The high profile class action led by Adero Law involving casual worker entitlements has put a spotlight on the return that the case’s litigation funder will be getting. It has been reported that the litigation funder could get a return of 250% on its investment. 250% seems like a high percentage but is it too high?
What does 250% look like? If the litigation funder invested $1m in a case then a 250% gross return requires the funder to receive $2.5m. The $1m invested has gone to law firms and disbursement recipients to enable the case to be run.
It is not clear whether the 250% return is a gross return or a net return. A gross return implies a profit to the funder of $1.5m. A net return of 250% implies a profit of $2.5m.
The first perspective on whether a $1.5-2.5m profit is too high is the amount that the class action claimants receive as a proportion of the total settlement. This question arises not only in funded litigation but in all litigation.
A well funded case with a high calibre legal team should be more effective than a poorly funded team that is desperate to settle.
However, the question we are considering here is whether a 250% return is too high? In the Adero Law led class action case, the funder is part of Augusta Ventures. It is reported that Augusta Ventures requires a return of 180%. If the case runs for more than a year then the return increases to 250%. If it goes to Appeal then the return has to be 350%.
Are these percentages out of the ordinary?
We have the benefit of referring to the activities of Australia’s market-leading litigation funder IMF Bentham Limited (IMF), which has been listed on the ASX for 17 years. IMF provides a reminder that not all cases are won. The high return on winning cases covers the cases on which there are losses.
In its 2018 Annual Report, IMF states that it has a target to complete cases within 2.5 years and to generate a return on every dollar invested of 2 times (excluding overheads). IMF’s overheads include around 85 staff.
In 2013, after 12 years on the ASX, IMF’s cases had an average life of 2.3 years and averaged 190% gross return on funds invested in each case.
Over its 17 year history, and now operating on a global scale, IMF generated a (net) return on invested capital of 50% which includes cases lost. The returns that IMF has been achieving, as well as its future prospects, have been good enough to secure it an additional $74.48m capital this month.
Which is fairer: a contingency based percentage of the settlement or a percentage return on the funds invested?
A percentage of settlement approach can have wildly unpredictable outcomes because it is not tied to the legal work involved in a matter, tempered perhaps if there is a market mechanism to ensure enough ‘bidding’ by law firms.
A return on funds invested approach is at least tied to the funds used in a case and therefore the legal work involved. The percentage return is currently determined by market mechanisms. Should the return be suppressed too much by regulations then funds for litigation may dry up altogether.