AxiaFunder is one of the first investment platforms in Europe to offer litigation investments to retail investors with projected double-digit returns from winning lawsuits. The lawsuits you can invest in on AxiaFunder include housing disrepair claims, shareholder disputes, copyright theft, breach of employment contracts and much more. In this interview, you will learn from the CEO Cormac Leech what it means to invest in litigation cases on AxiaFunder.
About Cormac Leech
First, could you tell the readers a bit about your own background? How did you become interested in litigation funding and working with crowdfunding?
I have a finance and strategy consulting background – having worked for over 20 years in various roles including equity research, derivatives structuring and more recently alternative finance origination at various institutions such as JP Morgan and Liberum, before setting up AxiaFunder.
The initial motivation was that I had a personal need for some litigation funding and felt there should be an alternative finance solution. Looking at litigation, the returns were quite high, therefore I could see that there was an opportunity to set up a high-margin profitable business.
The Story of AxiaFunder
There are yet not that many platforms like AxiaFunder, offering the opportunity to retail investors to invest in lawsuits, what need did you see that AxiaFunder could help solve?
From an investor’s perspective, AxiaFunder enables retail investors to directly access individual litigation case investments and build up their own portfolio of litigation investments based on individual risk appetite. In contrast, traditional litigation funders tend to rely on institutional capital and invest institutional investors’ funds on their behalf.
From a claimant's perspective, AxiaFunder focuses on the smaller end of the commercial litigation market mainly in the UK and continental Europe where we believe there is a significant shortage of capital and many clearly viable cases. In contrast, traditional litigation funders usually invest in high-value claims only.
How has it been building a platform focused on litigation funding? What have been the biggest challenges you have faced?
The biggest challenges have been to consistently sourcing cases that pass our assessment criteria; adjusting the operating model to reflect an increasingly more restrictive UK regulatory environment for alternative finance; and also, to attract sufficient numbers of high net worth and sophisticated investors to what is a relatively complex and high-risk product.
Investing at AxiaFunder
As mentioned earlier, AxiaFunder is offering investments within litigation funding - a type of investment that might not be familiar to all of our readers. Could you explain why you think funding third-party legal cases is an interesting alternative investment?
Litigation funding refers to the financing of a lawsuit by a third party (with no prior connection to the litigation) in exchange for a share of the proceeds recovered by the financed party. It has emerged in recent years.
Litigation funding appeals to investors for several reasons:
- It has the potential to generate high returns at a time when other asset classes are underperforming
- It has limited or zero correlation with the fluctuations in the broader economy and other asset classes such as equity, debt, real estate
- From an ESG perspective, litigation funding also helps to level the playing field and provide access to justice so that meritorious cases are not abandoned solely due to lack of funds.
If I decide to place money at AxiaFunder and build a diversified portfolio, how much can I expect in net yearly return after losses and delayed payments?
We believe Investors can expect to make double-digit annual returns net of fees. However, the returns are not guaranteed, and investors’ capital is at risk. The past returns on the platform, which have been encouraging are not indicative of future returns.
How do you calculate your returns? What method do you use to decide when an investment must be written off and accounted as lost or with minimal chance of recovery?
Returns are calculated based on a cash-on-cash IRR (internal rate of return) calculation. The historical track record is simply the arithmetic average of the IRRs on settled investment offers.
We would write off an investment when the litigation was no longer being pursued.
Do you personally invest in the legal cases listed on AxiaFunder?
For tax reasons, currently neither AxiaFunder nor its founders can invest our own capital into litigation opportunities listed on AxiaFunder.com. This is to retain the company’s EIS status for its equity investors. EIS stands for Enterprise Investment Scheme.
Risks at AxiaFunder
How do you decide which legal cases to list on AxiaFunder?
AxiaFunder has an experienced case assessment team who carefully assesses each claim based on some key factors including but not limited to:
- Legal merits. The case's legal merits must be strong – typically independent legal counsel will have endorsed the case with a high probability of success.
