a party who invests only part of their total capital into commercial claims, depending on the situation..As to “lenders”, they are more akin to “creditors”. They’re putting out a newer product which can be describe as “credit investing”. They will review cases with a similar criteria that a lender might use, and if that claim qualifies, they advance the money with a return more like a junk bond or a hard money loan, charging an IRR of 18-22%..5. Is there any Code of Conduct for TPF’s?.Applicable to Members of The Association of Litigation Funders of England & Wales, is a voluntary code which sets out standards of practice and behaviour to be observed by TPFs..Among other things, members have to pledge to have enough capital to fund all disputes on their books and all liabilities for 36 months; not to leave a dispute without good reason; and not to seek to control litigation tactics..6. Blurring of line between law firms and TPF’s.In the UK, the Legal Services Act, 2007 permits non-lawyer individuals and entities- Like TPFs- to have partial ownership of law firms..As a result, Burford Capital, which is listed on the London Stock Exchange, has launched a new legal arm dedicated to helping clients enforcing their arbitral award, called ‘Burford Law’ that is described as an ‘alternative business structure’..7. Do TPF’s and law firms work together? .In the US, law firms and TPFs are increasingly cooperating with one another, since such an arrangement allows them to share the risks and rewards of the underlying claim..A contingency law firm would, for example, be funded 50% of its fee by the TPF, and the remaining would depend on the outcome of the litigation..8. How do TPF’s function in the derivatives market.The ‘claims’ that arise out of funding a lawsuit are being treated in a way many other assets are i.e. being traded as ‘derivatives’. Parties (other than the funders of course) are betting on these claims, and taking ‘long’ or ‘short’ positions. It is being predicted that down the road, this will become a publicly traded market..9. Do broker’s exist in the Third Party Funding space? .Brokers and expert advisors have emerged in this space. They serve as a link between claims and capital, helping either to find the other. They attract claims, evaluate them, identify worthy ones, package and present them to potential investors, and negotiate the financing agreement. They are also available to monitor the prosecution..10. Are TPF’s listed? .While several fund houses exist, only two are being traded publicly. Burford Capital, which was listed on the London Stock Exchange nearly seven years ago, has more than quadrupled its share price in the last two years..The other one being, Bentham IMF whose shares are listed on the Australian Securities Exchange..Bentham IMF has had a historical success rate of 78% over the past five years, with an RoI of 2.3.
