Not just Class Actions: Dispute Finance adding value to Australian Corporate Transactions

OmniBridgeway_BlogArt_Not Just Class Actions_v12
Tom Glasgow
Managing Director and Chief Investment Officer - APAC
Chris Lisica
Investment Manager - Australia

In Australia, dispute finance has long been associated with class actions and access to justice. However, a paradigm shift is underway as well-heeled corporates begin to recognise the broader applications of dispute finance, particularly how it can be used as a sophisticated corporate finance and risk management tool.

Omni Bridgeway has been adding value to corporate transactions in other markets around the globe and is leading this mindset change in Australia. There has been a noticeable increase in corporates and their advisors recognising the advantages associated with dispute finance, including its role in valuing, monetising and de-risking litigation assets. In this way, savvy corporates are able to gain an edge in a number of situations, including M&A transactions, capital raising and refinancing scenarios, and the setting of accurate provisions.

This blog outlines some of the ways in which dispute finance can be utilised by Australian corporates to:

  • fairly assess, value, finance, monetise and/or de-risk complex litigious situations
  • reduce complex litigation to an actionable net present value number or range that can be applied in a number of scenarios
  • improve cash flow and bring value onto the balance sheet
  • access subject matter experts and specialists in a range of relevant fields

Viewing dispute finance through a different lens

Omni Bridgeway operates across global markets, where corporates are actively using dispute finance as a sophisticated corporate finance and risk management tool. This approach is driven by key features that distinguish dispute finance from conventional financing methods, uniquely supporting corporations aiming to unlock value and manage risk effectively.

  1. Treating disputes as a unique asset class: Traditionally, disputes have been viewed by corporates and their lenders as burdensome liabilities and a drag on P&L. However, dispute finance flips this narrative by treating disputes as a distinct asset class with inherent value capable of securing meaningful investment. By adopting this perspective and working with us, corporates can fairly assess, value, finance, monetise and/or de-risk their litigation assets with precision and sophistication, unlocking new avenues for enhancing transaction value and driving strategic growth.
  2. Non-recourse risk management: One of the most compelling features of dispute finance is its non-recourse nature, which provides corporates with partial or full coverage for litigation costs and downside risk without exposing them to financial liability in the event of a negative outcome. In a loss scenario, Omni Bridgeway bears the cost, including any adverse cost exposure. This enables corporates to pursue their legal rights without fear of adverse financial consequences, effectively managing stakeholder interests (including potential lenders or investors).
  3. Delivering balance sheet benefits: Due to its non-recourse nature, and the fact that financing is secured against the contingent assignment of claim proceeds, dispute finance offers corporates the unique opportunity to access funding without incurring corresponding liabilities on their balance sheets. This enables corporates to bring forward the contingent value of their disputes, either through funding of the dispute or monetisation, without any balance sheet liability. Working capital advances, which are free to use to support business needs, can enhance cash flow and profitability without adding debt to financial statements. This not only optimises financial performance but also strengthens corporates' abilities to pursue growth opportunities.
  4. Intelligent capital and non-financial benefits: Beyond financial support, dispute finance provides corporates with access to subject matter experts in numerous legal sectors, as well as specialists in valuation of complex disputes, asset-tracing and multi-jurisdictional enforcement. By leveraging these resources, corporates can navigate complex legal landscapes with clarity and efficiency, maximising the value of their litigation assets and achieving optimal outcomes. Further, by having a litigation funder assess and back a piece of litigation, impactful messaging can be sent to stakeholders (including potential lenders or investors) as well as opponents.

In embracing these four unique features, we are seeing the mindset of Australian corporates shift towards unlocking hidden value in their litigation assets. Further, as Australian corporates increasingly recognise the strategic importance of partnering with experienced litigation funders, the role of dispute finance in corporate transactions is expanding, driving innovation and delivering tangible benefits. One example of the way in which Omni Bridgeway is working with corporates to add value to corporate transactions is through its valuation services.

Omni Bridgeway’s Valuation Services

Omni Bridgeway uses a specialised valuation methodology to assess the contingent value in all of its litigation investments, addressing and balancing the many complex variables which may impact on the outcome of a dispute. Corporates working with Omni Bridgeway have increasingly shown interest in this unique valuation approach, which can inform, not only Omni Bridgeway’s investment decisions, but important considerations around settlement, case economics, risk, strategy and procedure. It can also be used to manage stakeholders (including creditors and shareholders), by providing insights into the risk-weighted benefits of advancing (or continuing to advance) a dispute.

In response to demand, Omni Bridgeway is increasingly providing its in-house risk-assessment and valuation services to corporates, both in conjunction with use of its funding and monetisation services, and as a standalone valuation service, for use in relation to both claims and defences.

Omni Bridgeway's valuation methodology is an innovative tool that reduces complex litigation into a single, actionable number or range. Unlike claim size or settlement range estimates contained within traditional legal advice, the figure generated through our methodology is the net present value (NPV) of the future loss-adjusted, probability-weighted cash flows for the likely outcome scenarios (including loss) of a dispute.

