Hedge Funds Make Their Move as Litigation Finance Assets Slump

A losing streak in litigation finance is attracting hedge funds and other alternative investment managers looking to invest in legal claims at distressed valuations, according to people familiar with the matter.

Firms working in distressed-debt special situations including Davidson Kempner Capital Management LP and Attestor are looking to buy up such assets at valuations as low as 10 cents on the dollar, the people said, asking not to be identified discussing private deals. In some cases, buyers are taking on distressed assets for free, and agreeing to pay the seller a small amount if the underlying lawsuit wins.

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Litigation finance has doubled in size over the past decade to become a $20 billion industry, channeling capital into lawsuits spanning everything from allegations of corporate malfeasance to bankruptcy disputes. But a combination of tougher regulations in key jurisdictions, protracted legal battles and investor flight has stunted its growth.

Spokespeople for Davidson Kempner and Attestor declined to comment.

The Assets Being Targeted:

In litigation finance, an investor provides capital to support a legal claim, typically by covering legal fees or other costs as a case moves through the courts. If the side backed by the investor prevails (or a settlement is reached), they get a share of the proceeds. The asset is the financial interest in that claim, rather than the lawsuit itself.

Some traditional litigation funders are simply “running out of cash,” said Zachary Krug, a managing director in NorthWall Capital’s legal asset investment team. Lengthy court cases in particular have emerged as a headache, he said, upending the financial logic of what had once seemed like solid bets.

And as early-stage investors walk away, “you are seeing a lot of supply into the market,” Krug said.

Fortress Investment Group is among asset managers regularly hunting for opportunities in the market, the people said. Bench Walk Advisors, itself a litigation funder, has also been buying up distressed legal claims in Italy and the Netherlands and is now looking to do the same in Germany and Spain, according to Adrian Chopin, the firm’s co-founder and managing director.

A representatives for Fortress declined to comment.

Longtime litigation funders are expected to face additional hurdles including stricter regulations in key jurisdictions such as the U.K. Sarah Sackman, minister of state for justice, has told lawmakers that such adjustments are needed in order to encourage fairness and transparency. She also said the goal is to introduce “proportionate regulation” of litigation funding agreements, in a statement to parliament in December.

Fund managers looking to scoop up assets have started appearing in person at litigation finance events, people familiar with the matter said. Such gatherings, which have traditionally been attended by insiders who know each other, are increasingly filled with unfamiliar faces understood to be representatives of firms looking for deals at distressed valuations, the people said.

At a conference hosted by law firm Brown Rudnick in October, participants acknowledged they were losing money and that investors were pulling back, Bloomberg reported in December. And appetite for such deals appears to have deteriorated further since.

In March, a $16.1 billion judgment favoring YPF SA investors against Argentina was overturned in a U.S. appeals court, sending shockwaves through the market. Burford Capital Ltd., which had been financing the lawsuit, saw its share price plunge 47% in a single day on the news.

Following the drop, Burford Chief Executive Officer Christopher Bogart said the firm had always treated YPF as separate from its core business, and said he was confident it would continue to grow. Year-to-date, its shares are down about 42%.

Alternative investment managers, meanwhile, appear to have little to lose given the prices at which deals are being struck. For them, the appeal lies in deploying excess capital in strategies that are uncorrelated to the wider market. In most cases, they’re also able to buy insurance for such bets, limiting potential losses if deals sour, people with knowledge of the matter said.

For now, there’s little to indicate relief is on the way for litigation funders. In the U.S., for example, market conditions “remain tight,” according to Westfleet Advisors. The advisory firm wrote in a March report that “many funders continue to face significant challenges in raising new capital from investors.”

Top photo: The building that houses the office of boutique fund Attestor Ltd. in London, on March 14, 2024. Founded more than a decade ago by German investor Jan-Christoph Peters, the firm is known in financial circles for guarding its privacy and taking a pugnacious approach to deals. Photographer: Chris J. Ratcliffe/Bloomberg.