Nick Rowles-Davies, founder of the innovative litigation finance hub and fund Lexolent, tells the Brief about his platform’s unique model and shares his thoughts on the sector’s past ups and downs and its future trajectory.

Litigation finance began life in the 1990s, coming into being in the UK following the introduction of conditional fee arrangements, which relaxed rules around third parties funding legal cases.

A former disputes lawyer, Nick Rowles-Davies has been involved in the industry since 2010, including a spell as managing director of Burford Capital in London.

In 2023 he launched Lexolent, a legal finance business which operates two arms: a globally coordinated origination and brokerage network which connects investors with cases in need of funding, and its own fund which invests directly into cases that meet its mandated criteria.

Doing things differently

Explaining the origins of the business, Rowles-Davies tells The Brief, “In 2021 I parted company with the business I was previously with and took a year out. As soon as I left I got approached by a lot of the investors I’d had in previous funds, who wanted to do things slightly differently.

I realised that there was no platform out there for potential investors to meet potential investments, so that’s where the idea started.

“They wanted access to cases and, instead of investing into fund structures, they wanted to go directly to law firms and make investments in cases. I realised that there was no platform out there for potential investors to meet potential investments, so that’s where the idea started.”

Initially, then, Lexolent started life as a brokerage platform, connecting investors directly with law firms, insolvency practitioners and accountants who had cases in need of funding.

Lexolent fund

The brokerage side of the business continues to operate but has been augmented by Lexolent’s own fund, which was launched to invest directly in cases.

The initial plan was for the fund to to sell its investments on the secondary market – accelerating the process by which investments were made but ultimately only holding onto any given case for the short term. However, Rowles-Davies says, “The problem was we really liked the investments we’d made, so we didn’t sell them and became a traditional fund.”

However, this fund has a narrower mandate than many larger litigation finance providers. It only invests in English-speaking common law jurisdictions and doesn’t, for example, invest in class actions or other collective claims.

The problem was we really liked the investments we’d made, so we didn’t sell them and became a traditional fund.

Assuming a case matches the fund’s criteria, it is triaged and considered for potential investment. The types of cases it funds include, Rowles-Davies says, “commercial disputes in London, The British Virgin Islands and the Cayman Islands, and insolvency practitioners with disputes against people who owe money into insolvent estates.

“We are also invested in some of the ongoing opioids litigation in the US, and have some whistleblower claims there in relation to Covid loans.”

Fund Two

Lexolent’s Fund One is fully committed and the firm is in the process of launching Fund Two, which Rowles-Davies hopes will be launched “pretty quickly.” It will operate with the same criteria as the first fund, investing over two years with a view to realising its gains over the following three – an overall horizon of five years.

As a relatively small fund, its investors tend to be family offices, which manage funds for very high net worth individuals and families, as opposed to full-blown institutional investors like large endowment funds and investment banks.

“Institutional investors are great,” Rowles-Davies says, “but the ticket sizes are too big for what we’re doing.”

As a rule of thumb, Rowles-Davies says, the Lexolent funds make a minimum investment of $1 million, which would equate to cases valued at a minimum value of $10 million, but most are substantially higher. However, in some cases they are willing to provide smaller “seed” investments to potentially interesting cases to help get them to the point at which they will meet Lexolent’s criteria for being fully investable.

Brokerage platform

Those cases that don’t meet the Lexolent fund’s narrow criteria are placed onto the firm’s brokerage platform for consideration by the wider market, which includes European funders who have the language skills to take on cases in which Lexolent’s own fund isn’t active.

Our mandate is, by choice, very narrow, we are very clear about what we want to do.

Rowles-Davies says, “The immediate question we always had historically from other funders looking at cases on our brokerage platform was, ‘Why aren’t you funding it yourselves? What’s wrong with it?’

“The answer to that, which they have come to understand over time, is that our mandate is, by choice, very narrow, we are very clear about what we want to do, and these cases don’t fit with that, so we’re happy to broker them.”

Unsatisfactory taste

The litigation funding industry might be relatively new but it hasn’t been without controversy – with recent attention directed, in particular, to the UK postmasters’ case which, some critics have claimed, resulted in a lower-than-anticipated settlement because the funders were not prepared to provide additional finance to continue the action to completion.

Rowles-Davies says, “They pitched the claim at several hundred million and they settled for £58 million, leaving just £12 million to distribute among the claimants after costs. As a consequence, they didn't get as much as perhaps they thought they were going to do.

“How did that happen? Possibly the case was compromised at too low a value, and the suggestion is that they ran out of money or the funder wasn't prepared to extend. I don't know whether that's true or not.

It went from being the poster child of litigation finance to the opposite.

“There was certainly cost pressure, but I think that the likelihood is if you underwrote the claim and it was worth, say, £300 million, then as long as the funder had enough money, it could pursue the claim to conclusion and they wouldn't have settled it low.

“So, perhaps it means the claim was worth less than it was originally pitched at, and therefore it was compromised and everybody was upset.

“Either the budget was too high for the ultimate level of damages or the claim was pitched too high. Something changed, and perhaps it could have been picked up earlier, but it leaves an unsatisfactory taste.

“It went from being the poster child of litigation finance to the opposite. The other school of thought, though, is that the claimants got a percentage of something rather than 100 per cent of nothing, and without the funding they wouldn't have been in the game.”

Commercial bargain

Lexolent’s fund, of course, doesn’t involve itself in group actions and focuses on commercial cases. While acknowledging that the broader sector’s activities in relation to class action cases brought on behalf of members of the general public may require regulation, he says, “The media tends to conflate litigation finance into one bucket, but I don’t think that’s appropriate.

“Litigation finance started out in insolvency, and in that context it is very much an office holder’s decision about how they are going to collect the assets. It’s a decision as to whether you get 60 or 70 per cent of something into the estate or 100 per cent of nothing.

“It’s a commercial bargain struck between a professional and a funder and I don’t think there can be an issue there. Often it is ratified by the court to start with.

“You also have high-value commercial disputes between two big companies. Again, that’s a commercial decision at board level between two commercial entities, deciding whether to spend their own money on litigation or take the risk off balance sheet by using a third party to fund it.”

From a legal to a financial industry

Since its inception, the litigation finance industry has changed significantly, not least in terms of the background of the people who work within it.

Rowles-Davies says, “When I first started out in the market there were four or five of us and we were all ex-lawyers. And the next wave, roughly in the period from 2010 to 2020, were again mainly lawyers who were moving from practice into litigation finance.

I'm immensely impressed with a lot of those guys that have come out of private credit.

“But in the last five or six years there has been a switch. We’ve had an influx of private credit funds, which historically hadn’t been interested in this market, and the funds they have spun out have been led by finance professionals.

“And they've brought, in my view, a beneficial professionalising element to the finance side of things. They've also brought different insight into how you can structure transactions.

“I'm immensely impressed with a lot of those guys that have come out of private credit. They're very bright people and I think they've changed the face of litigation finance: it's moved from being a legal industry to what it should be, which is a finance industry.”

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