Private investors targetted for new litigation fund

Financial News / Kit Chellel: Thomas Miller, the insurance and investment group, has become the latest firm to spot the potential of legal disputes as an asset class after holding talks with private investors over the launch of a litigation fund.

Litigation funds, such as Aim-listed Burford Capital and the £60m Harbour fund, cover the costs of individuals and companies pursuing lawsuits in return for a cut of the winnings.

Thomas Miller director Redvers Cunningham would not comment on the size of the vehicle at this stage but said it would launch within months and would be a "key player" in the market.

"We are talking to a number of potential investors about upscaling our involvement in funding by creating a dedicated fund," he said.

Demand for the emerging asset class is growing. Last month London-based Calunius Capital secured £40m for a new fund from a handful of institutional investors, while Aim-listed Burford Capital raised an additional $175m in a share placement last November. Harbour Litigation Funding raised £60m in May last year.

The asset class is attractive to investors because it is able to generate profits regardless of wider movements in the economy. Thomas Miller's fund is believed to be the first offering targeting private investors, although the company did not rule out opening it up to institutional players in future.

While litigation funding began as a way for individuals to pay for expensive lawsuits against companies, so-called David vs Goliath cases, it is increasingly becoming popular with corporations wanting to control their legal budgets.

Burford Capital, which mainly funds US commercial litigation and international arbitration, is seeing "substantial interest" from large companies, says chief executive Christopher Bogart.

"We do it both for corporate clients that have liquidity challenges - they are simply not able to devote the resources to complex litigation - and for companies that don't have any liquidity restraints but for budgetary reasons prefer not to deploy cash," he says.

Jonathan Wheeler, a London-based disputes partner at law firm Morrison & Foerster, agrees. "The market will grow," he says.

"If you are a big company, and it is cheap enough, you can find someone to cover your legal costs."

After-the-event insurers offer a similar risk-transfer service, covering legal costs and only charging fees if a case is successful. Thomas Miller already operates in this market.

However litigation funds allow external investors to gamble on the result of multi-million pound claims for the first time.

Experts say it is too early to say for certain what kind of profits these funds can generate. The litigation funding market is so new, there is no investment history and it can take years for complex lawsuits to resolve. But according to insiders, they have the potential to offer returns of 20% or more. Despite a lack of investment history, some of the UK's best known investors have backed the new asset class.

The single largest shareholder in Burford Capital is Invesco Perpetual, run by star fund manager Neil Woodford. Other large stakeholders include fund manager Baillie Gifford and JP Morgan.

Calunius Capital chairman Leslie Perrin says: "One of the advantages to investors is that portfolios are pretty resilient. You can lose a few and still make some money. And the risks are non-correlated to wider markets."

And the few large cases to have been successfully backed by disputes funds show how attractive the returns can be.

Last year, Burford funded US law firm Simpson Thacher & Bartlett so that it could continue to represent US developer Gray Development Group in a breach of contract action. Burford was required to put up $5m in capital, and when the case finished, there was a $110.7m verdict in favour of Gray Development.

If the decision is upheld and damages paid in full, Burford and its shareholders are entitled to receive $40m, eight times its initial investment.

However, those operating in the market urge investors to show caution.

James Delaney, a director at TheJudge, a broker linking litigants with potential funders and insurers, warns that lawsuits are a risky business.

"Interest is often ignited from the illusion of easy and fanciful financial returns," he says. "It is a marketplace that takes no prisoners for those who get it wrong."

Staff Author

Thomas Miller Group