More and more sophisticated investors are recognizing that investing in litigation finance can be an effective strategy to minimize the risk of market volatility. One important sign of the increasing acceptance of litigation finance is that institutional investors are signing up to fund litigation at a high level.
The University of Michigan has recently announced plans add a variety of alternative investments to its portfolio, including a litigation funding company. These investments, which must be approved by the university’s Board of Regents, could amount to as much as $300 million. With an endowment valued at $11.3 billion as of October 31, Michigan is no small player in the investment world.
Leading this proposed investment is a commitment of nearly $34 million to Harbor Fund IV, an London-based litigation finance company. According to Kevin Hegarty, the university’s finance chief, “[t]he primary risk of this strategy lies in Harbour’s ability to continue to underwrite the merits of the claims in which they invest, which makes this strategy largely uncorrelated to the capital markets.” Similarly, in September, the university committed $100 million to a fund that invests in legal claims against Brazilian government entities.
The litigation funding investment is combined with investments in a startup accelerator, Y Combinator, which is known for launching Airbnb Inc. and Reddit. In addition, Michigan also is seeking to commit $130 million to Toronto-based Bay & King Investment Fund, which seeks to invest in mining, distressed opportunities and commodities with “attractive upside potential due to valuation dislocations, transactional complexities, or supply-and-demand imbalances,” Hegarty wrote.
All of these investments have something in common: they involve the commitment to enterprises whose prospects are not tied to equity markets. When an investor like the University of Michigan has billions of dollars committed to equities, it just makes good sense to hedge that risk with an alternative investment that can generate income regardless of what is happening in the broader economy.
Topics: litigation finance, legal reform, third-party funding, litigation costs, alternative litigation finance, hedge funds
Works Cited: Janet Lorin, UM Endowment to Invest in Y Combinator, Litigation Fund, Crain’s Detroit Business (Dec. 5, 2017) available at http://www.crainsdetroit.com/article/20171205/news01/646816/um-endowment-to-invest-in-y-combinator-litigation-fund