A Practical Guide to Choosing a Litigation Funder
Woodsford Litigation Funding Insight
How to Select the Right Litigation Funder
With litigation finance on the rise and continuously taking different forms, it makes sense for lawyers to educate themselves on funding and the numerous finance solutions that are available to their firms and clients. When clients require or may otherwise benefit from litigation finance, it is arguably incumbent upon the lawyer not only to have adequate knowledge of funding and the products available, but also to help the client in deciding which funders to approach and (more importantly) which ones to avoid. In this regard, lawyers should select only reputable and professional litigation finance providers, who are experienced in the practice of dispute resolution.
With many disputes lasting several years, a litigation funding relationship is a long term one between the funder, the claimant and the lawyers, so choosing the right partner is key. With the number of litigation funders on the rise, it isall the more important to know what to look for when choosing a funder, but practical information, such as how lawyers and claimants can differentiate funders, remains hard to find. The aim of this guide is to offer an insider’s view into this topic by explaining important differences between:
• Funder structures
• Funder strategies
• Funder diligence / proposals
• Funder intangibles
Along the way, we will include some sensible suggestions in the form of Insider Insights.
What are the important differences between funder structures?
Litigation funding involves a third-party financing some or all of the legal expenses of one or more legal disputes in exchange for a share of the proceeds recovered from the resolution of the dispute(s).
What makes litigation funding attractive to claimants?
The first question a party seeking litigation funding should ask is: what is the source of the funder’s capital? Litigation funders can be split into those that have capital and those that do not. Funders with capital to invest have raised dedicated funds from institutions, endowments, private investors, universities or asset managers. They have convinced investors to back their team, based on its experience, track record, credibility and strategy. Most of the leading funders have significant capital to invest.
Conversely, some funders operate as pledge funds or essentially as brokers, meaning they may have access to capital, but it is not dedicated for their use. Instead, these ‘funders’ secure engagements with claimants and then seek to raise capital from the market on a case-by-case basis. It is not always obvious at the outset whether a funder is operating under this quasi-brokerage model.
Funders with their own capital to invest can also be distinguished between public or private. Public funders are listed on stock exchanges, subject to regulatory requirements and the expectations of investors. Other funders raise dedicated time-constrained funds that will be subject to mandates that may preclude them from certain types of investment. Some funders operate privately, for example as family offices, with substantial resources. Indeed Woodsford recently announced a US$100m commitment from its major shareholder, taking the capital available to the business to several hundred million dollars. Private equity, hedge funds and other similar entities also participate in litigation funding of cases on a one-off basis. Exhibit A provides an overview of funder structures.
As the funding market continues its rapid development, funders are organising themselves to pursue specific market sectors and opportunities. It is important to understand each funder’s structure, as it impacts how it operates, deploys capital and its investment time horizon.
Why do these structural differences matter to lawyers and their clients?
The funder’s structure can have significant implications for a lawyer and client seeking to fund a case. Funders with capital to invest can offer certainty that the funds required to see a claim through to conclusion are available to be deployed and that a claim will be funded in a timely manner, versus others that are subject to the uncertainties of the market. Funders with significant capital to invest off their own balance sheet, like Woodsford, have the greatest flexibility when deploying capital and can offer customised solutions for each situation. In our experience, such customisation can be invaluable when funding complex, high-value disputes.
Lawyers and clients should ask directly how a funder is organised, how much capital the funder has available and whether that capital is committed or not. Further, funders like Woodsford, as members of the Association of Litigation Funders (ALF) in London adhere to the ALF Code of Conduct which, inter alia, contains capital adequacy requirements. These are threshold questions, which any funder should be able to answer quickly and easily.
What is a funder’s strategy?
Funders each have their own strategies, preferences or areas of focus. Two of the foundational elements of any funder’s strategy relate to its participation and return profile. Does the funder require an active role (insofar as allowed by the relevant governing laws) or is it a passive investor only? Is the investment made only on a non-recourse basis? Woodsford offers its diverse funding solutions on a passive and typically non-recourse basis.
There are other important questions to raise to understand a funder’s strategy. Does the funder consider both new cases as well as those that have already been filed? Can the funder’s capital be used for both legal fees and out-of-pocket expenses, or even other uses outside the litigation? Is there a minimum investment size or a preferred relationship between the investment size and realistic minimum damages? Does the funder prefer single case or portfolio investments? Does the funder also consider judgment monetisation opportunities? What level of risk sharing/alignment with the law firm is viewed by the funder as adequately balancing the interests of all parties?
Woodsford invests across a broad range of claim types and considers both existing cases and those yet to be commenced. We are investors in both single cases as well as portfolio arrangements. Woodsford is also comfortable evaluating an early-stage opportunity and providing rapid feedback regarding whether a matter may be a fit for funding. We do not require detailed memos with respect to our case evaluations. Our capital may be used for general litigation obligations (fees or costs) or other uses as agreed by the parties. We are also comfortable considering smaller investments than those typically preferred by other funders.
