Is Asia the next frontier for litigation funders?
The following article was published in Hedgeweek, September 17 2019, by Joe McGrath.
While litigation funders have been celebrating growth and success in Western markets, they are also keen to seize opportunities further afield with Asian jurisdictions increasingly finding favour…
For investors keeping close watch of industry developments over the summer, it was impossible to escape the headlines resulting from the ongoing feud between litigation funder Burford Capital and shorting shop Muddy Waters.
A report, released by the latter, set tongues wagging after Muddy Waters said it had developed concerns about the accounting and governance approaches at Burford. The release of the report triggered several industry commentators to speculate about accuracy of return projections from litigation funds.
Despite this, proponents of these funds have been keen to voice their support. Caro Kann Capital has been among the most vocal, releasing a comprehensive analysis of why it considered Muddy Waters’ analysis of Burford to be flawed, and why it has absolute belief in the litigation funding market.
Meanwhile, the US, Australian and UK markets are continuing to witness substantial growth, fuelled by investor appetite for non-traditional asset classes, and the ongoing exploration of alternatives, while other, less developed, markets are emerging too.
“The market for litigation funding in Europe is growing strongly, and it is catching up with the more developed UK, US and Australian markets,” says Louis Young, managing director of London-based alternatives group Augusta Ventures.”
“While this absorbs investment and management capacity, we are seeing the established litigation funders deepen their operational resources, and as such, expansion into foreign jurisdictions does not cause the drag on management’s time that it may once have done.”
Among the regions beginning to feature more prominently in the future businesses plans of litigation funds is Asia. Traditionally a no-no, due to tight regulations on case funding, Asia is fast becoming a place where litigation funders want to be.
Astraea Capital, a New York based private equity and hedge fund group, is among the increasing number of firms looking at potential opportunities in Asia.
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“Big changes are happening right now in the Chinese-speaking regions regarding litigation investment, particularly in Hong Kong and Singapore.”
- by Sally Fan, CEO, Astraea Capital
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“Big changes are happening right now in the Chinese-speaking regions regarding litigation investment, particularly in Hong Kong and Singapore,” says Sally Fan, founder and CEO of Astraea Capital. “In Hong Kong and Singapore, we always knew there were opportunities. However, these regions inherited the champerty and maintenance laws which had been influencing the litigation investment market for a very long time.”
Fan explains that this meant litigation funders, historically, were unable to invest in Singapore or Hong Kong. But, in 2017, both jurisdictions passed new rules establishing a framework for litigation finance and funding products to be used in association with international arbitration disputes. While Singapore’s law change was immediate, Hong Kong’s came into effect on 1 February 2019.
“This is quite significant, since Singapore and Hong Kong are big international arbitration centres, and there are many big arbitrations going on there,” Fan explains.
“Now, because of the changes in the regulations, Hong Kong and Singapore are becoming a new frontier market for litigation investment companies. I wouldn’t be surprised that litigation funding will play a more significant role in the international arbitrations taking place there.”
Fan’s view is shared by many. Litigation Capital Management, for example, established a new office in Singapore in November 2018 to cover the Singapore and Hong Kong litigation finance markets. At the same time, the group appointed Roger Milburn as an investment manager to lead the company’s expansion into the region.
“LCM’s Singapore office has already generated a significant number of quality investment opportunities which have exceeded the company’s expectations,” Milburn says. “In response to impending regulatory changes, we launched an on-the-ground presence in Asia to take advantage of the growing use of litigation finance products and the greater certainty as to the legality of the arrangements with respect to certain types of disputes.”
For those funders who are not yet operational in Asia, the business case may be able to become even more compelling. In Singapore, for example, the regulators are considering widening the scope for funding of cases, by permitting the funding of domestic arbitrations.
“There is also a consultation underway which may allow lawyers to enter into Conditional Fee Agreements (similar to no-win no-fee deals) with their clients which will allow more innovative structuring for funders and lawyers alike,” explains Milburn. “These changes are likely to mean that professional funders which are not yet present in Singapore will take another look at their strategy of trying to operate in Asia on a fly-in fly-out basis only.”
And while Singapore may have been an initial target for geographical expansion for litigation funders, the next stage of the Asian invasion could be China. Astraea’s Fan, a Chinese American who claims to be the first Chinese to launch a litigation investment firm, spoke at a conference on litigation investment earlier this year, in Beijing.
She says: “Mainland China is quite different because its political, financial and legal systems are generally different from what we know in the western world. In Mainland China, there is a lot of money that needs to be invested.”
Fan explains that Chinese investors are quite keen on litigation funding as an investment opportunity, and are perhaps more comfortable with the idea of litigation investment than some of their western counterparts. However, this doesn’t mean the market will be easy for new funds to crack.
“If you look at the Mainland Chinese market alone, the cases there are relatively small, awards are small, and funding need is small for each case, compared to what we see in the US,” Fan says. “Historically in China, if the plaintiffs do need money for litigation, in the past, they might ask their friends and family to help out.”
However, there are limits to where friends and family can assist. In larger lawsuits, the plaintiffs and their lawyers simply cannot afford the litigation or may not wish to commit all of their own money. This is where litigation funders believe there could be an opportunity.
While the prospect of a truly international litigation funding market in mainland China may yet be some way off, there are certainly signs that firms are keen to evaluate the opportunity set. For funders to seize any opportunity, however, will require further movement in regulation and a serious round of recruitment to strengthen on-the-ground resources and local knowledge.