Introduction
Litigation is growing fast in our modern world. Litigation Funding, a very lucrative sector for specialist lenders, is maturing fast into the mainstream capital markets. The Litigation Contract Assets detailed below focus on an already well-established litigation sector that is growing exponentially, Undisclosed Commissions or UDCs.
The UDC sector began to feature in the UK litigation space as early as 1992 with the first PPI claim. Payment Protection Insurance was supposed to protect the insured against loss but were, in many cases, unsuitable and unusable and used to pay undisclosed commissions to unscrupulous brokers. PPI claims have now paid out over £37 billion with a further £60 billion estimated yet to be paid. Today, multiple genres of UDCs including Vehicle Finance, Mortgages, Energy and others have been identified. There are easily over £100 billion of UDC claims in the UK market needing finance at this time.
LItigation Contracts Explained
Litigation Contract Assets (LCA) bridge the gap between specialist litigation funders and the capital markets. In the same way a Mortgage Contract centralises the funding, the insurance, the liabilities, the valuation and the responsibilities,the LCA does the same for Litigation funding. The comparisons of the two funding contracts gives a good basis for investment. Mortgages are 100% financed thereby having a 1:1 cover for capital, they are insured through the property asset, the value of the asset may go up or down depending on how well it is maintained and the revenue depends on the people paying the mortgage. Mortgages are long term funding contracts often bundled into ‘tranches’ of multiple mortgages accumulating enormous values for utilisation and financing by the capital markets.
Litigation Contract Assets are only funded to 25% of the claim value thereby giving a 4:1 cover of capital against contract. There is no price fluctuation, maintenance or risk to this funding capital as it is 100% insured through an A-Rated Insurer. This Capital Cover insurance includes a 12% interest rate should the claim fail. These claims are designed to succeed, with only claims that meet all of the established claim criteria that have strong legal precedents.
Funding is for 12 to 36 months historically. Litigation funding returns are considerably, and historically, higher than mortgage funding returns. Essentially, when LCAs are compared to Mortgage Contract funding, they outperform with essentially no risk to principle.
Investors can bid to buy the funding rights to an LCA tranche and can also sell the rights at anytime. This provides liquidity in the asset and is handled by the LITDAQ exchange platform.
LCAs are only available to instituitional investors as the size of a typical tranche is £10 million plus.
LCAs are specific to a case a genre such as energy claims or PPI. Rigourous checks are taken out on each LCA by independant parties and the Legal Representative Firm. They are then bundled into tranches that are insured for capital protection on each individual LCA.
On Request,due dilgence packs are available for each of the Legal Representatives offering the LCAs.