How low can third party funding go?

Most people, when first confronted with the notion of third party litigation funding, will inevitably and understandably want to know how much a funder is likely to charge before they make an application to the market.

They appreciate that a broker will naturally be looking for the best price possible (and that is only achieved by searching the market) but they will want to know, indicatively at least, what it will realistically cost. A broker is able to provide a range based on what they are told about the features of the case which will include the prospects of success, longevity and enforcement.

But leaving aside these critical features, how high and how low can the cost of third party funding (‘TPF’) go?

Firstly, I should explain that this piece is concentrating on one-off funding arrangements and not funding facilities for portfolios of litigation, which allows funders to diversify their exposure. Clearly, the more the risk can be spread across a basket of cases and/or the proceeds flowing from a portfolio of work, the cheaper TPF can become.

That caveat aside, technically a one-off funding fee is only constrained by the size of the recovery and by the willingness of the funded party to share that recovery.

Some TPF fees are a percentage of the recovery without any cap on the resultant monetary sum. This type of arrangement is mostly likely to be offered and accepted by a client that has no other option but some clients prefer this type of structure despite the unlimited nature of the fee. This is because it means the funder is incentivised to maximise the recovery pot, which of course benefits them. If the funder has an equity stake in the case, without any ceiling, then it is fair to assume they will be more willing to invest money to get the best legal mind, experts and other advisers on the case.

Of course, a pure percentage-based return can also produce the lowest TPF fee possible, provided there is no mechanism guaranteeing a minimum return to the funder. Generally, funders will want to ensure they have a minimum fee (provided the recovery is large enough to allow the client to pay it). That minimum fee is usually based on a multiplier (or a percentage) of the amount of funds deployed or reserved for the case. This is often referred to as an “underpin”. For instance, ‘the fee payable is the greater of 30% of the proceeds or an underpin amounting to x2 multiple of deployment’ means that the funder will receive a minimum of 200% of the funds actually provided, even if that leaves the client with almost nothing (or indeed nothing). It would be a brave funder who was prepared to leave the client with nothing though, if they had received their capital back and were into profits themselves.

Interestingly, there does appear to be a trend towards more litigation funding agreements with a “ground-up” percentage fee without any underpin though. This probably stems from the fact that there is now greater competition in the market, with more funds competing for good cases than ever. Funders need to offer more attractive structures and a straight ground-up percentage is very attractive to clients who are worried about the uncertainty attached to the value of their case. It doesn’t matter how low the recovery is, the client will always receive something, despite the funder’s take. It is also a very simple concept to communicate – what can be simpler than ‘you keep 80 pence in the pound’?

Turning away from the percentages of recovery though, how low can TPF go? When asking that question, I would consider that we should include any ATE insurance premium which the client is obliged to accept responsibility for as a condition of the funding. Ultimately, the client cares about their net recovery after all their costs and, if they need to pay a related ATE insurance premium to get the funding, the client won’t distinguish between the premium or the TPF fee. It’s all the same to them.

So, my answer is currently x0.75. That is to say the funder agreed to make a six figure investment in return for a fee equivalent to 75% of the investment. There was no ‘greater of’ percentage fee.

In that case, the hearing was only months away and the full funding commitment was drawn down immediately to pay for hard costs already incurred so there was no need to reference the fee against the deployment or the reserve because the figures are the same.

I consider that to be a very competitively priced TPF deal, at least in today’s market. Certainly not many TPF agreements can be described as a fraction rather than a multiplier.

This deal was possible because it was a strong, developed case, with good enforcement potential, a scheduled mediation and the funder knew the case would conclude within 6 months (barring the risk of appeal – something the funder had to simply take a view on). The case settled without trial and the client paid x0.75 from a recovery that was actually lower than originally anticipated, making a competitive fee a blessing.

To our knowledge, the client did not have buyer’s remorse because they knew the fee was very low, as against other market comparables. Indeed, TheJudge had tested the actual market for their case to get the best possbile terms, so the client knew the price was competitive. Crucially, the case probably settled because the client had secured fundin – the opponent knew then that the claim would not run out of steam due to an inability to pay costs as they fell due. Who knows how much longer they may have held out in the absence of a funded adversary?

However, the point I want to emphasise is the part where I said this was cheap in “today’s market”. That market is changing – it’s getting cheaper. I would not doubt that there are cheaper one-off funding arrangements in existence now and, if not, then they’re probably on the horizon.

The message for lawyers is this – if you feel the market was too expensive when you last looked, it is worth looking again.

Please contact us if you would like to discuss litigation funding with one of our experienced brokers.