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Laurent Jeanmart B. G., Opalesque Geneva for New Managers: A new litigation fund joined a growing group of peers in the UK, to achieve a return of almost 16% in 2021. But it is different from its peers as it targets a high number of lower value claims rather than a few high-value claims.
The Katch Litigation Fund (KLIF) funds small-size, short-duration claims eligible to UK quasi-governmental compensation scheme, as well as larger claims where a group of claimants acts together to get compensation in court. It focuses mainly on the UK financial service sector; the typical loan size is £5m ($6.7m) and the typical duration is one to one and a half years. Launched in September 2020, the $56m fund was up 2.7% that year and returned an estimated 1.45% in January 2022.
KLIF is run by Katch Investment Group, an asset manager founded in 2018 and dedicated to investing in private debt, with offices in the UK, Europe and South America. The firm manages more than $800m in investment funds and mandates.
Laurent Jeanmart, one of the three founding partners, will be speaking at the Small Managers - Big Alpha Episode 7 webinar on March 8th.
We asked the London-based partners to tell us more about the new fund:
Opalesque: You say the fund differentiates itself from its peers through less credit risk, higher diversification and better liquidity. Could you explain?
Laurent Jeanmart: Conventional litigation funds are typically closed-ended funds with life spans of 4-6 years. In the first instance, the KLIF fund differs as it provides liquidity with nine months' notice as an open-ended fund.
Traditional litigation funds focus on high-value litigation claims. Typical budgets for claims are between £3m (US$4m) and £10m with claim values in the £25m-£100m brackets. These are often complex cases, either with group actions or with significant claims being made against single respondents. The stakes are very high. The KLIF strategy has been focusing on lower value claims, in high numbers. These typically have shorter durations of anywhere from three to 24 months, and many do not require costly 'High Court' appearances; rather they are processed via the Small Claims Court or via the Financial Ombudsman Service.
This requires the fund to engage with law firms on a more strategic level, providing funding to the firms directly. This provides KLIF with the operational leverage to fund higher numbers of cases than would otherwise be the case (where funding is typically provided directly to the claimants).
In addition to diversification, it allows for cross-collateralisation of cases to ensure capital is protected. Full recourse debt, capital preservation reserves, fully drawn interest obligations round out a suite of techniques that are not typically enjoyed by litigation funders. This is much more in line with other private debt strategies deployed by Katch.
Opalesque: What was the rationale for launching such a strategy in 2020? How does it fit in with Katch's focus on SME lending?
Laurent Jeanmart: Katch is always observant of emerging trends and portfolio strategies. In the context of litigation funding primarily being a form of corporate lending (to law firms), the SME lending focus is quite evident still. Note that the broader Katch Group had been allocating substantially to litigation funding before the launch of the Fund in 2020.
Opalesque: What are you looking forward in 2022 in terms of number of compensation claims, returns, etc.?
Laurent Jeanmart: The fund has enjoyed consistent returns, and it is anticipated that the fund will likely double in its AuM during the next 12 months. Returns to investors are provided by way of a preference entitlement to the first 8% p.a. of realised income and the first 8% p.a. of growth, with this entitlement effectively being underwritten by the Common share class.
We expect performance to remain towards the higher end of the performance bracket for 2022, i.e. 16% net.
The number of claims and/or claimants funded exceeds 5,000 and we anticipate this number to easily exceed 8,000 during KLIF's second year.
Litigation finance
Litigation finance (also called litigation funding or legal financing) is the practice where a third party unrelated to the lawsuit provides capital to a plaintiff involved in litigation in return for a portion of any financial recovery from the lawsuit. This type of financing has existed for more than 20 years in the US and is increasingly becoming a mainstream solution that helps equalise access to the legal system.
A growing number of UK law firms are reportedly following their US peers and betting on the outcome of cases in return for a share of the winnings through closer links with litigation funders. According to a report by LB100 firm RPC, the value of court cases and cash directly held by UK litigation funders was worth a record £2bn (US$2.7bn) in 2020.
With the economic devastation of COVID looming large, and disputes partners predicting an increase in insolvency and asset tracing claims, funders are preparing for an uptick in demand from those seeking funding out of necessity, rather than choice, including corporates, reports Legal500.
As Vannin's UK regional director Rosemary Ioannou told the paper: "COVID has resulted in a squeeze on client cash flow and liquidity, and the desire to find alternative ways to generate income and to monetise assets. This has meant funding has moved even more quickly up the corporate agenda."
Upcoming webinar:
Small Managers - BIG ALPHA Episode 7
Episode 7 of this groundbreaking webinar series presents you another carefully screened panel of investment managers:
• Bas Emmerig, Savin Funds
• Nikos Kargadouris, Balliol Road
• Laurent Jeanmart, Katch Investment Group
• Kemp Niklin, Rotella Capital Management
When: Tuesday, March 8th 2022, at 10:30 am ET
Free registration: www.opalesque.com/webinar/
Related articles:
31.Mar.2020 Opalesque Exclusive: Diligence gaps raise flags as litigation finance gets boost
12.Aug.2020 Opalesque Exclusive: Katch secures guaranteed income through private debt to SMEs
19.Mar.2021 Opalesque Exclusive: Yield hungry investors stick with private debt
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