Fortress raises second litigation financing fund

Fortress Investment Group LLC is pitching an investment opportunity within an increasingly popular yet controversial corner of finance — funding other companies’ legal battles.

The private equity firm is raising its second fund to invest in legal assets, having already deployed $6 billion into the strategy, according to a person familiar with the situation. 

Fortress has 32 people working in legal assets, led by former bankruptcy attorney Jack Neumark. A dozen were hired in the last 18 months as the New York-based firm looks to grow further in the sector, said the person, who asked to remain anonymous discussing sensitive information.

The company declined to comment on fundraising or returns.

“The Fortress legal assets strategy built on our firm’s prior experience as successful credit investors who are not afraid to use litigation when necessary to protect our rights,” Neumark, managing partner and co-chief investment officer at Fortress, said in an interview with Bloomberg News.

MONETIZING LAWSUITS

Interest in litigation funding — which involves paying costs for one side of a legal fight, and taking a slice of the proceeds if they win — has been growing in recent years. 

Investors looking for higher yields and diversified returns poured around $17 billion into litigation funding globally in 2020, according to a study from insurance firm Swiss Re. 

Third-party litigation finance investments have produced internal rates of return of 25% or more in recent years, Swiss Re has said, while also highlighting the risks that this lightly-regulated field increases claim costs and incentivizes lawsuits. 

Fortress, which also specializes in investing in distressed debt, has around $45 billion in assets. Investors in its legal funds include pensions, institutional and sovereign wealth funds, as well as high net worth individuals and family offices. It bought litigation financier Vannin Capital in 2019. 

The firm invests in pools of claims owned by large companies, lends to law firms, and finances other commercial litigation funders and legal services businesses, Neumark said.

“A successful area for us has been large, $100-million-plus, transactions with public companies in which we invest in those companies’ affirmative legal claims,” said Neumark. 

Fortress prefers not to throw its weight behind a single court decision, and instead underwrites a portfolio of claims across types of cases and jurisdictions across western Europe, the US and Australia, he added.

“From the companies’ perspective, by monetizing their legal claims they are selling a non-core asset that is marked at zero on the balance sheet,” Neumark said. “These deals help legal departments become profit centers and turn illiquid legal claims into cash that can be reinvested in the core business.”