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Litigation finance finds its feet targeting returns up to 20%

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A global shortage of yield-bearing assets for investors seeking to generate income is boosting the popularity of funds that back lawsuits in return for a slice of the proceeds if they win.

Next month, a new $1.45 billion firm called Contingency Capital will launch, joining the likes of hedge funds including D.E. Shaw & Co., Fortress Investment Group and Elliott Management Corp in the litigation finance space.

The move follows the foundation of the International Legal Finance Association, the first global trade body set up to represent the sector; as well as the recent debut listing of a litigation funder on the New York Stock Exchange.

Assets under management in the industry doubled in the last three years to more than $10 billion, according to ILFA, as investors seek bigger risks to boost returns. Central bank stimulus is now fueling the trend even more, along with investors’ demand for sparsely traded assets to shelter from the pandemic’s impact on whipsawing markets.

The need for an independent asset class is huge at the moment, according to Leslie Perrin, chairman of ILFA. “It doesn’t matter what happens to interest rates or the stock market, litigation assets will go unaffected.”

Litigation financing is not for the fainthearted. It’s illiquid -- investments are difficult to sell out of -- and the risk of a case being delayed or lost is high, potentially saddling investors with nasty losses.

But the performance can be worth it, with the funds typically aiming for annual returns as high as 20%, according to Neil Purslow, co-founder of London-based Therium.

Among those raising money to invest in the strategy is former Fortress partner Brandon Baer, who is starting his new company Contingency Capital with up to $1.45 billion in commitments.

New York-based Baer plans to take a broad approach to the market, including providing funding for bankrupt companies to litigate valuable claims on their books. Contingency Capital will also offer loans to law firms facing liquidity constraints when cases are delayed in slow courts.

Another area is investing in the claims of large solvent companies that are traditionally marked at zero under GAAP and IFRS accounting rules, said Baer. He plans to start his firm with a headcount of up to six investment professionals and is seeking to become a member of ILFA.

“Investors are looking for interesting non-correlated risk and better yield,” he said, adding that many of the distressed debt opportunities that the market expected as a result of the pandemic have subsided, for now at least.

For Therium’s Perslow, the market can be a shelter for sophisticated institutional investors that target a range of asset classes.

He fielded calls from investors at the start of the pandemic, telling them that litigation funding was largely unscathed.

“We were able to say, ‘We’re doing what we did yesterday and we’ll continue doing it and we don’t see much impact’,” he said. “Wider market dislocation illustrates one of the reasons why litigation financing is attractive.”

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