It’s a news story that probably went unnoticed by most readers of The Telegraph, but City of London Group’s sale of litigation funder Therium, long expected by those in the market, is a notable transaction for the sector, not least because it received coverage in a national broadsheet.

So why did COLG sell?

COLG and Therium were always rather unusual bedfellows. Funding litigation is an expensive business and you need significant capital reserves to build up a diversified portfolio of cases that allow you to manage risk and absorb losses. Being a public company, constantly under scrutiny to deliver earnings, makes it difficult to invest capital for the long term, especially when your share price is under significant pressure (COLG is currently trading at about 25p versus a high a few years ago of 95p). It, therefore, makes sense that COLG is putting all its focus now on its lending businesses – outlaying capital and receiving a regular income is something the City understands very well indeed.

Litigation funding is also a unique asset class. It is not correlated to the public markets, making it an excellent counter-cyclical play in a portfolio, but it does require a lot of patience while claims come to fruition and being comfortable with the fact that cases do lose and when they lose you get wiped out (it’s this last point that some investors, even with a higher tolerance to risk, struggle to get their heads around). Perhaps this is another reason that COLG felt disposing of Therium made sense? Litigation funding and lending are very different businesses requiring two distinct investment approaches.

Who is the purchaser?

It hasn’t been disclosed thus far. The most likely candidate would be an existing funder, looking to acquire claims more cheaply and quickly than sourcing them directly (analogous to a secondary in a private equity context). Whomever the purchaser turns out to be – and we may never know – it is encouraging that there is a market for portfolios of claims being sold and is more evidence that the sector is beginning to mature. Of course, there are numerous transactions like this occurring relatively frequently nowadays, but since they are between private parties they receive no publicity.

Wider implications

When the Association of Litigation Funders introduced minimum capital requirements a few years ago, the number of funders more than halved overnight. What we are seeing now is a slower, but continuing rationalisation of the market where only the biggest and most robust funders will survive.

If you don’t have deep enough pockets to build a viable portfolio of cases, or if you are under pressure to deliver consistent levels of earnings in the short term, it is challenging to be a successful litigation funding business and we are likely to see fewer, but bigger market participants in the future together with an uptick in M&A activity as the smaller players opt to be acquired by them.