Investors may be tempted by the large potential returns offered by AxiaFunder, but there is a danger they could lose even more than they put in.
Recent years have seen an explosion in the peer-to-peer and online marketplace sector.
It began with the likes of Zopa and RateSetter allowing you to lend your money to individuals and enjoy a healthy return on your cash, while FundingCircle were the first to open the concept up to lending to businesses too.
The assets you can invest in through peer-to-peer have continued to expand though, to the point that investors now have the option of putting their money into litigation cases, through the AxiaFunder platform.
But before you get too enticed by the potential returns of 20-30% highlighted by the firm, there are plenty of factors to consider here.
How does it work?
On the face of it, the AxiaFunder model isn’t that different from other peer-to-peer ventures. You log onto the platform and sift through different investment opportunities, picking the ones that strike you as appealing.
Only in this case you aren’t investing in properties or businesses, you are putting your money into legal cases.
Litigation funding is where a third party – in this instance investors – finance a legal case in return for a defined share of the proceeds. In other words, the costs and damages that go to the claimant should they win.
While the minimum investment will usually be £500, AxiaFunder points out that this may be higher or lower in certain instances, with a maximum investment also varying by case.
In order to invest, you will need to demonstrate that you are either a high net worth or self-certified sophisticated investor.
This is common with alternative investments and usually means answering a few questions online to show that you understand the risks of these sorts of investments.
How does AxiaFunder pick the cases?
AxiaFunder says there are six things it looks for when deciding whether to put a case up for funding on its platform.
Legal merit - essentially there should be a high probability of success. The firm says it is targeting a win or settlement probability of at least 65% for all cases funded on its platform.
After The Event (ATE) insurance – ATE cover is a way to protect investors from potentially having to shell out even more than they invest in order to cover damages.
Economics and timing – AxiaFunder looks for cases where the estimated damages will be at least five times the cost of pursuing a case to trial and with a resolution of typically less than three years
Enforceability – the firm looks for clear evidence that the defendant will have the money at hand to pay the targeted damages or that any court judgement can be enforced.
Quality counsel – the firm says it will only fund cases where the claimant’s legal team are “clearly capable”.
Alignment of interest – the claimant should have some ‘downside risk’ should the case be lost, while the claimant’s own counsel should have ‘skin in the game’
It’s worth noting that some cases that will go up on the platform are pre-funded.
This is common among property investment platforms and essentially means the investment has already been funded, and that the money raised through the platform is essentially repaying that finance.
What if it all goes wrong?
It cannot be emphasised enough that things can go very wrong with these investments. First, of course, they aren’t covered by the Financial Services Compensation Scheme, so there’s no legislative safety net.
But there is also a danger that you end up losing even more than you put in.
If a claimant loses their case, not only will your investment disappear, but they may also have to pay damages. That’s where the ATE insurance should come in, to cover that additional cost.
However, the firm admits that there is a possibility that the insurer could refuse to pay up, which means “you could lose up to double the amount invested”.
Stick it in an ISA
The growth, not just in the number of firms offering this form of investment model, but also expanding the different assets in which you can invest through peer-to-peer played a part in the Government introducing a form of ISA specifically for these alternative investments, the Innovative Finance ISA.
AxiaFunder is actually offering an IFISA, so you could enjoy tax-free returns from your litigation case investments, assuming everything goes to plan.
This isn’t for everyone
AxiaFunder has already managed to fund its first case, a professional negligence issue where the claimant was looking to raise £12,720.
Should the client win, the firm reckons investors are in line for a return of a mammoth 60% per year, though this is rather more than the firm predicts its returns will average out at for most investors.
This clearly isn’t an investment route that’s going to be appropriate for large numbers of us, given the significant risks involved not just of losing your money but potentially ending up even further out of pocket.
Only time will tell if there is an appetite – and an appropriate number of workable cases – for litigation funding to take off as a peer-to-peer investment asset.
If nothing else, it serves as an important reminder that there is now an awful lot more to this model of investment than lending money to other individuals so that they can buy a car or a new kitchen.
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