Lexpert Magazine

LEXPERT MAGAZINE | OCTOBER 2017 49 | LITIGATION FINANCE | pursue the US$3.4-billion arbitration. In return, it was reported Tenor got 35 per cent of any award or settlement, two of five Crystallex board seats and a say in the choice of an independent director. Since Crystallex's only asset was its claim against the outcome of the arbitration, while technically providing DIP financing, the hedge fund was really providing litiga- tion financing, says David Byers, a senior partner at Stikeman Elliott LLP in To- ronto and counsel to the court-appointed monitor in Crystallex. Byers says that, while Tenor, as the funder, played no role in the actual arbi- tration, it remained quite involved during the proceedings. "It was a high-risk invest- ment, and they wanted to make sure their money was well spent. "So they had a budget that had to be complied with, and they were observing the status of the arbitration and they were very interested in it throughout." At the end of the day, Byers sees third- party litigation financing as necessary. "Without the litigation funding, Crystal- lex would not have been able to preserve the only asset of the company and pursue its arbitration claim." He says if a client came to him tomorrow and asked about using a third-party funder to finance their case, he would have no hesitation in suggesting they consider it as an option. e only real downside, he says, is that it's "not the cheap- est way to go." Andrew Kent, co-chair of financial ser- vices and insolvency at McMillan LLP, who acted for Crystallex, says hedge funds are typically looking for returns of five, six or seven times their investment. Regular litigation funding generally offers a return closer to double or triple the original invest- ment, which he believes many hedge funds and private-equity funds will see as too low. He sees insurance companies, a Lloyds of London, for example, as more natural com- petitors in the field, adding they're already deep in the game in the UK. In fact, earlier this year, Kent and a cou- ple of other senior players from McMillan sat down at the firm with two "indepen- dent brokers" who had flown into town to meet and discuss litigation funding. ey made it quite clear they have access to the UK insurance market to cover the cost of any funding they were willing to put up. "ey are fronting for unknown insurance companies; it could be anybody. e insur- ance world has its own grey markets, but these people have insurance-company sup- port and they're out there looking for suit- able pieces of litigation. ey are actively soliciting opportunities in Canada. "As the market matures and gets bigger, I see insurers as a logical source of funding. is is a developing market. For them to play a major role, they're going to have to take on enough deals to make it an attrac- tive source of funding and for them to be able to spread out their risk. is may not work [in Canada] if they don't do enough deals, so it remains to be seen how it plays out. Insurers are coming to this market, but where it goes we'll only see over time." In other words, the way litigation is funded is going to keep evolving. e only real question is by who and how. Sandra Rubin is a Toronto-based writer and strategic consultant. When it comes to third-party liti- gation financing, there are some interesting new trends to watch out for. The area is being seen as a new asset class, which is attracting interest in capital markets. In the US, that's creating new entrants in the form of insurers and pension funds looking to go beyond trad- itional equity markets in the quest for divers- ification. Before being acquired by Burford Capital LLP last year, for example, Gerchen Keller had received over US$1.4 billion from investors including the Michigan Municipal Employees Retirement System and the Em- ployees Retirement System of Texas. Litigation finance may even evolve into a separate asset class. In its 2016 annual report, Burford, which trades on the London Stock Exchange, announced it had US$2.3 billion "invested in and available for legal finance." The world's largest global funder, Burford announced at the end of June this year it has closed a new US$500-million fund that will invest in complex litigation- related strategies. It will not invest in filed cases, the company stressed, but rather "assets that Burford believes are mispriced and where value can be realized through recourse to litigation and regulatory process- es. As such, Burford, through this new fund, generally will act as a principal as opposed to financier." Myriam Seers of Torys LLP in Toronto points to Balmoral Wood, a Toronto-based fund of funds that invests in established global litigation firms around the world, and says "there are also private-equity firms with capital to deploy. There are a couple of private-equity funds based out of New York … that are getting into this area." Naomi Loewith, investment manager in Bentham IMF's Toronto office, says one of the next big trends she sees coming to this country is litigation funders buying portfolios of litigation, ideally four unrelated cases, from a law firm. "We haven't done this in Canada yet, but we're in discussions with a few law firms, and we've done 13 of these arrangements in the United States, where we will invest in a portfolio of cases and advance money to a law firm to run those cases on a contingency basis. "Running those cases might mean hiring new associates, expert fees, new carpets, partners' draws –– whatever they need to actually run those cases through to the end. Then we would cross-collateralize, so we could take our return from any of the cases that are successful." A New Class of Investment? IN TODAY'S ULTRA-LOW INTEREST RATE ENVIRONMENT, MONEY MANAGERS ARE KEEPING A CLOSE EYE ON LITIGATION FINANCE

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