The verdict is in from a few endowments and pension funds: Take a chance on corporate litigation finance investments. But for other asset owners, the jury is still out.
Litigation finance investments target corporation-vs.-corporation lawsuits, providing money to plaintiffs for legal costs in lawsuits in exchange for a portion of any finalized settlement, shared between the money manager and the law firm providing legal representation. The investment managers vet requests from corporate plaintiffs for funding and reap sometimes double-digit returns by selecting cases in which their portion of the expected settlement will be larger than the financing they provide.
Managers — and some asset owner executives who've signed on with them — say the strategy provides uncorrelated returns regardless of market volatility or economic conditions.
"It's uncorrelated to economic activity," said David Holmgren, chief investment officer at Hartford HealthCare, Hartford, Conn. "So in a sense, it's like the traditional inflation-protection investment. This fits in with that diversification bucket, but we also do want income-producing and asset-backed assets in this allocation."
Hartford HealthCare on March 31 committed $20 million to a litigation finance strategy managed by Halcyon Capital Management LLC, New York. It was Hartford HealthCare's first commitment to the strategy. Hartford HealthCare has $3 billion in pension, endowment and other assets.
Also, the University of Michigan, Ann Arbor, in February committed $50 million to Lake Whillans Fund I, managed by litigation fund specialist Lake Whillans Capital Partners, a new manager for the $10.5 billion long-term portfolio of UM's endowment. In a report to university regents, Kevin P. Hegarty, executive vice president and chief financial officer, said Lake Whillans provides "funding for commercial litigation involving breach of contract or trade-secret misappropriation." Officials at the university could not be reached for further details.
Public pension funds also are taking notice. The $460 million Aurora (Colo.) General Employees Retirement Plan, which is conducting an asset/liability review expected to be completed by the end of the year, is considering an allocation of at least 5% of assets in corporate litigation finance, said David McConico, chairman of the pension fund's board of trustees.