Whilst the professional litigation funding market hasn’t been around for quite long enough to label any of the pricing models “traditional”, there are typical structures. The most prevalent is that of a funder collecting a fee which is the “greater of” a multiple of the investment or a % of the damages.
Funders Fee = the greater of x3 of the funder’s investment or 25% of the recovery
The “greater of” model is sensible from a funder’s perspective as it means that they are protected in circumstances where the award is very low and a percentage of damages would not meet their target investor rate of return. However, clients very often see this model as the funder wanting to have their cake and eat it. They focus on the fact that the multiple underpin has the potential to completely devour their damages. That is why some clients are asking for a “lesser of” model. That way the client will always keep a percentage of the recovery no matter how low that recovery is. For example:
Funders Fee = the lesser of 25% of the recovery or x6 of the funder’s investment
NB: This model is often referred to as a percentage with a “cap” i.e. 6 x the funder’s investment, capped at 25% of damages.
Clients see the ‘lesser of’ model as being inherently fairer to them, which is hard to deny. Although, you have probably noticed that in my first example I used a multiple of x3 and in the second, I used x6.
That is because a funder who is willing to flip from a ‘greater of’ to a ‘lesser of’ model wants to be compensated for taking a risk on missing their target return in the event of a low recovery by having the chance to make a return that is higher than the percentage in a high recovery scenario.
It would make no sense for a funder to place a multiple “cap” at a figure which they expect to be lower than their stated percentage share of the recovery, in the same way that under a ‘greater of’ model, the funders set the percentage with a view to exceeding the multiple underpin.
Whether funders genuinely expect their success fee to be a function of the multiple or a % is always going to be debatable. In my experience most funders are far more pessimistic than claimants about the real value of claims which is why they default to a greater of model. Where the case is very high value maybe clients should think carefully before reacting to oppose the default position. At least that is true where they are more confident than the funder in the size of the recovery. Funder’s success fees are bespoke to the case, but if you have a case for which you would like to discuss potential funding structures, please contact TheJudge on 0845 257 6058.