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Britain’s Post Office Horizon scandal blights the reputation of nearly everyone it touches. The financiers who bankrolled the sub-postmasters’ fight to overturn wrongful convictions are a rare exception. The part played by third-party funder Therium in the marathon legal battle is a useful validation of a sometimes controversial investment class.
Litigation funding — the provision of third-party legal funding by companies, hedge funds and private equity groups in return for a cut of the winnings — has been rapidly growing. UK litigation funders’ assets increased more than tenfold to £2.2bn in the decade to 2012, says international law firm RPC.
This is a young industry with insecure foundations. Its viability was threatened by a Supreme Court ruling last summer, though the government has pledged to reverse it. There are calls for regulation. The British Chambers of Commerce has joined a lobby group worried about the development of US-style litigation culture. The European parliament voted in favour of limits on payouts to funders. Australia introduced a 30 per cent limit in 2021, later revoked.
Third-party litigation finance (TPLF) is not always a David vs Goliath affair. Two-thirds of TPLF settlements for commercial litigation go to large rather than small companies, according to Swiss Re. But even funders working with big companies like to claim the moral high ground. Burford Capital trumpeted last year’s $16bn judgment against Argentina as exemplifying its contribution to the civil justice system.
For an industry accused of profiteering, however, the investment performance of quoted litigation funders has been weak. Shares in Sydney-based Omni Bridgeway are down 45 per cent over the past year. UK-listed insolvency specialist Manolete Partners is down more than 55 per cent. Burford Capital, dual listed in London and New York, is up 70 per cent in the past year but still below where it was in 2019 when hedge fund Muddy Waters attacked its financial reporting.
Burford has since revamped its accounting. But controversies are not the only reason it is tricky to value litigation funders. Disclosure is limited by constraints of professional privilege. The opacity creates a “market for lemons” problem, a US academic argues.
Another fundamental issue is that the rise in interest rates has blunted the appeal of financing long-running, highly uncertain legal battles. No wonder those making an investment case like to emphasise the funds’ ESG credentials.
Litigation finance divides opinion. The Post Office case showed its importance in providing access to justice. Its appeal to investors, at least in the public markets, is more questionable.
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