Along with more traditional asset classes like fixed income or private equities, litigation finance is another area for pension funds to keep on their radars.
With litigation financing, an investor provides an upfront funding commitment to a plaintiff to typically be deployed on certain milestones of a legal case, with the expectation of sharing in the proceeds of a favourable case.
Generally speaking, there are two different aspects of litigation financing: consumer and commercial litigation, says Edward Truant, the chief executive officer of Slingshot Capital Inc. “On the consumer side, it has a lot to do with personal injury loans, slip and fall, motor vehicle accidents, that type of thing. But that’s typically not an area where pension plans and institutional investors tend to invest. So the more appropriate area to talk about for institutional investors would be the commercial side of litigation finance.”
In single case financing, where the outcome is unfavourable, the financing provider won’t earn a return and lose their capital, Truant says. However, where there’s a settlement for a positive ruling, the financer would see a return representing a multiple of its original capital. There’s also portfolio financing, where investors can invest in a law firm’s portfolio or a corporate portfolio, he notes.
“In both scenarios, a litigation finance provider provides capital to either the law firm or the corporation to allow that entity to pursue a number of different cases within a portfolio. And the outcomes of those cases are all cross-collateralized. So the litigation finance firm is not dependent on any single case, but rather the outcome of the portfolio.”
From a risk-adjusted basis, this option is better than trying to invest in a single case, he adds.
Institutional investors looking to access the asset class can do so through both private and public fund managers or via a hedge fund, notes Truant, highlighting that using publicly listed managers is also an option. “Now the problem with investing in publics is it eliminates an element of the non-correlation of the asset class.”
Pension plans that invest in litigation financing would typically bucket it with their alternative portfolio, he says. “Generally speaking, from a duration and structure perspective, it’s similar to private equity, although the timelines are probably about half. So the investment periods are typically two to three years and then the harvest period is another five years in total. That would be similar to some of the private equity and venture capital, although they would have slightly longer durations.”
For a pension plan with a non-correlated bucket that invests in life settlements or insurance-linked strategies, that bucket could fit with that as well, adds Truant. “Depending on how complex the pension plan is in terms of segregating its assets, it can fall in a few different areas.”
Litigation financing can also be considered impact investing, he says, since the cases typically have some societal benefits. “What I mean by that is, typically you have one corporation injured by another corporation’s actions, and that damage can be quite extensive to the point where it’s caused the corporation to reduce their employee roles, perhaps even ultimately lead to the insolvency of the corporation. So litigation finance allows those groups that have been pretty significantly damaged to not only fight their battles in the courts, but also potentially restore their businesses, so that it continues to employ people and grow.”