The news that Australia’s largest litigation funder, Bentham IMF, has teamed up with one of the US’s most aggressive hedge funds to expand into Europe and take on even larger cases in the Asia Pacific ought to send a few shivers through boardrooms around the world.
For a decade-and-a-half IMF has been the most successful financier of class action litigation in Australia, averaging a gross return of nearly 200 per cent on the investment it has made in the cases it has brought and losing only about 3 per cent of the cases.
Since it listed on the ASX in 2001 it has funded cases offshore and in 2012 it opened offices in the US, where it has backed about 10 cases. It signalled last year that it was looking at entering Europe, and the UK and the Netherlands in particular, more directly but would seek to fund any new operations through joint ventures.
Today it announced it had landed a big fish as a partner, the US hedge fund (often referred to as a ‘vulture’ fund) Elliott Management Corporation. Elliott was founded by billionaire Paul Singer in 1977 and now has more than $US20 billion of funds under management.
Elliott isn’t known as a litigation financier, although it has been involved in a lot of litigation. It’s more commonly emerged as a buyer of distressed corporate and sovereign debt and as an activist shareholder.
It is, however, used to the aggressive, long-running and expensive litigation that IMF has commonly been involved in – the average duration of IMF’s cases is just under two-and-a-half years. The most notable case Elliott has been involved in (apart from almost all the major post-crash corporate restructurings in the US and some high-profile investments in Europe) has been a continuing dispute with Argentina over debts it defaulted on in 2002.
Under the arrangements announced today IMF and Elliott will set up shop in Europe, co-funding litigation through a joint venture. They plan, presumably because their legal systems are more familiar and class-action friendly, to focus particularly on the UK and the Netherlands.
Elliott will also have an option to jointly fund cases in Asia Pacific, including Australia, which have an initial budget of more than $A8.5 million, with IMF receiving a case management and advisory fee for those cases. That agreement and the European joint venture have an initial term of five years.
Given IMF’s success in Australia, one of the larger common law litigation markets in the world, its willingness to joint venture large cases here and share the returns from cases in Europe might appear surprising.
The Australian market is, however, a relatively mature one with a reasonably solid number and range of participants, particularly for the less-costly cases. IMF has traditionally been risk-averse, running a large portfolio of cases to reduce the risk posed by the loss of a particular case.
The option it has given to Elliott to participate in the bigger cases will enable IMF to bring more of those potentially lucrative actions – the costs of a large case relative to smaller actions don’t rise proportionately – sharing and spreading their risk.
The rationale for entering Europe directly with a partner aren’t dissimilar, although the relative lack of familiarity with the jurisdictions and the relatively higher costs and ‘’adverse costs’’ risks associated with litigation in the UK and Europe compared to Australia makes risk and cost-sharing a sensible and conservative approach.
The European class action environment is less developed and sophisticated than the US and Australian markets. IMF regards it as a competitive but fragmented market that will suit its integrated approach to identifying and managing cases. The capacity provided by the joint venture will allow it to pursue the portfolio approach it has adopted in Australia to spread its adverse cost risk across a range of cases.
Elliott has a European presence and has been involved in a number of aggressive corporate plays there, so it will bring an understanding of the environment to the joint venture along with its financial capacity.
If the partners can replicate IMF’s local success in the US, Europe and the wider Asia Pacific region, the Australian business will realise its ambition of having a global footprint and becoming a globally important litigation funder. If they can’t, the inherently conservative IMF probably won’t have bet its entire business on the global strategy.