Exhibit B highlights important elements of a funder’s strategy, which may help the lawyer and claimant to determine whether their case may or may not be a fit:
When reviewing a funder’s website, pay close attention to any mention of specific cases that the funder has either invested in, or successfully resolved. Look at the biographies of the team members, paying attention to those in the diligence roles. What firms did they come from? How much trial experience do they have? What types of cases have they litigated or likely reviewed, and how do those cases compare to the case for which funding is being sought? Keep in mind that litigation funding, like many forms of early-stage investing, is about recognising patterns – that is, a good investment has certain characteristics and the purpose of a funder’s diligence is to determine whether those characteristics are present.
Why is the funder’s strategy important to lawyers and their clients?
It is essential to work with a funder that has relevant case and claim-type experience. There are several reasons for this. First, the funder’s diligence will be more efficient and focused, saving time and effort for all parties. Second, the funder will make a sound appraisal of the case’s risks and will be better equipped to provide a timely and compelling proposal. Finally, the funder will have realistic expectations regarding the way the case will unfold and will be a stronger partner over the long-term. Woodsford has one of the most experienced and long-standing executive teams in the litigation funding market, with its executive team drawn from top US, English and global law firms, and has deep expertise evaluating a broad range of claim types.
Early discussions between funders and lawyers should be a healthy dialogue. Lawyers should feel empowered to interview the funder to test their knowledge of a claim type or technology area. Make sure the funder can clearly articulate its strategy. Should a funder later decline to fund a case, lawyers should take care to distinguish whether this decision was based on the fit with its strategy or the case’s merits. Woodsford puts great value on its lawyer relationships and makes every effort to provide timely and useful feedback regarding cases it has evaluated.
Funder Diligence / Proposals
What are the different approaches funders take to conducting due diligence?
Funders take various approaches to due diligence, which can have significant implications for securing case funding. Some funders, like Woodsford, are well organised and able to conduct preliminary diligence efficiently, providing feedback or a commercial proposal within 3-5 days of the receipt of the case background information. Our approach is to offer economic terms quickly, so as not to waste time if a transaction appears unlikely. Other funders may conduct more detailed diligence up-front, requiring a longer period of exclusivity, with the intent to provide a commercial proposal much later in the process.
The experience of the funder is an important consideration for a law firm client. Some funders are new to the market or do not have executive teams with experience working together. Litigation funding requires a multi-faceted analysis, drawing on complex legal, financial and technical issues. Experienced funders, have the benefit of reviewing thousands of cases over many years and can bring that perspective to discussions with lawyers. Sophisticated funders can also bring substantial analytical, legal and technical resources to bear during the diligence phase of the case, challenging lawyers and offering valuable insights that may improve the case or strategy. Woodsford, for example, has an Investment Advisory Panel (IAP) which consists of jurists from around the world, former top litigators and managing partners from major law firms, a former federal district court judge, a former judge of the ECJ and a former President of the International Court of Arbitration of the ICC. Exhibit C highlights different funder approaches to the diligence process.
Reputable and well-organised funders should guide the lawyer through its diligence process, so that both parties are clear on the path forward and the realistic timing. However, as mentioned, the diligence process should also be an interactive dialogue, with lawyer and funder exchanging information along the way, to avoid any last-minute surprises toward completing a transaction.
What are the different approaches funders take to preparing proposals?
Funders also provide proposals of varying depth and breadth. Some funders will provide a proposal which just contains the major economic terms. This approach can lead to confusion or further negotiation if substantive elements of the transaction have not been agreed by the parties.
Experienced funders prefer to provide a more robust proposal which includes the major economic terms, but also includes the most significant substantive contract provisions appropriate for a transaction of this nature. These contract terms may describe the representations and warranties to be made by the parties, the circumstances under which the agreement may be terminated or other important considerations.
In our experience, providing a more detailed term sheet first benefits both parties and allows potential issues to be addressed in a timely and amicable fashion. Exhibit D compares these two approaches.
Litigation funding is an analytical business, so it is perhaps surprising that some of the most important ways to differentiate funders fall under the category of “intangibles”. These elements can also be referred to as “off-term sheet” considerations. In our experience, these intangibles, which are highlighted in Exhibit E, can end up being far more important than any ink put on the page of a term sheet or contract.
An experienced funder could even alter the settlement dynamics of a funded case. This would occur when the funder’s participation is disclosed to the defendant to enhance the claimant’s negotiation position. The fact that an expert, dispassionate, objective third-party has assessed the claim and is prepared to invest significant funds on a non-recourse basis, sends a very strong message to the defendant. Woodsford, in fact, funded a case which resolved in an attractive settlement, with the defendant citing Woodsford’s sophistication and financial backing as rationale for settling the matter, which created an attractive financial outcome for the claimant.
As a market leader, Woodsford takes its responsibility to educate stakeholders about funding seriously, whether they decide to use our funding or not. Woodsford also recognises that funders must earn and establish trust with claimants and law firms. Only then will they become a partner of genuine capability and value.