This NPV is the result of a comprehensive risk assessment and valuation process which considers various factors, including the expected monetary outcomes of the litigation, the likelihood of success, potential costs, duration to resolution, and the time value of money. This holistic approach provides a nuanced understanding of project value in terms which are familiar to sophisticated corporates, their boards and their financial advisers, enabling informed decision-making, strategic planning and negotiating leverage.

The service can be tailored to suit the particular needs of the corporate or the complexity of the litigation being valued. However, the process broadly follows the following format:

  1. First, documentation relevant to the actual or potential litigation in question is obtained from the corporate or its lawyers. In the event that little or no documentation exists, Omni Bridgeway can leverage its extensive industry contacts to obtain an opinion from lawyers or experts with relevant subject-matter expertise, or otherwise work with professionals trusted by the corporate.
  2. Secondly, this information is subjected to a rigorous due diligence process undertaken by Omni Bridgeway’s top-tier in-house team. This diligence involves an assessment of liability, quantum, recoverability, and other critical factors to form a view as to prospects of success. Depending on the needs of the corporate, an additional layer of rigour may be employed by subjecting the matter to the scrutiny of Omni Bridgeway’s Investment Committee, comprised of eminent legal practitioners, retired judiciary, commercial arbitrators, damages specialists and investment specialists.
  3. Thirdly, a probabilistic scenario analysis is undertaken based on the available information. This analysis maps out the full range of potential outcome scenarios based on a number of considerations including different durations, possible quantum theories (adjusted for recoverability considerations), loss risk, interest accruing on claim amounts, and possible enforcement requirements. Expected cash outflows and inflows, which are derived from observable data inputs, are then attributed to each scenario.
  4. Finally, the above data feeds into a sophisticated probability-weighted cash flow analysis, which takes the total weighted cashflow (based on the aggregate probability of each cash flow arising), and subjects this to a 12% discount rate (based on the weighted average cost of capital for the legal finance asset class). The result is a risk-adjusted NPV figure or range—the total value of the litigation.

Once the NPV of the litigation is known, it can be utilised by corporates in a number of ways across various scenarios. This includes negotiations, settlements, provisions, and insurance discussions, as well as developing strategies and exploring funding, monetisation, and de-risking options. Some specific examples include:

  • On the buy-side of a M&A transaction, due diligence may uncover that a target company is defending significant ongoing litigation. In such a scenario, the buyer may wish to negotiate an indemnity in respect of that liability, a reduced sale price or, in the context of an auction process, make a competitive bid without overpaying. Here, Omni Bridgeway can effectively act as an independent third-party valuer, and the NPV reached can be used as a bargaining tool and to inform those negotiations.
  • In a capital raising or refinancing scenario, a corporate with a strong claim against another entity may require urgent access to capital. However, if that claim will not be realised for some time, potential investors or lenders may view it as a significant drag on P&L. Further, they may place an overemphasis on the downside risk. By subjecting the claim to the valuation process, a more robust understanding of the likely outcome can be obtained, making the corporate look more attractive to interested parties. That informed valuation may also open discussions around funding, risk-mitigation and/or monetisation of the underlying asset.
  • A publicly listed entity involved in a class action in which there is a real risk of losing may need to set aside funds to ensure any future adverse judgment can be met. A comprehensive valuation of the litigation undertaken by Omni Bridgeway’s class action specialists can act as either a standalone assessment, or as a sense-check of the lawyers’ advice, to help the company’s General Counsel and management recommend an accurate provision or engage with insurers on an informed basis.

The list provided above offers just a glimpse of the myriad of ways in which the Service can enhance corporate decision-making. As its adoption grows in Australia, we see its practical applications continuing to broaden. By reducing complex litigation into a single NPV via Omni Bridgeway’s multi-disciplinary platform, corporates are better equipped for informed decision-making, strategic planning and negotiating.

Looking forward

As the landscape of dispute finance evolves in Australia, we are witnessing a steady shift in the mindset of corporate entities. Increasingly, we are approached by corporates seeking assistance in leveraging dispute finance beyond its traditional boundaries in order to value, monetise and de-risk their litigation assets. This trend signifies a growing recognition of the broader applications of dispute finance in corporate transactions, signalling a positive step towards unlocking its full potential.

Looking ahead, we anticipate that this shift in perspective will gain momentum as Australian corporates become more familiar with the numerous benefits offered by dispute finance. With the aid of tools such as Omni Bridgeway's in-house risk-assessment and valuation services, corporates can gain an edge in various scenarios, including M&A transactions, capital raising and refinancing endeavours, and in the setting of accurate provisions. By harnessing the insights provided by Omni Bridgeway, corporates can navigate legal complexities with clarity and confidence, ultimately driving strategic growth and maximizing transaction value.

For more information on how we can add value to a corporate or deal you are associated with, please do not hesitate to contact us.