The estate of Elvis Presley is using a litigation fund to help finance a court case against Sony in one of the highest profile cases yet to make use of this section of the investment industry. Litigation funds pay part or all of a claimant’s legal fees in exchange for a slice of the damages. They have been touted as an alternative investment strategy, offering a spread of risk unrelated to the performance of financial markets or economies; but in the UK, at least, they have been struggling to grow.
Litigation funds: the strategy pays a claimant’s legal fees in exchange for part of the damages
The sector got a boost at the end of last month, when London-based Calunius Capital announced it would be funding litigation on behalf of Elvis Presley Enterprises in Germany. The case is against RCA Records, now part of the Sony Group, which acquired the worldwide rights to Presley’s back catalogue in 1973. According to the legal complaint, the 1973 deal gave RCA a “conspicuously disproportionate” bargain.
Leslie Perrin, chairman of Calunius, said: “This case is a good example of what the market has become.”
Nevertheless, when it came to raising capital for the £40m Calunius Litigation Risk Fund, Perrin admitted it was tough. He said: “Tens of thousands of pitches were given. The brick wall that Calunius kept running into was track record.”
Most funds are new – in the UK, they include Litigate, with £100m, and Astraea Capital – with little or no track record.
Being able to demonstrate success certainly helps. Michael Shone, chairman of Commercial Intelligence Funds Group, which provides litigation funding in emerging markets, said his firm’s sixth fund was the easiest to raise.
Private equity structure
But the use of a private equity-style fund structure, which means investors have to commit capital for at least three years, is also said to be discouraging potential investors.
Moreover, Gavin Foggo, head of litigation at law firm Fox Williams, said: “Litigation is a high-risk, high-reward strategy. You’ve got to have the big wins to balance out the losses.”
And while investors generally are unsure about putting their money into litigation funds, lawyers are also unsure about using them, at least in the UK. Although litigation fund managers like Calunius say awareness of their offering is growing, no more than 100 commercial cases in the UK have received third-party funding, according to the Civil Justice Council, a UK non-departmental public body funded by the Ministry of Justice.
Foggo said: “From a litigator’s viewpoint it’s a useful tool to have, but like all tools it’s only useful in certain situations.”
Kerry Underwood, chairman of Law Abroad, an employment and personal injury law firm based in the UK, said few, if any, of the biggest City of London law firms use it. Underwood said: “Litigation funding is practically non-existent. Of the 100 cases estimated by the Ministry of Justice, I suspect there are no more than 10 to 15 firms out of 10,000 that have used it.”
Underwood believes there is a role for litigation funding, particularly for small practices struggling to access capital through normal channels such as bank loans, provided it is done for baskets of cases, not just one. He said: “If you look at areas like clinical negligence there are around 10,000 cases a year, so that is an area where litigation funding, in one year, could multiply substantially.”
As UK opportunities remain limited, litigation fund managers such as Burford Capital and Juridica Investments, both based in Guernsey, are targeting the US, where large corporations spend millions of dollars on litigation.
Christopher Bogart, chief executive of Burford, said: “US litigation is worth hundreds of billions of dollars.”
With $300m in assets under management, Burford is the largest public litigation fund, quoted on London’s Alternative Investment Market. Bogart says his portfolio’s short-duration cases, of 12 to 18 months, have recently returned “above 50% on invested capital”, adding that £4m was paid out to investors in April.
Perhaps because of facts like this, interest in litigation funds appears to be growing among US investors. Ron Geffner, a partner at US law firm Sadis & Goldberg, said several managers have approached his firm in recent weeks to create litigation funds. He said: “They appear to have sources of capital lined up seeking investments that bear no relationship to broader indices.”
However, he believes it is too early to be bullish on the sector.
Richard Fields, chairman and chief executive of Juridica, said the US market is getting so big “we could easily deploy $150m a year”. But it is only now that Juridica, which launched in December 2007, is beginning to deliver returns on cases.
Fields said: “The last couple of years have been about waiting for case results. We think we’ve reached that point. We expect to see significant activity in the portfolio over the next 16 to 18 months.”
A US federal court judgment this year rewarded Juridica in a case involving breach of contract and fraud. On an initial $2.4m investment, the fund is expected to receive $4.5m.
Fields said: “A US case we have going to trial this year is a multibillion-dollar case. If it goes to a jury they could potentially return a verdict of several billion dollars.”
Investors said litigation funds can often expect about 10% of the proceeds.
Fields said: “My prediction is in the next few years one of the players in the US market will be a multibillion-dollar business.”
Up close: funds in action
The sixth fund raised by Commercial Intelligence Funds Group – the Global Diversified Alpha Fund III – which currently has $20m in capital and may grow to $60m, focuses on Africa and Malaysia.
Michael Shone, the group’s chairman, said they were dealing with cases where counterparties had tried to declare force majeure as a justification for defaulting on payments.
Shone said: “In Africa it happens a lot, and there isn’t anyone else providing financing to small companies. Our pipeline is quite far advanced.”
He estimates as much as $3bn of claims have arisen from Malaysian companies that went to Africa to build pipelines and other infrastructure, only to fall into insolvency or incur serious financial difficulties as a result of non-payment.
Shone said: “At the moment, we’re involved with Malaysia’s big three construction companies.”
One of the fund’s sensitive cases involves a group of South African miners who, after investing with a fund manager, claim they were defrauded of almost one billion rand ($140m).
Shone said: “We did a deal with the liquidator on behalf of the mine workers and agreed to split the returns of the case 50-50.”
Source: James Williams - Financial News
