Private Equity Trend Alert: The Benefits of Partnering with a Funder

July 25, 2018

private-equity-trend-alert

For emerging companies in innovation hotspots, enforcing legal rights against competitors or other wrongdoers has traditionally been viewed as an unduly expensive and time-consuming endeavor and a drain on investor value.

But that traditional view is being challenged by highly skilled litigation funders like Bentham IMF. Litigation finance is increasingly helping private equity firms, venture capitalists, hedge funds, and other investors unlock further value of portfolio companies by turning claims into assets and optimizing their returns.

For the companies themselves, funders are reducing the risk of pursuing litigation and injecting capital to help product development and growth during high-stakes disputes.

A Startup Example

Consider this instance: A startup on the brink of releasing cutting-edge software and becoming a tech colossus discovers that another company is marketing a copycat product. Worse, the competitor’s founder is a former employee who clearly misappropriated the product’s underlying code from the startup.

A venture capital firm has invested in the startup, and it now realizes the only way it will ever see a worthwhile return on its investment is if the startup pursues trade secret litigation against the competitor. Even with a meritorious case, the VC has no appetite for tying up its capital in what is likely to be a grueling and expensive process.

The VC then refers the startup to a litigation funder. In return for providing the funder with a portion of a successful recovery, the startup is now able to hire the best possible counsel, defray risk, and remove litigation expenses from its financial statements. As part of the deal, the funder also has agreed to provide additional working capital that can be used to help the startup continue its growth.

The startup aggressively pursues the trade secrets case against the competitor, successfully settles its claims, and with the capital injected by the funder, launches its product on schedule—thus yielding a valuable return for itself and its investors.

A more detailed analysis exemplifying how this works with real-world numbers is explained in this case study.

Identifying Opportunities

Bentham’s funding is nonrecourse—meaning it only collects a return on its investment in the event of a successful recovery. Bentham employs a team of highly experienced litigation experts to analyze the merits of a case and determine its chance for success. It invests only in those claims that are likely to yield a substantial and positive recovery. While litigation can be unpredictable, this extensive due diligence process can help claimants significantly reduce their risks when considering whether to initiate important litigation.

For private equity, venture capital, and other investors, Bentham can identify opportunities to monetize a number of claims at companies, and it invests in portfolios of litigation to further reduce risk and maximize potential recoveries. Further, partnering with a funder like Bentham can transform litigation into a revenue generator and boost a company’s appeal with a potential buyer, or in the case of a startup on the verge of an IPO, with Wall Street investors.