What’s Drawing Investors To Litigation Finance – An Asset Class In Making
An alternative investment is a financial asset that does not fall into one of the conventional equity/income/cash categories. Litigation Finance is such an example of an alternative investment asset class.
Litigation Finance is a practice where a third party invests capital in a case in return for a portion of the financial recovery from a lawsuit.
Now in India there is a startup which is bringing the access to this asset class for retail and institutional investors. This startup is founded by Anurag A, Himansu Kesari & Kundan Shahi. Their advisory team comprises, VCs, General Counsels of Large corporates, Partners of top law firms, Risk Managers, Investment Bankers.
LegalPay is a Delhi based Investment Management Company dealing with investments B2B commercial litigation finance company. The company manages investments in commercial litigation which helps with capital access to businesses to transfer their risk of litigations. It finances case types like breach of contract or antitrust where both litigants are business entities. It also does portfolio funding where financing is provided to collateralized by a docket of commercial legal claims.
Speaking to use the CEO Kundan Shahi told that this segment is now in demand due to current economic scenario. He mentioned that we are in a similar business of risk underwriting and this time we are underwriting a potential commercial legal claim and making that decision to invest. Our underwriting process is very stringent and we follow multi-level evaluation process to ensure higher success rate.
This segment picked up when Blackrock Inc invested in a Litigation claim of Hindustan Construction Company, INR 1750 crores.
Any commercial legal claim is akin to an invoice, and investing in a commercial legal claim is similar to buying future receivables in a lesser valuation.
The company does a three-level underwriting of all legal claims that it receives for funding request and only if a case clears all the levels of underwriting it is funded.
When LegalPay receives any funding request, at the first level the internal junior associate runs a due diligence on the case and if the case passes that level then the internal senior lawyer runs another thorough due diligence. Only if the request passes that level too, then LegalPay hires a law firm who specialises in the sector that the request is from for instance if the request is for a funding request for a case in the petroleum sector then LegalPay hires a law firm who specialises in the petroleum sector and only if the request passes that level too that the case is funded.
The benefits of investing in Litigation Claims are that-
– Invested in legal claims generally do not depend on capital markets or broader macroeconomic factors.
– Litigation funding gives higher return than other asset class. Historical track record in other countries.
– Unlike other asset classes where monetization events are uncertain, legal claim investments are assured realization event.
– On average a civil lawsuit in India upper court takes 30-36 months from filing to disposition.
Commercial litigation investment is an exciting alternative asset class for investors, with a moderate investment period it gives around 50% IRR.
Investors are attracted to litigation funding as they have witnessed that all institutional investors have invested in litigation finance and LegalPay underwriting model gives them confidence of investment in curated deals.
On average, a civil lawsuit in the High court takes 36 months from filing to disposition, 16 months in Supreme court and less than a year in NCLT.
LegalPay intends to invest in 4-6 commercial cases in this year and 100 commercial cases in the next 3 years. The funds of the investors are diversified in different cases to ensure that 40% IRR is maintained.
