Part I: What is a fair and reasonable return for a funder?
At Crescient, we know that we are not qualified to comment on justice - but we can comment on what is fair and reasonable, and we do comment on what returns a funder will need to receive to create the incentives for the funding market to remain liquid.
We were asked recently by a class representative in the competition appeal tribunal to have a look at what a reasonable return for a funder would be. It is a very complicated question, but it does succumb to financial theory. There are, however, some inputs that need independent verification if we are trying to work out what return a funder will need to get in order for the market to allocate capital. We analysed a leading funder’s public data and came to some interesting conclusions:
Time to return is very difficult to assess, but over a dated portfolio it is possible to get a mean… and that mean is consistent with our experience of litigation funding.
Loss ratios are high - on individual cases, we would expect losses (where more than 50% of an investment is written off) to be around 40% of total amounts invested.
MoICs are variable - but it is important to understand that the ‘big wins’ a funder makes are very important contributors to the overall return for a funder.
The first chart below illustrates the time to return of our funder’s cases - the average time money is ‘out’, rather than the total time money is out.
Distribution of Investments by Average Duration
When looking at the chart, it is important to understand that this is the average duration of investments, not the total duration — an investment with a duration of 3 years in the chart above, may well have a total duration of 6 years from signing the investment agreement to conclusion. The portfolio above is slightly ‘old-fashioned’ in that it includes a number of litigation types that tend to run longer. More modern portfolios may seek to limit the exposure to these types of litigation.