One of the very early entrants into litigation finance in Germany was Allianz, a large German insurance company with over $100 billion in gross written premiums. It stands to reason that an insurance company would be an early mover in the marketplace as there is no entity better placed than an insurance company to have a significant depth of data about case outcomes upon which they can analyze risk and reward.
In 2012, an article was written by Christian Stuerwald of Calunius Capital LLP which aptly described the reasons for their exit:
“The business grew, quickly became profitable and expanded into other jurisdictions, mainly Switzerland, Austria and the UK, with time and growing market penetration and acceptance the cases became bigger; as claim values grew, so did the size of the defendants, that meant that more and more often cases would be directed against large corporate entities. This is really where the problems began, because most corporate entities, certainly the ones that are domiciled in Germany, are customers of Allianz, typically of course in the insurance sector.
“Because of the nature and sheer size of the organisation it was not always easy to detect potential business embarrassment risks in time, as the checks needed to be done on a global basis. This led to some instances where a litigation funding agreement was entered into when it was discovered that the case was directed against a long-standing corporate client, who declared himself not amused when the fact of funding was disclosed.”
“it was decided to keep the business and place it into run off,”.
The same phenomenon applies to hedge funds that have many similar relationship conflicts. Hedge fund conflict checks have presented significant issues for certain funders who have spent time analyzing cases only to find out at the last minute that the case presents a conflict for their main investor, with many of these investors having veto rights to avoid this very situation. For funders, this is a bit of a double whammy, as not only are they prevented from making a good investment, but they also suffer reputationally with the law firm that brought them the case, which may have longer term implications for origination.
I further believe that the investors who invest in hedge funds should not be concerned with the specific contents of the hedge funds’ litigation finance portfolio. Rather, they should take the enlightened perspective of their investment as a financial hedge against any other pieces of litigation in which they otherwise find themselves.
Topics: Litigation Finance, Hedge Funds, Conflict of Interests, Market Risk
Work cited: Ed Truant, Slingshot Capital, June 10, 2020