Chasing the money in lawsuits
More investors aim to profit from backing legal action
When AMP shares plunged this year after the firm was engulfed in a feefor-no-service scandal, the Australian wealth manager was hit within weeks by the first of five separate class action lawsuits.
It wasn’t just the seriousness of the situation that prompted the attention of so many law firms. The multiple suits were all supported by external funding bodies, whose coffers have been swollen by a flood of money moving into litigation financing in Australia and elsewhere.
Investors have been allocating cash to lawsuits, attracted by juicy payouts and the sense that the returns aren’t necessarily correlated to movements in equity and bond markets.
“We believe there is a large amount of capital looking to enter this market,” says Michael Peet, an analyst at Goldman Sachs Group in Sydney. “Litigation funding is rapidly emerging as an alternative asset class.”
While there are no good figures for the total amount of money backing litigation in Australia, or globally, there is plenty of anecdotal evidence that the tide is rising. Connection Capital LLP in London, which invests on behalf of wealthy individuals, has seen a “considerable level of interest from new and existing investors”, says Emma Bewley, the firm’s head of funds.
Sydney-based IMF Bentham, one of the largest publicly traded litigation specialists, has responded by raising its first three external funds during the past 16 months, gathering a total of A$270 million ($296m).
The rise of litigation funding globally had been constrained by an old English legal restriction that prevented a third party from sharing in the proceeds of a judgment. Australia was the first major jurisdiction to allow exceptions in the early 1990s, while the UK followed suit in the 2000s. In 2017, Singapore and Hong Kong became the latest to permit it, in certain cases.
In Australia — where litigation funding originated — there are signs of saturation. While the overall number of class action suits is relatively stable, the number of investor and shareholder cases — the ones that tend to attract outside funding — have risen sharply.
More than 60 per cent of Australian class actions received funding so far this year, according to law firm King & Wood Mallesons, compared with less than 40 per cent four years prior.
Over the past five years, 100 per cent of shareholder class actions have been funded, versus about 30 per cent for consumer protection litigation, according to separate data from the Australian Law Reform Commission and professor Vince Morabito of Monash University.
“Funders play a critical role in Australian securities class actions,” says Michael Lange, a securities litigation counsel at Financial Recovery Technologies, a US group that helps investors track class actions.
While the right fund manager can still generate outsized returns, “the real issue that no one talks about is whether there is too much capital chasing this asset class and how does the litigation fund manager find quality of case inventory in a crowded global market,” says Dan Farrell, the chairman and chief executive officer of Privos Capital, a global multifamily office.
“In other words, are there enough good litigation cases to go around?”
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Dan Farrell, Privos Capital