As businesses begin to call more employees back to the office, U.S. courts are working toward their own return to normalcy. Predictably, jurisdictions have taken dramatically different stances on reopening, including vaccination and mask-wearing policies. The pandemic has significantly altered court operations since last year, causing some jurisdictions to limit proceedings to essential matters (e.g. arraignments, restraining orders, etc.). Many more courts will continue to prioritize criminal cases over civil matters. As a result, the U.S. judicial system will require time and progressive thinking to process its large backlog of cases.
We witnessed a microcosm of this dynamic play out in California, where at the start of the year its Judicial Council approved a plan to distribute $25 million to help trial courts address pandemic-related case delays. A May budget proposal by Gov. Gavin Newsom sought an additional $90 million for staff, space, and other resources that could help address the backlog. Other states have tried to solve similar judicial challenges. For example, Bloomberg Law reported that the Texas judiciary is urging lawmakers to hire retired judges and continue virtual court sessions, in hopes of avoiding a pandemic case backlog that lasts for years to come. Florida officials have said their pandemic backlog exceeds one million cases and that remote proceedings will likely be necessary to expedite these cases.
As we have mentioned before, procedural delays and court closures may benefit cash-on-cash returns for litigation finance firms, as the industry commonly structures deals to include pricing multiples that increase as the time to case resolution grows. We believe a silver lining of the pandemic will be permanent changes to some court procedures, such as increased virtual depositions and hearings, which may create a more efficient judicial system.
While the courts attempt to address broad issues, the litigation finance industry remained in the headlines during an eventful quarter. Most notably, new litigation finance regulations implemented in New Jersey’s federal courts attracted significant attention and press. There were also several successful capital raises across the space, led by incumbents. Additionally, a recent survey of market participants revealed the traits most desired in a litigation funding partner. We explore each of these developments in greater detail below.
Disclosure: A Continued Point of Contention
Disclosure has been a topic of debate in the litigation finance industry for several years. The issue centers around certain courts requiring funding recipients to reveal the existence of litigation finance contracts and disclose related deal documentation. The debate reached a crescendo in New Jersey, where in April the state’s federal district court proposed and later adopted a new rule related to this issue. Civ. Rule 7.1.1 applies if any person or entity who is not party to the litigation provides funding for some or all of the attorneys’ fees and expenses on a non-recourse basis, in exchange for (1) a contingent financial interest based upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal or bank loan, or insurance.
If the above criteria are met, the following information must be disclosed: (a) the identity of the third-party funder(s), including the name, address, and if a legal entity, its place of formation; (b) whether the funder’s approval is necessary for litigation decisions or settlement decisions in the action and if the answer is in the affirmative, the nature of the terms and conditions relating to that approval; and (c) a brief description of the nature of the financial interest.
After the court invited comments on the proposed rule, LexShares’ Director of Risk and Deputy General Counsel, Kenneth Harmon, submitted a well-reasoned letter arguing against the proposed changes. Mr. Harmon underscored that mandatory disclosure further constrains access to justice by imposing added financial burden on under-resourced plaintiffs, who will have to spend more money defending efforts to disclose their funding agreements. Regrettably, New Jersey did not heed these comments and the proposed rule was adopted on June 21. This new rule will exclude claims filed in New Jersey’s state courts, as it only affects cases filed in the U.S. District Court for the District of New Jersey.
While New Jersey's disclosure requirement is the broadest we have seen adopted to date, it is not the first court to institute disclosure requirements. For example, in 2017 the U.S. District Court for the Northern District of California adopted a rule requiring disclosure of litigation finance in class action cases. There have also been several unsuccessful attempts to advance disclosure proposals through the Civil Rules Advisory Committee, which is the body that drafts the rules of federal litigation.
