While the adoption of commercial litigation finance is on the rise, the particulars of the asset class are not widely understood. What is a litigation related asset? How can it be valued? How can a company use litigation financing to more efficiently operate its business?
We at Lake Whillans Litigation Finance (lakewhillans.com) have launched this series to address these and other questions. This week’s column will kick things off by discussing the basics of litigation related assets and the commercial litigation finance industry.
Let’s start the discussion with a more familiar financial product, a bond. At its most basic, a bond is an asset that entitles the holder to receive payment from the issuer. It is valued with relative ease as it is priced by a large and efficient group of market participants. A legal judgment, though a less familiar asset, has similar features to a bond; it entitles the holder to receive payments from the issuer (albeit a begrudging issuer in this case). While perhaps a bit more challenging to price than a bond, its price is still primarily a function of credit risk.
So what about an unadjudicated legal claim? Unlike a bond or a judgment, it is uncertain whether the asset entitles the holder to receive a payment (or other form of proceed). If the legal system determines that the claim is valid, then it transforms into a right to receive a payment, just like any other debenture. If the legal system determines otherwise, then it is worthless. The ultimate outcome, however, can frequently be predicted based upon an assessment of the plaintiff’s claim, including the documentary record, strength of witnesses, and plausibility of the narrative. Commercial litigation finance companies invest in such unadjudicated legal claims, otherwise known as litigation related assets, by evaluating their merits and purchasing (most typically) a portion of the anticipated proceeds. At the present, this market is priced by a small group of market participants.
Litigation financiers who invest in these claim assets are essentially pricing debentures that have yet to come into existence. For companies in the midst of litigation this capital can be invaluable. Financing a litigation can provide a company with the necessary resources to mount a litigation against a more well-heeled adversary; it can also be the most efficient way to raise capital for general corporate purposes, allowing a company to grow without diluting equity or taking-on burdensome debt. It can also help a general counsel who may have a portfolio of affirmative claims, but is unable to garner the budget required to pursue these claims. Other companies may simply wish to hedge litigation risk by monetizing a portion of a claim.
This column is one in a series by Lake Whillans Litigation Finance. To learn more about us, and litigation finance generally, visit us at our website, lakewhillans.com. To ask a specific question, suggest a topic, or simply say hello, drop us a line at firstname.lastname@example.org. Our next installment will tackle how a litigation financier values a litigation asset.