"The volume of litigation claims is pretty static. It increases by overall growth in economic activity, but it doesn't have big peaks and valleys," says Chris Bogart, founder and CEO of Burford Capital, a closed-end commercial litigation financing fund. The company had its IPO in October 2009 and raised additional capital in November 2010 to become the world's largest dispute financier, with about $300 million in assets under management at the end of March.
The first position taken by Juridica Investments, a closed-end commercial-litigation financing fund that launched in December 2007 and trades on the London Stock Exchange's Alternative Investment Market (AIM), was in a case where it provided a $2.5 million line of credit to the plaintiff. "We disbursed $9,000. Our return was $3.5 million in less than six months," CEO and co-founder Richard Fields says.
Next was a case that had already settled. "The lawyers wanted to borrow money against their future contingency fee. We loaned them $12.5 million at 25% interest. We had a guaranteed minimum return of $1.75 million and were in and out in less than three months," he says.
Clients can invest in Juridica, which currently has $210 million in AUM, two other public funds, or in private funds where investment minimums are generally $100,000 to $1 million or more. Capital is typically tied up for five years or longer, and investors must be SEC-accredited.
Bradt, who's been in the industry since 2003, says there are about 20 private funds in the U.S. and about 40 globally. Most of the major foreign private funds are based in London, including Harbour Litigation Funding, IM Litigation Funding and Therium Capital Management. They focus primarily on investing in litigation in the U.K., not the U.S.
Entering The Asset Class
There are two ways to get into litigation investing: direct investments or a public or private fund.
Direct participation in specific cases provides the greatest possible returns but also carries the greatest risks. "As stand-alone investments, these are very speculative, very high-risk," Alpert says.
As Bogart explains, "There's no liquidity and you don't have the benefit of portfolio diversification or experienced underwriting." Direct investors who aren't extremely careful can inadvertently create potential ethical problems for practitioners, like compromising the attorney-client privilege, or running afoul of numerous state laws.
Moreover, these are "medium-duration investment assets," Bogart says, because the average time to settlement or judgment is three years. That's one reason interest in investing in this asset class is strong among institutional investors and private equity firms. Illiquidity makes these investments inappropriate for hedge funds concerned about meeting redemption requests.
Juris Capital has served as a broker for "one-off" opportunities, but the firm advises against it for all but the most sophisticated investors. Instead, they typically build pools of lawsuit assets for clients that include high-net-worth individuals and family offices with $350 million or more.