How to work a litigation funder

Why is customer service an anathema in the third-party litigation funding (TPLF) industry, viewed as some “thing” that matters only when eating out in a restaurant, buying a car or staying at a hotel? We hear lots of consultant-inspired corporate tag lines (“internationally recognised”, “global force”, “market leading”, “strong track record”, “in-house underwriting capabilities”, to name but a few), but doesn’t customer service underpin all of these like they do in any other market? And if it does, then why is TPLF (after two decades of continuous growth) still receiving the same criticism time and time again that applying for funding is just not quick enough to the extent it can often feel like one time-gobbling abyss of process after process?

Stories of hours spent getting information ready, followed by weeks of radio silence, then a flurry of misguided questions, followed by a few more weeks of radio silence, a flurry of calls before progress is made to a… committee that then asks more questions before going to the investment committee, which precedes the sign-off from the actual investment committee with their investor, only to be told the application is rejected because of a small technicality, or even worse, without any explanation? (And really, absolute shame on those funders who fail to explain why they pull out at the last minute!)

Like with all reputations, they form not because it happens all the time but because it happens enough times with sufficient frequency for it to stick in enough memories. And that should be of concern to the TPLF industry. As one litigator who has relationships with numerous funders recently said to me: “I think of funding and take a deep sigh. Then I think of [unnamed funder] and I lose the will to live.”

Free market principles will ultimately dictate that those funders who engage in a tedious, meaningless cat-and-mouse game won’t survive. Lest we forget, litigation funding is a business that needs customers coming through the door. TPLF can promote the benefits of funding all it likes, but if a funder annoys them enough once in through the door, the customer won’t come back to that funder no matter how impressive the name on the business card.

Let’s consider luxury brands. The customer service when buying a luxury branded product is designed to make the customer “feel” like a million dollars. One could argue that the analogy is defective in TPLF because unlike in TPLF, the customer holds the cash which automatically empowers them. But that is not the actual source of empowerment. The empowerment comes from having something the other wants. Customers of litigation funding have the litigation risks, whether a single case or a portfolio or the entire law firm, that litigation funders need and that’s why they, the lawyers and claimants, are often in an unrecognised position of power.

So, with that, let’s move from the abstract to the practical. Here are five tips from a litigation funder on how to “work” a litigation funder.

Tip 1: be demanding

The amount of investment capital available in the litigation funding industry continues to increase unabated. But with that comes deployment pressure. In fact, most funders are under more pressure to deploy than ever before and finding good investable litigation risks, whether cases, portfolio or otherwise, is tough going for funders. Fail to deploy and they will lose their investors and their fees.

So, leverage the fact that each funder needs you more than you need them. They don’t have as many investment opportunities as you have other funders. Demand swift responses. Demand transparency and explanations. Demand some basic courtesy in communication. Set timelines and deadlines. Because if one can’t smell the jerky, there are plenty of others that will.

Tip 2: create competitive tension

No one sells a house by approaching one person only at a time. So why do it with a litigation case or portfolio? In the real world, only the outcome matters and approaching multiple funders creates the competitive tension that empowers you to play one funder off the other.

Most funders will spin a story of why they are above the rest and why you don’t need to approach others because of their name and reputation built over many years. This spin is actually a very logical and sensible one for a market that gauges prowess by name, reputations and “recent work”. But TPLF, while full of litigators, is not the legal market. It is a financial market and actions, not the spin, will tell the story.

Let free market rules decide. Make funders walk the walk rather than talk the talk. “Competitive tension” is a real thing that people use all the time in every other financial market so create it and use it. And it’s always worth remembering a funder who shies away from competition ultimately won’t survive… and no one wants to work with a funder who’s not going to survive.

Tip 3: use brokers (they’re really like M&A bankers)

Those who see brokers as “lesser” professionals are misguided. Brokers tend to get paid by insurers and funders (and some get paid by the litigant) but either way, the bulk of their commissions come from the premiums and returns that are made when there is a successful outcome. In other words, they do a huge amount of work for a commission they might make as and when, or if, the case is successful.

They’re constantly running a level of contingent risk that would make most law firms collapse. They’ve taken a huge risk to establish their franchise and all are in it for the long run. So when they arrange insurance or funding, they are necessarily on your (both lawyer and litigant’s) side. They will fight your corner and they will do everything possible to get you the best deal and to get it over the line. And if it’s not a deal with one funder, they will try to find another solution (whether it’s another funder, co-funding with various funders or re-engineering the economics) like brokers have successfully done for years with after the event (ATE) insurance.

The work they do will also save you a vast amount of time and effort that is better spent elsewhere. They can be a good sounding board. They will put themselves in the firing line to remove the kind of transactional angst that can often derail a transaction for non-commercial reasons. And because they’re experienced having done this with ATE insurers (which is a far bigger market than TPLF), they know how to create that all-important competitive tension for you.

They really are no different to M&A bankers, just that M&A bankers are called “investment bankers” rather than the not-so-glamorous “brokers”.

Tip 4: don’t give away exclusivity, it has a value

Exclusivity is not the practice direction that some funders like to make it seem. It is actually an asset with a value. For a funder, it secures a right of first refusal or, in financial market speak, a call option, both of which have commercial value. The value for funders is that it takes away your negotiating leverage on pricing and urgency and lets them control the situation to serve their own interests.

Put another way, exclusivity is a sure way to remove competitive tension. The only time it makes sense to give exclusivity is if there is no position to weaken; that is, that there is no competitive tension and the funder you are giving exclusivity to is your last hope.

On the basis that exclusivity then has a value, exclusivity should only ever be granted for a consideration of equal value. It could be a monetary amount. It could be (as some funders have done very selectively) for seed funding in return for exclusivity. It could have penalty clauses or a monthly fee for exclusivity.

But also know that some funders will never ask for exclusivity as a general principle. Those funders believe free market rules always apply and that solicitors shouldn’t be prevented from being able to act in their client’s best interests by getting the best solution for their clients.

Tip 5: take control by being prepared

A broker may help you considerably in this but if you still prefer to go it alone, take control by making sure your application is top notch. M&A bankers will never take a deal to market without having everything (the pitchbook, Investor Memorandum, the forecasts) spot on. The risk of shooting too early is to lose that competitive tension.

Make sure all the issues you can think of are considered and addressed. Be transparent and open. Communicate information in a way that makes it discourteous for them not to reciprocate. Have your documents logically filed and don’t miss out any key facts. It’s not just the substance of responses to queries raised by funders that is important but the speed with which you respond. The quicker, the better prepared you are, the more it says about you. And the slower they are.

Ultimately, being prepared means increasing your chances of being a star attraction to multiple funders allowing you to play one funder off the other to get the most competitive offer more quickly.

So, why would a funder give these tips?

Because this is the future. Only those funders who care about preserving what share they have of the cake today hate these conversations. For an increasing number of funders who embrace the above, it’s about supporting the continued growth of the market by encouraging the industry to operate to a level and standard much more akin to an established financial market.

I have made this point many times and some do not agree that TPLF is a financial market. But this blindly or conveniently overlooks the two simple facts that, one, the ultimate source of money that drives litigation funding comes from established financial markets and, two, history has shown established financial markets started out much like TPLF is now.

Greater competition and choice is the next evolution of the market. Create tension by speaking to brokers, speaking to multiple funders and don’t measure funders by the same metrics as lawyers. For an industry that is financing numerous class actions championing consumer (read “customer”) rights and competition claims, this shouldn’t be hard for funders to see.

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