A promising punt for the adventurous
Tim Bennett Nov 09, 2012
The phrase “litigation funding” conjures up images of ambulance-chasing lawyers pursuing mass personal injury claims. But that’s perhaps a little unfair. As David Stevenson notes in the Financial Times, this is “a viable alternative asset class for the adventurous investor” – although we’d emphasise the ‘adventurous’.
Litigation funding is basically all about funding another person’s legal fees in return for a cut of the amount recovered. This enables litigants (who can be individuals, but are often small-to-medium-sized businesses) who might have been otherwise unable to afford to bring a case to do so.
Imported originally from Australia, the idea is contentious – for many years the practice was outlawed both in Britain and America. While those days are long gone, it still has its critics – Mary Terzino, a consultant to the US Chamber Institute for Legal Reform, writing in the Lawyer.com, claims it “skews the legal system away from its purpose of delivering justice and towards a model that places profit at its centre”.
She also believes the legal system could be clogged up with cases “that are weak on merits but have the potential for a large reward”. Others disagree, however. Christopher Hancock QC, speaking on behalf of the British Bar Council in The Guardian, says it offers an “alternative means of access to justice”.
Disagreement about its merits aside, this is a growing area. The American market could be as big as $44bn if one recent research report is to be believed, although Stevenson thinks “in reality the actual market is probably worth no more than a few billion pounds at present”.
The reason for its rapid growth is simple – the cost of litigation to firms is estimated to be rising at a rate of 8% a year and actions (ranging from tricky commercial disputes to technical competition law cases to tough insolvency disputes) can take anywhere between three and five years to be settled.
This also means that this is no market for the faint-hearted. As private equity veteran John Moulton tells the Financial Times, picking up potentially tricky, protracted legal cases “is not an easy thing to do and lots of people will fail at it”.
For now, the only way in for a British retail investor is via two listed funds, Juridica Investments (LSE: JIL) or Burford Capital (LSE: BUR). Of those two, patent and antitrust specialist Juridica is our favourite with a lower total expense ratio (2.88% versus 4.75%), and a gain of just over 12% in the last 12 months. It’s available at a discount of 10% to its net asset value.
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.