Phuket Lifestyle – jury is still out on litigation funding

PHUKET: One very exciting new asset class available to individual investors that I have been looking into is litigation funding. When I first heard about some notes attached to this I thought it sounded too good to be true and dismissed it, but as sometimes is the case, extraordinary opportunities can arise.

The asset class is currently only accessible via structured notes, but these work very differently than most other forms of investment, which I usually think are a rip-off. I have heard a fund structure is currently being put together for listing on the Irish exchange and this really excites me.

Litigation is expensive and often fairly clear-cut cases are not tried because the costs of going to trial are prohibitive. We all know the story of David and Goliath, and many big corporations often get away with misdeeds simply because it is too difficult to fight a “Goliath” team of high-paid of lawyers.

Litigation funding levels the playing and helps David. The notes I have looked into have always been commercial litigation, so it is not helping lowlifes chase frivolous cases hoping for a quick buck.

The interesting thing is that insurance companies will actually insure cases they consider to be clear-cut. The costs are included in the structure and insurance costs are even covered in the insurance. So, if the case is lost, the insurance company is on the hook and the investors have their capital protected.

I am not a big fan of guarantees, but this one appears to hold water. Insurance companies are not big risk-takers, and they only insure cases that are “sure” wins. As such, the win ratio of funded litigation is very high – and the premiums collected are pretty large as well, as insurance companies aren’t charities, either.

Despite the costs of insurance and financing, the potential take from profitable lawsuits can be large, as well as participation in the award amount.

Apparently the market for unfunded litigation is enormous. As it stands now, the cases never move forward because the companies can’t afford them and the litigation funding market is still relatively small.

I am not yet convinced of the actual way this opportunity is packaged, but I am still doing my homework and waiting to see how things unfold for some people who I know are willing to be investor guinea pigs.

However, I am convinced of the concept, but in the investing world that isn’t enough. You may have known computers were the future 25 years ago, but if you threw all of your money into Tandy you’d probably be kicking yourself now.

The reason I believe this asset class could become exciting very quickly is that it is completely unrelated to traditional and even almost all other alternative asset classes. It doesn’t matter what is happening in the stock markets, bond markets, economy or elsewhere.

Litigation funding could be a great addition to a portfolio to lower overall volatility and increase returns. I will continue to see how this market grows and will most likely be writing about this again in the future.

I would be very careful, however, of sticking a large percentage of your portfolio into a new asset class – at least “new” in terms of being geared towards individual investors, as there has been corporate litigation funding for quite some time.

David Mayes MBA provides wealth management services to expats around the globe, specializing in UK pension transfers. He can be reached at david.m@faramond.com

— David Mayes