Augusta – a proven funder of smaller commercial claims
Thursday 8 June 2017

Australian litigation funding has mainly been confined to large claims. Augusta has shown claims of less than $2m can be funded. This article describes obstacles to funding smaller claims, and how Augusta has overcome them.

Proportionality is key. Imagine a claim for $1m with costs and disbursements to trial at $300,000. A successful claimant could in theory recover $1m plus costs, which at around 65% is a further $195,000, so $1.195m overall. Losing, however, means liability for the opposing costs, also realistically $195,000, plus the $300,000, an unpalatable bill of nearly $500,000.

Such a claim funded on a typical 3x cost multiple might net the claimant only $295,000 ($1.195m less $900,000), which is not even 30% of the claim.

Even this assumes that $1m is a valid assessment of quantum. However, Augusta’s data suggests that claim figures tend to be optimistic, and that recoveries are generally about 60% of the sum claimed. So, a claimed $1m might yield nearer $600,000, and with costs at $300,000 it could prove a very unattractive venture.

Also, a narrow claim to costs ratio can mean less room for settlement. If a claim for $1m did prove realistically worth around $600,000, a settlement offer (reflecting litigation risk etc) might come in at 60%, inclusive of costs. But if that $360,000 was offered late, and when the claimant’s costs were already $200,000, the claimant might well prefer to proceed, in the hope of a better award. This increases the incidence of litigation risk, and thus the chance of a loss for the funder.

Funders sometimes seek to meet that risk by requiring a claim (as made) to costs ratio of 10:1, but for a $1m claim that would mean that the costs could never exceed $100,000, which is unlikely for all but the simplest case.

Lower revenue and higher costs

In smaller claims, a funder’s revenue is lower as their fees must be less than in large cases, and more modest individual returns mean that a higher win rate is needed, so due diligence here must be equally if not more robust. A smaller case funder also needs to invest more widely in order to deploy capital comparable to a large case funder; the former must invest in 10 times more cases if his average spend is $500,000 and the latter’s is $5m; and a higher win rate must be maintained. Due diligence means appraisal, and so more lawyers, alongside the funder’s increased cost of monitoring the higher number of cases.

Recoverability is another cost-related issue. Larger actions generally involve a well-resourced and recognisably solvent defendant. In smaller cases this might be a small or medium company, or an individual, so recovery prospects are harder to assess, inevitably increasing risk and due diligence cost.

Augusta has succeeded in this market

In the last three years in the UK, Augusta has invested in over 100 smaller cases.

It has achieved that by:

(i) creating a proprietary investment platform and optimising use of technology for greater efficiency;

(ii) largely leaving the instructed solicitor to manage the case;

(iii) a reduced success fee, to ensure that the claim to costs ratio remains feasible and structuring the finance to increase the likelihood of a workable settlement;

(v) a market leading adverse cost insurance policy (ATE) as part of the finance; and

(iv) a win rate of around 95%, based on the high quality of its investments.

Augusta has shown that funding smaller cases is possible. We will consider any reasonable-sized commercial claim having already partnered with over 60 law firms delivering them solutions to generate additional revenue streams. Last month it opened its Sydney office, and is ready to apply its proven processes in funding smaller claims in Australia.