The Wall Street Journal this week, reporting on an lawsuit against a private equity fund that is being financed in part by a major investor in the fund, described some of the issues relating to litigation funding schemes.
A major Dutch investor lost $60 million when a Carlyle Group LP fund collapsed in March 2008. Now, he is paying for others to sue the U.S. private-equity firm, a high-stakes gamble that could make him hundreds of millions of dollars.
Louis Reijtenbagh, a 70-year-old former family doctor who became one of the Netherlands’s richest men by investing in art, distressed debt and other assets, has already put an estimated tens of millions of dollars behind the case, according to people familiar with the matter. Meanwhile, Carlyle is suing him in Delaware for providing the funding for the litigation.
. . . Litigation funding – or the practice of paying for lawsuits in exchange for a share of any settlement or award – has become an asset class in its own right, with pension funds, investment managers and family offices investing in it. But it typically involves groups of investors spreading their capital across portfolios of lawsuits rather than a single individual funding the action. Returns can be high but critics say litigation funding can lead to overzealous legal action, or to billionaires trying to silence their enemies or tie them up in costly court proceedings for years.
The full story is available here.