AxiaFunder is the most interesting new crowdfunding site we have seen in the last year
Sophisticated investors have sophisticated problems. They worry about things like portfolio construction, relative returns, macro outlooks, diversification and return correlations. An ideal new investment for them is one that offers high returns, some extra diversification, and low correlation with the rest of their investment portfolio. P2P loans can tick many of these boxes. But in our view, litigation funding site AxiaFunder can potentially tick all of them.
AxiaFunder is a site that gives investors the opportunity to fund litigation cases, in return for a share of the proceeds received from any settlement or judgement. We think this is something that will only be suitable for sophisticated investors who are looking to add a new asset class to their portfolios. The potential returns are high, and they are not influenced by factors such as economic conditions, real estate prices, or global pandemics. The key risk is the outcome of the case being funded.
There are some downsides of course. Investors need to invest across several cases to limit the impact of a single lawsuit being unsuccessful. The investments are also not liquid and will take up to 3 years to generate a return. However, we think that many of our readers have a large enough investment portfolio to be able to allocate funds to these types of investments, particular if the returns forecast by AxiaFunder of 20-30% p.a are achieved. We interviewed the co-founder and CEO of AxiaFunder, Cormac Leech to find out more.
To visit AxiaFunder, click here.
Interview with Cormac Leech, CEO of AxiaFunder
Cormac what is AxiaFunder? What is its history?
The company was founded in 2016 by myself, Rabin Tambyraja and Sophie Liu. AxiaFunder is an online funding platform that connects investors with carefully vetted commercial litigation opportunities that we believe have the potential to generate attractive risk-adjusted returns. The first case successfully funded via our platform was in January 2019.
What types of cases are you funding?
AxiaFunder is specifically targeting those cases in the UK and overseas requiring a commitment of £25k to £1m. That’s because, in our view, this part of the market has been relatively underserved by existing litigation funders. To the best of our knowledge, we are the first litigation crowdfunding platform in Europe.
Who owns AxiaFunder? What experience does the management team have?
AxiaFunder’s main shareholders and management team consists of Cormac Leech, Michael Lent, Rabin Tambyraja and Sophie Liu. Together we have a combined 40+ years of financial experience and 30+ years of litigation experience:
- I have over 20 years of experience in financial services (equity research, derivatives, private equity) and have spent the past 7 years focusing on the alternative finance space
- Michael Lent, the head of case assessment of AxiaFunder, is a highly experienced lawyer / partner with over 8 years of commercial litigation case assessment experience and over 25 years of commercial litigation experience. Michael has a 90%+ success rate.
- Rabin Tambyraja, the co-founder of AxiaFunder, has over 20 years of experience working in finance in a range of positions from investment banking and project finance to equity research and fund management for leading international institutions.
- Sophie Liu, the COO and co-founder of AxiaFunder, was previously a co-founder and COO of Xanadu, a Chinese B2C internet startup and has spent a number of years working for L’Oreal International.
How does it work? What is the investment proposition?
We identify cases that, in our view, are suitable for investment and then make each case individually available for investment through a bond or equity investment offered on our platform. Some of these cases may have already been pre-funded before reaching the platform, in which case the purpose of the investment on the platform will be to refinance this pre-funding.
After deducting AxiaFunder’s upfront fee, the net funds raised are held in a Special Purpose Vehicle (SPV) and used to finance the litigation (or used to refinance the SPV for cases that have already been pre-funded, via a bridge loan or otherwise). If the claimant wins the case (or the case is resolved favourably), the SPV receives a contractual return which is typically either a share of the damages received or a fixed return per annum. In addition, after deducting AxiaFunder’s share of the return, the remainder is available for bond or equity holders (depending on how the SPV is funded). In the case of an SPV funded by bond issuance, any remaining profits in the SPV after paying the agreed bond coupon (likely to be relatively small) will be paid to a nominated charity. If the claimant loses the case, the bond or equity investors are likely to lose the majority of their invested principal. Industry data suggests that the investments are likely to mature within 24-36 months but may take longer.
What’s your track record so far? How many cases have you funded, and what have the results been so far?
Nine cases have been fully funded via our platform, of which two have been successfully resolved, generating a 43% return to investors in 8 months and another generating 94% after 15 months. Seven cases are still ongoing. Additionally, we have just closed the capital raise for the 9th case this week that required c £200,000 of funding.
If an investor was able to generate a diversified Axia Funder portfolio, what is the likely level of annualised return, taking into account expected wins, losses and payoffs?
We recommend investors build a portfolio of 10 cases and expect potential returns on a portfolio basis to be between 20% and 30%.
Your site mentions that you can lose more than the sum invested. That will sound worrying to some people. In what situations can that happen? Is there any limit to how big this liability could be?
Litigation funding involves adverse cost risk – the potential liability of third-party funders for opponent’s costs if the claimant’s case fails and the claimant himself lacks the financial resources to pay these adverse costs. While not impossible, we believe the adverse cost risk for investors is exceptionally low given the following unlikely sequence of events which would have to take place:
The claimant would have to lose the case and the After the Event (ATE) insurance policy would have to be void due to a breach in the terms and conditions. In that scenario, the opponent would be entitled to seek recovery of their costs from the claimant. In turn, if the claimant was unable to pay those costs, the opponent could seek to recover part of their costs from the company. We believe this sequence of events has a very low probability of occurring.