Currently, there is no overarching federal legislation that compels disclosure of litigation finance. We believe disclosure regulations will remain a patchwork of state laws and local court rules. Furthermore, we do not believe New Jersey’s new federal rule will have a material impact on the commercial litigation finance industry. Moreover, we are not wholly opposed to mandated disclosure, so long as any requirement promotes access to justice — without confounding the underlying meritorious legal claims with irrelevant discovery into how such claims are financed.
Industry Activity and a Notable Survey
This past quarter was also a very active period for new capital raises and industry entrants. In April, Burford Capital announced the closing of a $400 million private offering of senior notes. The offering was priced at 6.25%, due in 2028. The notes are guaranteed on a senior unsecured basis with the use of proceeds being for general corporate purposes, including the potential retirement of existing indebtedness. The offering was upsized by $50 million and represents the company’s inaugural bond issue in the U.S. institutional market, and the largest capital raise in the firm’s history. We view this as a positive sign of increased awareness and appetite from institutional investors for litigation-related assets.
In addition, UK-based funder Augusta Ventures closed its third pool of funding with commitments of £250 million in June. The fundraising was supported by Beach Point Capital Management, the anchor investor in Augusta’s previous funding, as well as two new investors: Magnetar Capital, which will act as the anchor investor in this deal, and Northleaf Capital Partners. It is notable to see Magnetar, a multi-strategy alternative investment manager, leading this funding. We believe these developments are consistent with what we have seen throughout the current low-yield environment, as managers continue to pursue new strategies in search of yield.
During the quarter, Tets Ishikaka of London-based LionFish Litigation Finance conducted an interesting poll asking what users and observers of litigation finance look for most in a litigation funder. 154 respondents contributed to the following results:
- Speed and execution: 43%
- Transparency and communication 34%
- Pricing 19%
- Brand recognition: 4%
We were surprised to see speed and execution rank so highly, given that pricing typically outstrips all other categories when LexShares asks funding recipients about their deal priorities. Speed, execution, transparency, and communication throughout the underwriting process are all undoubtedly important. However, we largely find that if a funding recipient is not amenable to pricing and deal structure, the other poll categories quickly become irrelevant.
New Accolades for the LexShares Team
LexShares was honored to be recognized by multiple organizations this past quarter.
For the first time, Chambers and Partners included LexShares in its 2021 ranking of leading litigation funding firms. The independent research conducted by Chambers, which relies on confidential feedback provided by clients and industry peers, is considered a benchmark of excellence across the legal industry. We view Chambers’ ranking of LexShares as a testament to the expertise of our team and the reputation we have established among practicing attorneys. In acknowledgement of our technology-enabled approach to litigation finance, Chambers also named LexShares a Band 1 member of its inaugural LawTech Guide. In its profile of LexShares, Chambers highlighted our Diamond Mine software and “middle market” focus as key differentiators.
In addition, LexShares’ CEO, Cayse Llorens, and LexShares’ Director of Investments, Allen Yancy, were recognized as innovative industry leaders in Lawdragon’s Global 100 Leaders in Legal Finance guide. Members of our team have been included on the list since its inception, and we are pleased to continue this honor with the inclusion of Messrs. Llorens and Yancy.
Also during the quarter, Harvard Business School published a case study titled Litigation Finance 2.0: LexShares, which summarizes our growth story. The case was authored by Harvard professor Lauren H. Cohen, who has previously written about litigation finance. We were excited to collaborate with HBS on this case, which highlights several key aspects of the litigation finance market today as well as LexShares’ distinct investment framework.
For more insights into litigation finance, follow LexShares on LinkedIn.
This release may contain “forward looking statements” which are not guaranteed. Investment opportunities posted on LexShares are offered by WealthForge Securities, LLC, a registered broker-dealer and member FINRA / SIPC. LexShares and WealthForge are separate entities. Investment opportunities offered by LexShares are “private placements'' of securities that are not publicly traded, are not able to be voluntarily redeemed or sold, and are intended for investors who do not need a liquid investment. Private placements are speculative. Investments in legal claims are speculative, carry a high degree of risk and may result in loss of entire investment.