Third-party funding of commercial litigation is a growing business area where hedge funds have been present for some time. Now commercial claims are beginning to be taken seriously as an asset class

A market is growing around funding of commercial claims. Many are now beginning to see third-party funding of commercial litigation as akin to other assets, and one that is a diversifier to a portfolio with no correlation to any other major asset class.

Over breakfast in central London, Selvyn Seidel, founder and chairman of Fulbrook Management, a company that advises on, sources, evaluates, arranges funding for and supports selected commercial claims, explains how he sees the market developing and the opportunities for hedge funds as well as institutional investors.

Fulbrook Management and its affiliate Fulbrook Capital invest in and advise on high-stake corporate litigation and arbitration. The business is particularly focused on patent/intellectual property cases and complex business disputes, including trans-national commercial and investment arbitrations mainly in the UK and US.

Fulbrook, says Seidel, is different from other litigation funders. "We not only evaluate a case and fund it by advancing capital, but we also put together integrated human resources to evaluate and enhance claims. We do not just advance money, but also work with the claim after it's funded to try to enhance, to give value. This is a little different than most established funders," he explains.

Seidel is most interested in international disputes. With offices in the US and UK, the company can take advantage of disputes in both financial centres, although Seidel does concede London is the more active and is seen as a centre for prosecuting commercial disputes.

Investment into third-party litigation funds range from $100,000 to $10 million, with an expected return on investment of around three to one, according to Seidel. He believes cases can be valued fairly accurately and are being perceived as a new asset class.

In a wide-ranging interview, Seidel explains why third-party litigation funding is becoming more attractive to hedge funds and investors. "Hedge funds have been in this industry longer than instructional funders," explains Seidel. "They mostly concentrate in the patent area but, using their own experts, hedge funds will evaluate a particular case that a company is involved in and conclude that it is an important case. Winning or losing will have a big impact on the company. So they invest in the company depending on how they evaluate the outcome of the litigation. Hedge funds have been doing this for years and doing it very well," he adds.

Others are now getting involved in the process, with institutional funders also taking interest. Hedge funds, he says, are continuing to develop this area and are "bringing onboard some of their own experts to help them analyse cases. They will on occasion do just what institutional funders do and put their own money into a one-off claim," notes Seidel.

Funding structures, admits Seidel, are "as various as snowflakes". He says each is unique and relates to the specific claim. "In general, if a funder thinks a case is worthy, it will enter into a financing agreement with the claimant to advance, depending on the nature of the fund, anything up to $5 million–$10 million to prosecute the claim on the basis of a financing agreement, giving the fund rights and security interests. If the case is successful, then some of the cash will go back to the funders or payment is made through securities, liens, escrow accounts. There are a variety of ways to secure a return."

Seidel talks about how returns are achieved, the differences between the three main areas for litigation funding (the UK, US and Australia) and the reputational risks investors need to consider before becoming involved in third-party litigation funding.