First, the case would have to be pursued to a contested hearing that determined liability in favour of the opponent. We perform a very thorough case assessment particularly in relation to the legal merits of selected cases, thus, this event seems very unlikely. Secondly, the ATE insurer would have to refuse to indemnify under the policy because of material non-disclosure on the part of the insured. We believe this it is highly unlikely that the claimants could mislead the insurer to the extent that the insurer is entitled to avoid the policy.
Alternatively, the ATE insurer could become unable to pay due to insufficient capital. AxiaFunder protects against this risk by only using insurers that are investment grade or that have a Solvency Capital Ratio of at least 110% for the ATE insurance cover. Given the stringent requirements of Solvency II, the chances of an insurer’s insolvency at this level are very low. Further, if the insured is an individual, they (and the third-party investor) will be protected by the FSCS (Financial Services Compensation Scheme) up to a limit of 90% of the exposure.
Finally, the court would have to ‘pierce the corporate veil’ and the investors would then be severally liable proportionately. In summary, in all likelihood the ATE insurance combined with the financial resources of the claimant themselves and the limited company funding structure mean that the adverse cost risk for investors is extremely low.
How many cases a month are you expecting to be available over the next year or so?
Currently, we have a case pipeline of £2-3m, and we hope to start funding 2 cases a month (each, on average, requiring a funding amount of £0.5m) in the near future.
How do you select which cases to fund? Do you turn down a lot of cases for every one you back?
AxiaFunder targets a win or settlement probability of at least 65% for cases that are funded via the platform. We seek to ensure that cases available for funding on the platform satisfy the following criteria:
- Legal merit: The legal merits of the claimant’s case must be strong – typically independent legal counsel will have endorsed the case with a high probability of success.
- ATE insurance in place: AxiaFunder will only fund cases that already have ATE insurance lined up. This protects AxiaFunder’s investors from adverse cost risk and also serves to filter out cases which ATE providers do not believe to be sufficiently attractive to insure, thereby tending to improve the quality of the pool of cases being assessed.
- Viable economics & timing: The estimated damages normally must be at least 5x the estimated costs of pursuing the case to trial, with an expected time to resolution of typically less than 3 years, and acceptable visibility on costs.
- Enforceability: There must be clear evidence that the defendant has the financial resources to pay the targeted damages and/or that any court judgement can be enforced.
- Quality counsel: AxiaFunder will only fund cases for which the claimant’s legal counsel are clearly capable. Weak or inexperienced counsel can prevent an otherwise strong case from succeeding.
- Alignment of interest: The claimant should have some downside risk if the case is lost. Equally the claimant’s own counsel should have ‘skin in the game’, consistent with a conviction that the case is likely to win.
Other key criteria related to regulation, security for costs, appropriate pricing and funding strategy to trial are also taken into account during the assessment process. For every 10 cases reviewed, only 1 is approved for funding. To date, we have reviewed over 150 cases of which only 14 have been approved for funding.
Do you get investment only from retail investors or do you also receive institutional funding?
We receive investment from both retail and institutional investors.
Do most cases end in a settlement or do they tend to go to trial? Will COVID increase the time it will take to resolve cases?
Based on publicly available data, 80% of cases settle pre-trial. Additionally, other large players in the market report a success rate of 70-90%. The pandemic is affecting litigation and arbitration in different ways, ranging from an increased use of remote hearings to general court closures, depending on the countries and institutions concerned.
What insurance do you take out to reduce risks?
AxiaFunder always ensure that that there is no liability for adverse costs by taking out ATE insurance equal to the adverse cost risk of the claim- either Standard or Non-Avoidable ATE. This is an insurance product that the third-party funder insists (in the case of AxiaFunder) is taken out by the funded/claimant. For both Standard and Non-avoidable ATE insurance, the policy provides protection against the liability to pay the adverse costs of the opponent if the case is unsuccessful. However, it should be noted that Standard ATE insurance has some conditions which could enable the insurance to avoid paying out if for example the claimant misrepresented their claim or their solicitor had been negligent (although in this latter case there should be recourse to the solicitor’s indemnity insurance).
Non-Avoidable ATE insurance is written on the basis that the insurer will not exercise any grounds to avoid or vitiate the terms of the policy, for an additional premium. Therefore, if the case is lost, say, because the Court determined that the funded/insured had been untruthful in giving their evidence, the policy would still pay out (the insurer’s reserving their right to recover their losses from the insured personally) thus protecting the third party funder. Where adverse cost risk exists, AxiaFunder will seek to ensure that a suitable amount of Non-Avoidable ATE insurance has been put in place before making the case available for funding. However, for certain cases where the adverse cost risk is viewed as low and Non-Avoidable ATE insurance is not available, AxiaFunder will rely on Standard ATE insurance. We believe that in the vast majority of cases, Standard ATE insurance provides adequate cover. AxiaFunder will always clearly state the type of ATE cover that is in place for each case.
Who can invest at AxiaFunder?
We accept investors from all countries in EEA and most countries globally (excluding US and Canada). To be able to invest in cases on our platform, investors have to be registered on our website, passed the risk questionnaire to demonstrate the understanding the risks involved in litigation funding and completed the KYC process. It is important to note that while the returns are high, these are not guaranteed, capital is at risk and losses may exceed the amount invested in some scenarios. This investment only suitable for well informed investors that can afford to invest for up to 3 years. While risk can be greatly reduced by diversifying across at least 5 to 10 cases, the risk on each individual case is relatively high.
Thanks for your time Cormac, and good luck.
To learn more about AxiaFunder, click here.