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While the European Commission is seeing that it takes time to drum up interest on the demand side of the private enforcement market – reaching out to parties afflicted by cartels and informing them of their rights to damages – it seems the supply side of the market is forging ahead.
Hedge funds and institutional investors are already making hay on the lucrative market for distressed debt, where they cover short-term repayments against the longer-term gains from restructuring.
But while such markets become less attractive due to the economic cycle, hedge funds are scouting round for new “more exotic” financing possibilities, according to one investor. And private enforcement is seen as one embryonic area ripe for investment on similar terms.
Investors see potential in damages claims – as they have done before with debt or insurance claims – but witness corporations and law firms unable to exercise the full value of those claims. For the hedge funds, this represents a clear market opportunity.
At the same time, lawyers and companies are scouting around for ways to fund often costly actions which can take years to pursue due to slow access to evidence and the protracted navigation of civil law across member states.
MLex has learnt of various hedge funds approaching specialists in financing legal procedures in Germany and the UK, looking to co-fund private enforcement cases. Furthermore, private investors have declared their interest in firms like Cartel Damage Claims, seeing the potential of paying off a fraction of a claimant's potential gain early and then picking up the lion's share of the winnings on completion of a successful case.
Financiers of legal proceedings – such as Foris, Juragent, IM Litigation Funding, Prozess Garant – are seeing the market grow steadily although cases resulting from competition infringements remain only a negligible part of their business. Nevertheless, many see potential for growth in the coming years and have already been contacted by private investors.
While these opportunities may stem from law firms learning to navigate better the legislative landscape to bring claims, it is also a sign of a higher level of understanding of the sector among hedge funds, keen to profit from the evolving sector and steal an advantage on their competitors.
But development across Europe has been uneven as some jurisdictions remain more attractive than others for private enforcement. The complications of differences in civil litigation mean that there is often little appetite for such cases, even less so when some countries ban contingency fees or apply the 'loser pays' principle.
For example, while recent legislative changes have made the Netherlands a favourable jurisdiction for collective actions – playing host to existing and future actions against cartels in beer, electrical wholesale and hydrogen peroxide – funding through private equity remains exceptional and unwelcome.
“It is difficult to see a role in the Netherlands for hedge funds and other professional or private funders in the [Dutch] class action market, which are becoming more active in other parts of Europe. Such private funding of litigation is currently non-existent in the Netherlands and is unlikely to be welcomed,” stated law-firm Freshfields Bruckhaus Deringer in a recent report on third-party funding.
In other jurisdictions, such as Austria, the door is open for hedge funds to wade into the world of private enforcement but the distinct lack of money to be made in damages claims scares most of them off.
Nevertheless, Freshfields maintains it has witnessed an increase in hedge fund and private investor activity on the market, and although this has traditionally been a model applied to insolvency cases, it now appears that the economics are enticing for damages claims resulting from competition infringements.
“Funds are gearing up for new opportunities,” one private investor told MLex. “The mood-music is that these markets are developing and there are investors out there who believe they can price that risk better.”
Furthermore, the establishment of US firms such as the class action specialist Cohen, Milstein, Hausfeld and Toll in London has shown that there is growing interest in the development of this sector, both on the basis of the legal changes needed to bring a case and on the economic reasoning needed to make litigation viable.
The arrival of CMHT also highlights the longer-term potential for international co-operation on damages cases, meaning that claimants may be able to go through US channels to access evidence and documents which are otherwise unavailable in a European jurisdiction.
Although this may be some way off and may require a more profound cultural shift, it is certainly a sign that the market is not waiting for legislative measures – which could be a decade in the making – before snapping up the opportunities presented by the commission's antitrust cases. This is true both for lawyers thinking up innovate ways to bring claims and investors thinking up innovative ways to price risk.
With the market developing in different directions in different jurisdictions, all eyes will be on the commission's suggestions for private enforcement which will be presented in a white paper at the beginning of 2008. But by the time the EU's drawn-out regulatory process bears any fruit towards an endorsed model, a private enforcement 'market' – already waking up to the possibilities – could well be in full swing.
By Lewis Crofts