What investment is 17 times better than the ASX?
If you want to extract returns 17 times greater than you’re likely to receive from the ASX 200, then get into litigation funding.
That is the assessment of right leaning thinktank the Menzies Institute which has told a Parliamentary Committee that the returns available to investors in funded litigation “are, quite frankly, astonishing”.
“When benchmarked against other asset classes, litigation funders in Australia are generating ROIC returns around 17 times more than investors in ASX 200 stocks and more than 10 times the average global hedge fund and private equity performance,” the Institute said in a submission to the Joint Parliamentary Committee on Corporations and Financial Services.
The committee is reviewing legislation which would see litigation funding subject to regulation via an Australian Financial Services (AFS) License regime and Managed Investment Scheme (MIS) oversight.
The submission clearly lays blame for the unregulated nature of the litigation funding industry at the feet of the Australian Labor Party and notes that “in the year following the granting of the exemption for litigation funders, class action filings more than doubled” with the historically high levels being maintained ever since.
“At the same time, the percentage of class actions backed by litigation funders has steadily increased to the point where nearly three quarters of all class actions are now promoted by a litigation funder,” it said. “These developments have effectively converted what was intended to be a mechanism to allow groups of people to resolve their legal claims efficiently and cost effectively into an industry which is focused on delivering financial returns to investors in litigation.”
“As demonstrated in this report, the returns delivered to those investors exceed the returns available in nearly every other investment asset class in the world. This both undermines the credibility of the legal system and comes at the expense of the very people the class action procedure was intended to assist.
“The litigation funding industry is generating extraordinary profits for its investors – profits that are paid out of the compensation awarded to their clients, the class members,” the Menzies Institute said noting that in 2016, on average 59% of settlement proceeds went to class members whilst the average percentage paid out of these damages as a funding commission was just 15% with the balance going to the plaintiffs’ lawyers.
“By 2019, the average amount paid to plaintiffs had fallen to just 39% of the settlement proceeds, whilst commissions paid to litigation funders increased to 24% and legal fees to 37%.
“Nearly two thirds of the compensation intended for their clients is being taken by the promoters of class actions.”
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