Litigation Funding & Due Diligence: A Best-In-Class Approach

Litigation Funding & Due Diligence: A Best-In-Class Approach

Elena Schaffter

Elena Schaffter  -  27th February 2024

In 2023, the Supreme Court sent the litigation funding market into turmoil by ruling that litigation funding agreements – which entitle litigation funders to a payment based on the level of damages recovered – are damage-based agreements.

Why is this significant?

Essentially, the ruling rendered many existing litigation-funding agreements unenforceable unless they complied with the restrictive regulations that govern damage-based agreements. For litigation funders focused solely on UK cases, this ruling had the potential to impact every single portfolio case – leaving many facing losses, as well as an urgent need to review the way they drafted agreements.

The ruling caused widespread upheaval in the industry, with hundreds of funded civil lawsuits in the English courts thought to be affected. However, the litigation funder that we partner with (and its clients) didn’t panic. This is why.

An overarching focus on due diligence

At Hays Mews Capital Alternative Investment Division, we take a meticulous approach to due diligence – and we hold the providers we partner with to the same standards.

Our litigation financier partner – a leading UK-based company with global reach – is committed to implementing measures that mitigate risk for investors at every stage of the process. Having a portfolio that encompasses a variety of cases is a key element of this success: our partner will never focus all cases in a portfolio on a single jurisdiction, for example.

Leveraging a three-pillar approach when selecting cases

Instead, our partner uses three pillars – which it applies regardless of jurisdiction – to determine whether a case is suitable for investment:

  1. Do the economics of the investment work?
  2. Is the case strong on merits?
  3. Is the defendant solvent and will any award be enforceable?

In simple terms, our partner uses these pillars to seek out strong cases where there’s a high chance of a favourable ruling.

Looking outside (as well as within) the UK for the best cases

Commercially, the UK is oversupplied with funders. As a result, you’re more likely to find a high quantity – rather than quality – of cases to fund. What’s more, it’s likely that quality cases in the UK have reduced commercial appeal, compared to those in other jurisdictions. That’s why our partner takes a global approach when it comes to sourcing cases.

Ultimately, when considering the merits of an investment in a case, jurisdiction should never outweigh the three pillars. Leveraging its extensive network of international contacts, our partner is committed to sourcing cases that offer the highest possible return on investment.

Ensuring variety to mitigate the impact of unexpected events

These are by no means the only measures our partner takes to protect investor capital. It also includes low-value high-volume case portfolios – this means that portfolios more likely to reach a favourable outcome provide a buffer against those where it is less likely.

Because of this variety, there is a lower likelihood that unforeseen events – an industry downturn or the appointment of a defendant-friendly judge in a district, for example – will cause large waves across the portfolio. Instead, the portfolio’s performance is designed to be insulated. While one or two cases might be negatively impacted, the portfolio as a whole remains on track to achieve target returns.

In addition, by grouping cases into portfolios, investors’ returns are no longer dependent on a single case, and investors aren’t reliant on every case within a portfolio to receive returns. And by designing each portfolio to encompass logistically and sector diverse cases – all at different stages of the litigation cycle – risk is further mitigated.

Fixed-income products with robust security structures

Finally, this commitment to due diligence is mirrored in the security structures of the fixed-income products our partner provides. For example, the provider offers a performance guarantee to protect investor capital.

The Supreme Court ruling has thrown many litigation funders into disarray, with smaller operators expected to go out of business. However, while our partner has, of course, reviewed the structuring of agreements in light of the ruling, its commitment to due diligence means it has been able to continue to source the best cases for investors.

Explore the benefits of litigation funding

We’ve been meticulous in our search for best-in-class products – and our litigation financing partner is equally selective when sourcing cases. As a result, we give you access to fixed-income bonds that offer some of the highest levels of investor protection, along with returns of up to 12% per annum.

Elena Schaffter
Elena Schaffter

Elena Schaffter

Director, Fixed Income Division

Like to know more about litigation financing opportunities at Hays Mews Capital Alternative Investment Division? For a free, no-obligations chat at a time that suits you, use the link to book a slot in my diary.

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