Cases Full Of Cash

Lawyers who pay almost no tax and produce nothing are making obscene profits from other people’s misfortune. BY James Mathias.

Litigation funders earn commissions that are generally expressed as a simple percentage of the compensation awarded to the plaintiffs who brought the case.  However, like private equity and hedge funds, funders measure their profit using the metric of ‘Return on Invested Capital’ (ROIC).  This is a measure of the profit that a funder has made from its investments after the return of the funds it has deployed to run a case.

The returns available to investors in funded litigation are, quite frankly, astonishing. When benchmarked against other asset classes, litigation funders in Australia are generating ROIC returns around 17 times more than investors in ASX 200 stocks and more than 10 times the average global hedge fund and private equity performance.

Even when benchmarked against exceptionally high risk / high return investments such as biotech, the returns of funds are still nearly six times higher.

Consider the returns generated by three Australian funders which have disclosed their results:

• LCM disclosed a return of 139 per cent based on an 8.5-year portfolio return.

• Omni Bridgeway’s non-US (predominately Australian) return in FY 2019 was 154 per cent.

• Litigation Lending Services returned 165 per cent in 2019.

The high returns and low risk of litigation funding make this a tantalising investment class for investors in the current climate of low returns on more traditional forms of investment.

The litigation funding industry seeks to justify these returns by arguing that they are necessary given the risks associated with funding class actions in the event of losing a case and the funder becoming liable for adverse cost orders.  However, as demonstrated below, the success rate for third-party funded class actions in Australia is between 87 and 94 per cent.

The low risk associated with these investments does not justify the returns generated by Australian litigation funders on any sensible interpretation of corporate finance principles.

The returns in Australia significantly exceed those generated by litigation funders in other jurisdictions, including the United States. Globally, it is estimated that the litigation funding industry generates annual returns between 29.4 and 43.2 per cent, with average annual returns of about 36 per cent.

Omni Bridgeway (IMF Bentham) has confirmed the lucrative nature of the Australian market as compared to the US in a recent investor presentation. It revealed that its ROIC for non-US, predominately Australian ligation investments are currently 3.7 times more profitable than the ROIC for its US litigation operations.

Furthermore, the performance of litigation funding investments are not corelated to other investment classes. Even during times of pandemics such as COVID-19, there is no expectation that stock prices for listed litigation funders should fall. In a recent briefing to investors, Omni Bridgeway (IMF Bentham) has disclosed expert analysis that revealed that its share price is not correlated to the ASX 300 Diversified Financials Index, and that history has shown “Omni Bridgeway’s share price has not suffered in the longer term”. The analysis also revealed that in times of crisis, rather than its share price dropping Omni has seen its share price increase, first during SARS by 164 per cent and second during the Swine flu outbreak by 26 per cent.

Given these returns, coupled with the fact that the barriers to commencing a class action in Australia are lower than those in the United States, it is not surprising that Australia is now the second most attractive class action jurisdiction globally.

This is an extract from Litigation Nation - click here to read.