Chris Smith of Vannin Capital considers what can be learned from the decision of litigation funder Juridica to withhold new investments.
Last November, Juridica announced that it ‘will not make any new investments (other than for funding existing investments in the Company’s portfolio where such funding is reasonably required to realise maximum shareholder value) and will seek to return capital to shareholders in the most appropriate manner, following completion of investments.’ In other words, Juridica will be withdrawing from the market once its current portfolio has matured.
As one of the oldest funders in the market – it was listed on the London Stock Exchange’s Alternative Investment Market in 1997 – Juridica’s decision to stop funding new cases raises questions for both Juridica and the wider funding market. In particular, why did the fund, which was profitable, come under pressure from its investors to stop taking new cases? And what lessons can we learn from this?
The answer to the first question is relatively straightforward: the fund took some significant losses and investors became spooked. They asked themselves whether the fund was going to generate enough cash to continue funding new cases and, at the same time, deliver a return on investment. The conclusion they clearly reached was that there was not a sufficiently robust plan in place to do so.
As with any other sector, some companies develop a blueprint for long term success and others do not, despite offering identical or similar products or services. For those companies that continue to succeed in this space, there are several lessons that can be learned from the Juridica announcement which are worthy of exploration.
Juridica has funded 30 cases or portfolio of cases since 2007, a little over three investments per year, and at the time of their 2015 half yearly report were heavily over indexed in antitrust and competition claims (35.2 per cent of NAV in just one active investment in two cases). Without a broad base of claims across a range of categories, Juridica was exposed if a few of the cases resulted in a loss, which inevitability they would. One of the fundamental rules of being a funder is that cases can and will lose.
To build a sustainable business, funders need to have a sufficient volume of claims, weigh up the risk each claim represents on an individual basis and in the context of the wider portfolio, and ensure that at every step risk is carefully calibrated and managed. Put simply, the objective for all funders is to ensure that the returns from the wins outweigh the losses by a sufficient margin to enable re-investment in new claims and make a profit. Simple in concept, but complex in execution.
2) Robust screening is essential
Whilst diversification is key, so is having a robust screening process that ensures only those claims that have a high chance of success are funded. All investors, whether they are in our asset class, will have their own view of what makes a process successful. But at Vannin we firmly believe that there are three key elements: First, deep diligence must be conducted so that the case is as well understood as possible based on the information available. Second, an opinion must be provided by a domain expert (typically a QC). This ensures that the best specialist advice is fed into the decision making process and removes any (unavoidable) subconscious bias that one of our team may have either for or against funding the case. Third, the investment decision must be collective and approved by our Investment Committee. This ensures that all angles of the case are considered and provides consistency in decision making.
3) Funding remains profitable
Whilst Juridica has made the decision not to fund any new cases, for the last eight years it did, in fact, deliver healthy returns for investors of 29 per cent on invested capital in concluded investments.
Juridica’s decision to ultimately withdraw from the market may be seized on by critics of the industry as a sign of trouble, but in reality it is nothing of the sort.. For the funders currently in the market there are a few lessons – or more accurately, reminders to keep their processes tight – but they certainly won’t be losing any sleep.
Chris Smith is a leader in business development at litigation funder Vannin Capital.