- Legal team. AxiaFunder will only fund cases where the claimant’s legal team is clearly capable. Weak or inexperienced counsel can prevent an otherwise strong case from being successful.
- ATE insurance cover. AxiaFunder will only fund cases that have ATE insurance coverage lined up. This protects AxiaFunder’s investors from adverse cost risk and filters out cases that 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. The estimated damages normally must be at least 5x the estimated costs of pursuing the case to trial.
- 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.
- Straightforward 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.
Of every 20 cases reviewed, AxiaFunder expects to only select one for funding on the platform.
Returns have to reflect the risk profile of a particular litigation investment. Generally speaking, the higher is the perceived risk of loss, the higher the cost of capital. Factors that affect the risk profile of the claim include but are not limited to:
- The strength of the claim (and any defences)
- The likely duration of the claim
- The value of the claim
- The likelihood of appeals
- The creditworthiness of the defendant
- The probability of recovery
For example, seed funding – a relatively small commitment of funds to pay for disbursements or fees that are needed before it is possible to establish whether or not there is a viable cause of action worth pursuing - is inherently speculative. The returns for this investment must be higher to compensate for the higher risk. Nevertheless, the pricing has to be competitive and accepted by claimants.
If AxiaFunder, for some unlikely reason, should go out of business, what will happen to the investors’ money?
Each case is funded by a Scottish Limited Partnership (SLP), a legal entity on its own. If AxiaFunder goes out of business, the SLP will continue to fund the cases until they are resolved. When raising funds for each legal case, the funding amount includes the ATE insurance premium and admin expenses so that the SLP is completely self-sufficient to support the case until its resolution.
AxiaFunder License and UK Regulation
According to your website, AxiaFunder is a trading name of Champerty Limited, an appointed representative of Share In Ltd, which is authorised and regulated by the Financial Conduct Authority. Could you clarify for the readers how you are regulated?
AxiaFunder is a trading name of Champerty Limited (FRN 811606), an appointed representative of Share In Ltd (FRN 603332), which is authorised and regulated by the Financial Conduct Authority.
AxiaFunder carries on regulated activity under the responsibility of an authorised firm – Share In Ltd. Share In Ltd handles client money on behalf of AxiaFunder and ensures AxiaFunder is compliant with FCA’s regulations. All the financial marketing material needs to be approved by the ShareIn compliance team before publication.
Some of the readers might have heard that the EU platforms are preparing for a Crowdfunding License that starts in November. Is there anything you would like to see improved in the UK regulation for platforms like AxiaFunder? Would you prefer to have your own license?
There have been some significant regulatory changes in the UK recently which have taken up operational resources — hopefully, the pace of change will slow in the years ahead. That said. the changes have been generally sensible and beneficial for retail investors and the long-term resilience of the sector. At some point, AxiaFunder will seek to have its own regulatory license, although relying on a principal firm is working well for now.
AxiaFunder in the Future
What’s next for AxiaFunder? Where do you see the platform in five years?
We just launched a new portfolio litigation product with 2 key characteristics – 1) automatic diversification and 2) improved investor risk-reward ratio.
We are currently also in the process of launching a new class action case. We estimate there will be at least £500k to £1m available for funding each month across both portfolio and commercial litigation investments.
Other plans include setting up some general funds to fund small commercial cases which are too small to be funded individually.
Last question for Cormac Leech
Thank you for taking the time to make us all wiser on litigation funding and AxiaFunder. Is there anything else you think our readers should know about AxiaFunder?
The long-term mission for AxiaFunder is to reduce to cost of legal financing while at the same time enabling investors to get access to a very large number of vetted cases. For the next decade, we expect that investors will be able to get high double-digit returns from investing in litigation. In the long term, it seems likely that returns will decline to high single-digit levels or possibly even lower, as the sector becomes more liquid and competitive.
- The Government of the United Kingdom: “Use the Enterprise Investment Scheme (EIS) to raise money for your company”