Nott: Holding the pen
Cardiff’s Capital Law has set up a litigation funding arm and secured backing of up to £50m to finance smaller commercial cases run by other mid-market law firms.
New North Litigation Capital is the only UK funder currently owned and operated by practising lawyers.
It is backed by private equity house Pollen Street Capital, which has agreed a senior secured credit facility.
Headed by Capital Law group senior partner Chris Nott – who is working on the venture full-time – New North will only fund commercial disputes. The minimum value is £1m, although this is negotiable for strong smaller cases.
New North generally expects the solicitors to be on a partial conditional fee agreement. “I will pay them a fair proportion of their fee as they go along so they’ve got cash flow, but I would expect their profit elements to be bet on the outcome of the case,” Mr Nott told Legal Futures.
Funding can be for costs or just disbursements – indeed, its first deal is a disbursement funding package for a firm going wholly contingent on its own fees in a professional negligence claim against a very prominent law firm, worth £3-5m in damages.
New North will not initially commit more than £3m to a case and will set a maximum of £5m in funding – as the money is ringfenced once committed, this allows New North to have a spread of investments.
“I’m looking to take lots and lots of small cases in recognition that I’m probably going to lose some of them,” Mr Nott said.
He said he had already been approached for WIP (work in progress) funding but had turned it down. “I’m just providing you with a loan against cash flow and you are going to pay it back to me at some point, whether you win or lose the cases…
“That doesn’t float my boat. What I’m interested is where I’m an equity investor or I’m taking risk and therefore get a higher return.”
In 2016, Capital Law announced a £50m fund, backed by a hedge fund, to help its own clients pursue litigation. Mr Nott admitted this did not work as well as hoped, with the main lesson he learned that he needed to “hold the underwriter’s pen” – that is, not to have to seek approval from the finance people before committing funds.
That is what he has done with New North. “What I wanted to do was create a litigation fund targeting the mid-market that was lawyers funding lawyers rather than financiers funding lawyers…
“One of the problems with litigation finance is that the ultimate decision-making often rests with financiers who are not experienced lawyers and therefore their measurement of risk is wrong.”
The established litigation funders would point to the ranks of experienced lawyers, often recruited from the biggest names in the City, that they employ to vet cases. Mr Nott countered that, first, these lawyers were not used to assessing the type of claims New North was targeting, while “the ultimate decision is still not made by them”.
He was helped in navigating the private equity world by Capital Law’s chairman, David Williams, who has had a career in the sector, but it has still taken time to get New North off the ground – the Liz Truss crash having led previous backers to pull out.
Also, Mr Nott had two red lines for backers: that they would not have any ownership of New North and that its investment committee was just lawyers. It is made up of Mr Nott, chief investment officer Andrew Brown, an experienced litigator, and an independent barrister chosen for each case.
Mr Nott said: “We wanted to give the market the confidence that, when they’re dealing with us over whether we will underwrite the case and what the terms might be, they’re actually dealing with the person who’s ultimately making that decision.” This means quick decisions, either way.
As to whether other law firms might be cautious about using him for funding, he said he did not expect much business from other Welsh firms and maybe some “old school” practices would be wary.
“You’ve got a case that you think is a good one but you can’t raise the money for it. If you could, you’ve got a fee of between £500,000 and £1m, which is probably a third of your annual budget over two years. And I’m the difference between you getting that case and not. I think you will probably quickly get over the fact that I’m a practising lawyer… We think it’s a help, not a hindrance.”
Capital Law will also use New North to fund its own cases – “If I approach other funders, they’ll just think that they’re a stalking horse” – but the due diligence will be done independently.
There have been other attempts over the years to provide funding for smaller cases but none has achieved much. Mr Nott said the key component of success was building a large portfolio.
This took “an awful lot of underwriting work” and so the temptation for others has been to back larger cases, where the return would also be larger.
“There are three of us in New North but I’ve got the whole of Capital Law behind me as a massive underwriting bench,” Mr Nott explained.
“If you give me a shareholder dispute case, I can do that on my own. If you give me a property dispute case, I can’t, but I’ve got people in Capital Law who can. It’s the fact that it’s owned by a law firm with the experience of a law firm allows us to do loads of cases quickly.”
Connor Marshall-Mckie, investment director at Pollen Street Capital – which separately took a majority stake in Leonard Curtis last month – commented: “New North addresses an important gap in the litigation funding space, focusing on smaller mid-market commercial litigation.
“With the significant opportunity available and the deep experience of the leadership team from Capital Law we are excited to partner with the team to support their growth.”
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