The letter of the law: Exclusive interview with AxiaFunder’s Cormac Leech
Cormac Leech, chief executive and founder of AxiaFunder, talks to Kathryn Gaw about litigation funding and the importance of doing your due diligence…
Litigation funding is a complex area, but the potential returns are astronomical. At the time of writing, AxiaFunder had successfully funded – and won – five legal cases, with another seven cases pending. Its investors have earned just over 50 per cent in returns thus far, although the platform’s chief executive and founder, Cormac Leech, estimates that average annualised returns will eventually even out to around 20 per cent.
Leech tells Peer2Peer Finance News how AxiaFunder spotted a gap in the market, and how litigation funding is about more than double-digit returns…
Kathryn Gaw (KG): Why did you launch AxiaFunder?
Cormac Leech (CL): We saw litigation funding as a commercial opportunity that had good prospects of success.
This is a new asset class that has traditionally not been available to investors and therefore, returns are higher than they otherwise would be. At the same time, it is fulfilling a social need because these are cases that would be very likely to win in the courtroom if they had the capital. The missing element is the capital, so it seems to me that litigation funding can create value both for investors and claimants.
The initial motivation was that I had a personal need for some litigation for several years and felt there should be an alternative finance solution for people who need litigation funding. Looking at litigation, the returns are quite high, therefore there is an opportunity to set up a platform which can charge higher margins. There seemed to be an opportunity to create a profitable business.
KG: Has it become profitable?
CL: Not yet, although we’re making a lot of progress. In the last couple of months, we have seen a big increase in the volume of cases on our platform. So in the last three months, we have launched approximately £1.3m worth of cases, which is a big increase. To put that in context, the volume to date was about £1.5m, so if we fund all of the cases we have just launched, we will effectively be doubling the volume on the platform in the space of three months.
KG: What is behind the recent rise in cases?
CL: Well, I think as we’re getting established, we’re getting more direct enquiries, more claimants. We’re also building the investor base. We have more than 1,000 registered investors on the platform. We’re building both sides of the business, we’re getting increased claimant enquiries and also increased investor interest. It seems to be making progress, quite organically.
KG: Could you explain litigation funding?
CL: Essentially, a claimant will be willing to share some of the upside on a case, but does not want to have any downside if the case loses, so we will provide non-recourse finance, which is to say if the case loses, there is nothing payable to us.
Before we do that, we will vet the case quite carefully across 10 criteria. We will look at the case based on the merits, whether the case has some prospects of success, whether the defendant has the ability to pay a settlement, if we think the case is large enough to justify the cost of litigation.
We always need to have an adverse cost solution. In the UK, litigation pays the costs of the other side and if you fund the case for a claimant and the claimant loses the case, the funder can sometimes be liable to pay costs, therefore you need to have that in place to protect investors from that potential liability. So we always make sure there is adequate insurance.
Read more: Litigation finance special report
We also look very carefully at who the legal team is running the case. We want to make sure the case is operating in a jurisdiction where litigation is legal and that the case is fully funded right through to the end of the trial.
We want to make sure the price is appropriate given the risk, so that the investors are getting paid for the risk they are taking. Some cases are riskier than others.
If the case checks out on all those different dimensions, then we will look to enter into a funding agreement with the claimant. We will prepare a very detailed 40-page offer document that we put to our investors to source the capital for the case.
Once we’ve raised the money, we set up a special purpose vehicle (SPV) to finance the case and as and when the case wins, the share of the proceeds comes back to that SPV.
That’s the basic life cycle of a case.
KG: Why aren’t more alternative lenders tapping this part of the market?
CL: I think it’s quite a complex market and quite a high-risk product. If you lose a case, the insurance will cover adverse cost risks, but theoretically there is a risk that the insurance won’t pay because the insurance company becomes insolvent or repudiates a contract. So there is a theoretical, very remote risk that you can lose what you invest, so that may be putting some people off.
It’s almost like a derivative product. It’s also quite a niche product because it’s quite difficult to find many cases that qualify. If we look at about 20 cases, we might find one case to put on the platform. Yes, returns are high, but it is quite niche.
KG: AxiaFunder recently funded a case in Barcelona – what were the challenges of branching out into the Spanish legal system?
CL: The cost of lawyers in Spain is lower, so the cost of pursuing litigation is lower. That makes it a lot easier to make the numbers work because it vastly improves the ratio of the claim value versus the cost to litigate.
But on the negative side, Spanish lawyers are less familiar with litigation funding and they don’t have client accounts in the same way UK lawyers do, which creates its own challenges. By and large, it seems there is an untapped opportunity for litigation funders in continental Europe that we are exploring.
KG: Are you looking at funding cases in any other countries?
CL: Potentially, but for whatever reason, we seem to get more enquiries for Spain. We had some potential opportunities for litigation in the US, where the claimant is a UK resident, but the defendant is in the US. I would say Spain and the US would be our international countries.
KG: What were the challenges of scaling the business during a pandemic?
CL: It hasn’t really affected us too much because we have always tended to work from home. We are quite a lean team, so we work out of shared office space, and most of us were already working remotely before the pandemic.
We had a dry spell in the fourth quarter of 2020 and the first quarter of 2021, with no volume whatsoever on our platform. We were unable to find cases we thought were good, but in the last three or four months, we’ve raised £1.3m across four cases. One of the offers we recently launched was to finance three cases and within three months, two of the cases had resolved positively.
KG: What’s next for AxiaFunder?
CL: We would like to launch a secondary market. If we could with confidence offer our investors the ability to sell in six to 12 months, that becomes more attractive to investors. Getting the returns over time, it’s entirely possible to invest in a case and then sell after six to 12 months with a 10 per cent or 20 per cent return.
To get the secondary market working, the challenge is to determine pricing. The assets are complex and subject to uncertainty, so getting the pricing right is a challenge we’re having to focus on.