The emergence of litigation finance has enabled CFOs to better manage and finance a once dormant asset – potential litigations. Many of the companies that we finance are emerging businesses with promising new products that have the ability to transform an industry. Businesses such as these are often characterized by a high ROI (return on investment) and a constrained budget (often having recently raised capital from the venture community). Imagine that the wrongful conduct of a third party has damaged such a business, and the company now faces the prospect of an expensive and lengthy litigation if it is to secure compensation. Before litigation finance, the decision might well have been between bringing litigation or not – now the decision is between self-financing or third party financing.

In order to determine which option is preferable, the CFO would likely attempt to value the potential litigation. In an older post (which you can find here), we discussed the framework for valuing a litigation. For the sake of simplicity let us assume that the expected damages are $30 million, and the chances of losing the case are estimated to be 30% – therefore the estimated value is $21,000,000.

Next, the CFO would likely attempt to calculate the cost of monetizing the asset. In order to estimate the true cost of allocating capital to the litigation, a CFO might undertake the following analysis:

The first step in the litigation finance process typically involves a decision by a company, perhaps together with its counsel, that it makes sense to explore whether litigation finance is an attractive option.  There are many reasons why a company may choose to do so.  Consider, for example, a company that has been wronged but…

While the adoption of commercial litigation finance is on the rise, the particulars of the practice are still not widely understood. How are litigation finance deals structured? How do lawyers and clients work with funders without jeopardizing the attorney-client relationship? How are litigation-related assets valued? How relevant are champerty issues?

We at Lake Whillans Litigation Finance will be addressing these and other questions; discuss topics of interest around commercial litigation finance; and spark an informative dialogue. We will kick things off by shedding some light on a few frequently asked questions about the structure of litigation finance deals.

Q. Who are the parties to a transaction?

Generally, litigation finance companies transact directly with the claimholder. While the claimholder’s counsel is typically involved throughout the investment process—helping to answer due diligence questions and providing a case budget, for example—the investment contract is structured as a bilateral agreement directly with the claimholder. The attorney-client relationship remains exclusive to the claimholder and its attorney.

Q. Can litigation finance provide capital for activities other than litigation?

As we discussed in our articles on the process of securing commercial litigation finance and claim valuation, litigation funders perform due diligence on potential investment opportunities, including evaluating the merits of the claim, the likely damages, the likely duration of the claim, and other factors. This diligence process typically includes the exchange of documents and…

Champerty, maintenance, and barratry are related doctrines that trace their roots back to medieval England. The United States Supreme Court has succinctly described the three doctrines as follows: “Put simply, maintenance is helping another prosecute a suit; champerty is maintaining a suit in return for a financial interest in the outcome; and barratry is a…

As we discussed in our article on the process of securing commercial litigation finance, the first step in the litigation finance process typically involves a decision by a company, perhaps with its counsel, that it makes sense to explore whether litigation finance is an attractive option. Let’s view this from counsel’s perspective. Imagine the following…

When pricing a litigation or Legal Claim (sometimes referred to as a litigation-related asset), there are four primary components of analysis. The first component is the probability of success on the merits.  Litigation is inherently uncertain.  Each side has its own story, which may or may not be fully revealed at the time of evaluation.…

The so-called rainmakers in biglaw firms throughout the country have traditionally built high-end business litigation practices by cultivating relationships with the largest corporations and their general counsel, clients that generally were less financially constrained and thus more likely to accept the hourly rate billing structure over the long course of complex litigation. With the advent of litigation finance, and firms such as Lake Whillans, entrepreneurial litigators at large firms have a new path to building sustainable high-end litigation business that is attractive to biglaw firms. Rather than the more traditional focus on companies with relatively unconstrained litigation budgets and strong balance sheets, entrepreneurial litigators at large firms have begun to realize that litigation financing affords them the opportunity to build practices by targeting companies with often severe financial constraints but meritorious claims, often against larger companies, requiring complex and expensive litigation. Lawyers in biglaw that have had experience in third party funded cases find that litigation finance can overcome the common practical constraints that have made biglaw often resistant to contingency fee arrangements, reduced or capped fees with success premiums.

Those constraints flow from a number of challenges facing large law firms:

Venture capitalists invest in early stage growth companies, typically in high technology industries, such as biotechnology, energy, or IT. While many of these investments go on to become Tesla, Amazon, or the next life-saving pharmaceutical, about 65% of venture financings return 0-1x. Many of these investments fail simply by virtue of the high-risk nature of…

About a month ago, I discussed the venture capital landscape, and why litigation funders are attractive partners for VCs and VC-backed companies in need of resources to adequately defend their businesses. A similar, but distinct, phenomenon exists in private equity.

Private equity firms (which invest in a broader class of companies and employ a wider array of value generating techniques than venture capital) share some common characteristics that make litigation finance a useful product within the industry.

In our last post we discussed the analysis a CFO might undertake when considering whether to raise capital for a litigation. We touched upon the fact that many companies do not have a portfolio of litigation – a fact which makes it difficult to mitigate the risk of investing in a legal claim. Today, we will focus on that insight and dive more deeply into idiosyncratic risk and the value of diversification.

Generally speaking, an investor must be compensated for the time value of money and risk. The risk that an investor must be compensated for is the risk that the return on an asset will be lower than the expected return. While any investment in a litigation has substantial risk, the vast majority of that risk is what would be termed in modern portfolio theory as “idiosyncratic risk.” Idiosyncratic risk is asset-specific risk that has little or no correlation with the market. This risk can therefore be substantially mitigated or eliminated through adequate diversification. By contrast, “systematic risk” (in modern portfolio theory parlance) is risk that is inherent to the entire market or an entire market segment, and cannot be mitigated through diversification. To illustrate the difference between these two types of risk, idiosyncratic risk manifests if a company suffers a major factory closure due to a natural disaster (in which case the price of its stock will likely decline while the rest of the market remains unaffected) while systematic risk manifests if the global economy slows down (in which case the price of a company’s stock will likely decline, but so will the price of the larger market).