HNW investors see opportunities in lawsuit funding
High net worth private investors are increasing their exposure to alternative assets to achieve greater portfolio diversification in an uncertain economic climate, reveals research from Connection Capital, a private client investment business specialising in alternatives.
More than 35 per cent of private investors are now allocating 20 per cent or more of their investment portfolio to alternative assets which include private equity, commercial property, private debt and mezzanine finance. This is up from 26 per cent who said the same last year, according to a recent survey among 176 respondents with an estimated GBP900 million in assets.
One asset class that is becoming increasingly popular is commercial litigation funding, says Claire Madden, (pictured) managing partner, Connection Capital. Commercial litigation funding is the financing of legal cases by third parties in return for a defined share of the proceeds (costs and damages). “It was a relative emerging asset around 2010 but it is more in the mainstream now.” By the end of 2009, around USD400 million had been raised globally but by the end of 2017 this had increased to USD5 billion states the firm.
According to AxiaFunder, a commercial litigation platform, the overall UK market for legal services is GBP30 billion and in the US, the total litigation market size is around USD200 billion.
“These types of investments are totally uncorrelated to what is happening in the wider economy, but it is very difficult for investors to access this asset class which is almost totally crowded out by institutional investment. We were early investors around 2012,” adds Madden.
Madden is also seeing strong demand particularly on the private debt side. “This is because in the current environment bank lending is becoming more challenging,” says Madden.
Private equity remains a popular option, according to the research, with 41 per cent of investors surveyed saying they expect to increase their private equity allocations over the next 12 months. The firm provides between GBP3 million and GBP10 million of funding for direct private equity and debt deals.
However, this is not the case for commercial property explains Madden. “If there was a supply of good value product on the commercial property side, that would be strong as well. The big problem is that there is too much capital chasing too few assets and a lot of the assets are overpriced so we are sellers of commercial property at moment.”
Madden is also seeing what she calls a polarisation of asset allocation. The research found that 57 per cent of respondents have less than half of their portfolio allocated to listed equities and only 11 per cent plan to increase their exposure to listed equities in the coming year.
“Our clients are experienced investors and we are seeing them moving their portfolios into cash, to reduce volatility and to take advantage of opportunities thrown up by any sort of dislocation. They are balancing that out to keep overall returns in their portfolio by diversifying into more illiquid higher returning investments such as alternatives.”