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Litigation finance inched toward the mainstream in 2019, with both lawyers and corporate leaders expressing increasing openness towards taking outside capital to help pursue commercial claims. 

But it was an up-and-down year for some of the key players in the industry, which was estimated in November to have $9.5 billion in assets dedicated towards U.S. investments. One publicly traded giant, Burford Capital, saw its stock tumble after it was hammered by a short selling campaign. And a year after Vannin Capital announced that it was shelving its own IPO, the company was instead acquired by a SoftBank subsidiary which then purged its American operations.

Other funders were able to crow about new funds and high-profile advisers coming on board. And Burford also had a triumph in the emerging secondary market for claims.

Here's a closer look at an eventful 2019 for the sector:

Capital Surge: Money managers and investors remain all in, viewing litigation finance as a noncorrelated investment class that can flourish when the stock market and related investments are underperforming.

Several outfits parlayed that enthusiasm into new funds. Channel Islands-based Therium Capital Management tapped three institutional investors, including a sovereign wealth fund, to launch a $430 million fund in March. Burford raised a $300 million fund for post-settlement financing opportunities in April, and IMF Bentham—also traded publicly—raised a $500 million fund to underwrite disputes outside the United States in June.

Meanwhile, Silicon Valley-based Legalist, founded by two Harvard undergraduates in 2016, raised $100 million in its second round of financing and also brought on board former U.S. appeals court judge Richard Posner as an adviser.

Higher Stakes: This influx of capital isn't without consequences.

"It's getting more competitive to get deals done for funders," said Paul Haskel, co-chair of the corporate department at Richards Kibbe & Orbe LLP, explaining that consumers of litigation finance are aware that it's a buyers' market and they are shopping around for the best terms. 

That heightens the risk of bad bets for funders, as returns on investments are binary. It becomes even more important to cash in on successful bets to offset the losers, and more stringent terms make that more challenging.

Smaller funds, which lack the ability to pull together diversified portfolios, are facing the biggest risks. "There's a greater risk that one loss will be a catastrophic loss for your business," Haskel said.

Secondary Opportunities: Burford attracted favorable attention in June when it announced it had sold off a 10% share in one of its investments for $100 million. A U.S. Supreme Court decision to not get involved in a dispute between a one-time Argentine-owned petroleum company and a bankrupt investor boosted the value of the case.

Burford CEO Christopher Bogart said at the time of the sale that he was not not aware of any of Burford's peers in the litigation funding space taking advantage of a secondary market for claims.

"It's something that we've been talking about developing for the last several years," he explained. "The funding challenge we have is that capital flows in litigation finance are difficult to predict."

Haskel doesn't expect Burford to be alone in the secondary market for long.

"I can certainly see it as an opportunity to access much greater capital on large deals," he said. "A lot of investors in this funding market came from the distressed debt world. They are certainly accustomed to syndication and this sharing-of-risk architecture."

Selling Burford Short: Shares in Burford, traded on London's AIM exchange for small and businesses, plunged in August after an attack by short-selling investment firm Muddy Waters Research.

Burford hit back, calling Muddy Waters' 25-page report false and misleading, and the company's stock price has largely stabilized after losing roughly half of its value. But in addition to raising questions about accounting and valuation practices and corporate governance at Burford, the debacle sowed doubts about the wider industry, prompting other players to differentiate themselves from their embattled rival.

And Burford has promised litigation against Muddy Waters over alleged market manipulation, indicating the fallout of the fight will spill over into 2020.

Vannin Trouble: Back in 2018, it seemed that the ranks of publicly traded litigation funders was set to grow. Instead, Vannin Capital paused plans for an IPO that September, a move that presaged further challenges.

It appeared the funder had landed a lifeline in September when its sale to global investment manager Fortress Investment Group was announced. But a month later, the SoftBank subsidiary quietly began shuttering Vannin's U.S. operations, along with its presence in Germany.

Fortress explained the step as an "organizational change" designed to take advantage of its own legal assets business. But it also offers an opportunity to speculate about the future: Will 2020 usher in a further shake-up among the players in the industry?

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