Guido Demarco: The global litigation funding market has undergone significant changes, with a noticeable trend towards consolidation.

Firstly, after a first period of rapid expansion, funds now seem to be specializing in specific areas of law or topics within the litigation landscape. This specialization allows funding entities to leverage expertise in particular legal domains or jurisdictions, enhancing their ability to assess and manage risks effectively.

This need for specialization could also be linked to cost structure. Many litigation funders often operate using a “2 and 20” fee structure, which is a common model in hedge funds. The “2” refers to a 2% annual management fee based on the total assets under management, and the “20” represents a 20% performance fee on the profits generated. This typical hedge fund fee structure may not be well-suited for the litigation funding industry because of overhead costs for originating (finding and initiating) and vetting (assessing the viability of) legal cases are higher in the litigation industry compared to more traditional financial markets. This misalignment of the fee structure with the specific challenges of the litigation industry may pose difficulties for litigation funders operating under the standard hedge fund model. In other words, to intake IP cases you need an IP specialist, who may know nothing about competition law or international arbitration. Unless you have a team of specialists, you need to choose your areas of focus. Additionally, there is a tendency for funders to focus on cases demanding concentrated deployments of capital for efficiency and economies of scale purposes.

One of our key missions at Stonward is to keep overhead costs low by focusing, for now, on the Spanish market, most notably on antitrust cases. However, we also now have the expertise and capacity to focus on IP litigation as well as other areas such as complex special situations.

Secondly, the rise in interest rates during 2022 and 2023 changed the opportunity-cost calculus for many investors backing the litigation funding industry. Despite the challenges posed by high-interest rates, we anticipate that raising capital will become easier in 2024 as the markets continue to stabilize, leading to increased liquidity and a return of investors to the litigation funding market.

How is Spain benefitting from market consolidation?

In the current landscape of market consolidation in the litigation funding industry, Spain stands out as a promising hub for several reasons. Spain boasts a sophisticated legal market that not only presents opportunities within its borders, but also serves as a double gateway to the broader Latin American continent and the EU market. This dual advantage positions Spain as a strategic focal point for litigation funding.

“The investment decision-making process is marked by a comprehensive assessment that integrates the legal and financial aspects of a case”.

The ongoing trend of market consolidation has heightened the demand for specialist funders, and Spain is reaping the benefits of this shift. Language can be seen as a logical barrier. Cases in Spain are heard in Spanish. The underlying evidence is also in Spanish, so not only fo you need lawyers with specialization, but also with the ability to underwrite in this language. Relying purely on external counsel may not be enough. To manage an asset (a case) you need a team on the ground who knows the local terrain and the nuances of the local market.

Stonward, with its years of experience and strategic presence in Spain, along with collaborative partnerships with other funders abroad, has strategically positioned our litigation fund to capitalize on the evolving dynamics of the litigation funding market.

The decision to focus almost exclusively on the Spanish market, therefore, provides Stonward with a distinct qualitative advantage. This focused approach allows Stonward to develop an in-depth understanding of local legal intricacies, enabling the team to navigate the unique challenges and opportunities presented by Spanish procedural law. Moreover, with Spain serving as a double gateway to the Latin American and EU markets, Stonward’s strategic position facilitates access to a broader range of opportunities.

What role does legal strategy play when you are deciding to invest in a litigation?

The significance of the legal strategy in the decision-making process for litigation investment cannot be overstated. A robust legal strategy serves as a foundational pillar, laying the groundwork for the acceptance of a case. However, under a holistic approach, acknowledging that a well-crafted legal plan, while essential, does not stand alone as the sole determinant of investment viability.

The financial solvency of the defendant is another key component. In other words, a case with a brilliant legal strategy might prove futile if the defendant cannot fulfill its financial obligations, limiting the potential for a successful outcome.

Therefore, the investment decision-making process is marked by a comprehensive assessment that seamlessly integrates both the legal and financial aspects of a case. This multifaceted evaluation ensures that not only is the legal strategy sound and well-executed, but also that the overall financial health and stability of the opposing party are thoroughly scrutinized.

By marrying legal acumen with financial prudence, we try to identify and pursue investment opportunities that not only have strong legal foundations but also align with the broader financial goals to generate attractive risk-adjusted returns.

“The financial solvency of the defendant is a key strategic component, since a case with a brilliant legal strategy might prove futile if the defendant cannot fulfill its financial obligations”.

How does market specialization give Stonward a competitive advantage?

Think of litigation funding like seeking medical advice. Just as you would not visit a cardiologist for a knee problem, in the same manner, to assess the viability of a particular type of case, you need a lawyer proficient in the specific issue at hand. So, while a cardiologist might be able to point you in the right direction, you will eventually need to visit a knee specialist anyway.

In the realm of litigation finance investments, especially in a procedurally complex jurisdiction like Spain, having a local presence ensures that the funding strategy is precisely tailored to address the unique challenges and opportunities presented by the Spanish legal framework, thus reducing risk, uncertainty and cost—much like a doctor specializing in a particular field ensures focused and effective treatment for a specific ailment.

Stonward combines local language capabilities and subject matter expertise with a sophisticated understanding of the procedural landscape and the broader financial market to evaluate and underwrite winning legal strategies.