Portfolio funding - litigation in the construction sector
Third party funding has been a part of the disputes landscape for many years, however there has been little evolution or innovation in the market. Traditional third party funding, where an investor funds or part-funds a client’s dispute for a return of any damages received, is not geared towards serving corporate clients, particularly those in the construction industry, or repeat business. Traditional funding is also focused on single distressed situations which is why the pricing can be so high.
To date, construction companies have often not engaged in litigation funding as it is too expensive and the process too lengthy and cumbersome. In short, no construction company could ever choose to agree to traditional single case funding terms if they could afford to pay their legal fees themselves. Alternatively, if the situation is distressed and the company has no choice but to accept the hugely expensive terms, even then funders often dislike the risks associated with construction disputes, particularly those relating to quantum, enforcement and collection.
Many successful construction businesses have books containing numerous disputes including litigation, arbitration and adjudication. Funding just a single case does not solve the entire problem that the business is wrestling with. Offering funding (at a rate of 300% or more) for only the very best case does not solve the overarching issue of financing the disputes book.
The key for the business to obtain value is by moving away from one-off cases and instead focusing on portfolios of disputes. The book can include a complete range of cases including bringing and defending claims, local and international court and arbitration matters and those cases where quantum or collection risk would prevent funding on a single case basis. This unlocks and uses the value of the ‘good’ cases to allow the other cases to be run or defended.
From the funder’s point of view their interest is spread and cross-collateralised across all of the disputes. This reduction in risk means that the pricing can come down to a level that a corporate could consider attractive, starting as low as 20% on a non-recourse basis.
Taking investment in these assets (disputes) has many benefits for a construction company. These include taking the risk off balance sheet and addressing all of their litigation financing issues, not just the best cases. This approach also allows the company’s litigation budget to be spent in other ways, which has a significant positive impact to the valuation of the business (by removing the litigation spend from the budget) and allows the business to monetise an amount of the book value, giving them the opportunity to book that revenue into their accounts when they want it.
There are key elements that are crucial when looking at a portfolio approach. The first is really understanding the problem and what the construction company is trying to achieve, is it the financing of ongoing or nascent cases, raising finance against their contingent assets or a combination of both?
Often, the initial approach is with one case, the most pressing issue, but the important question is, ‘what else have we/you got?’. The immediate case is not usually the real problem that needs solving, but is likely to be the most difficult and expensive to resolve. It is important to look at the complete book, or at least a part of it to build a portfolio. This may include working with the company to see what disputes they have, or could have – almost an asset generation process.
The last element is the realisation and understanding that the investment does not have to relate directly to the security. Because of this, there are no specific financial products, but instead bespoke finance agreements that are specific to the particular business and their situation.
The construction market to date has been mostly overlooked by traditional funders, particularly in jurisdictions such as the Middle East or Africa. However, it is a sector that is perfectly positioned for the portfolio asset finance approach.
Often the issue is not a question of liability, it is instead one of cashflow. Taking a contractor example, investing into a contractor allows them to deal with subcontractor claims (for example paying legal fees to defend, coming to a standstill agreement, or indeed paying/settling) and securing the investment against the claim(s) against the employers, or against separate claims. As liquidity is becoming more and more of an issue in the construction industry, the option to monetise a percentage of the total value of the book should not be overlooked.
Construction companies are likely to have many claims in many different jurisdictions which are not being run. Restricted budgets, costs of defending claims and general liquidity issues prevent cases being run and encourage settlements at an undervalue. A better understanding of the available litigation financing options could make a significant difference to a construction business operating in challenging times.
The involvement of external financing also allows a second level of due diligence on the cases, the rebuttal of vastly reduced settlement offers, and allows for good lawyers to be running all the cases, both to defend and also to realise monies owed. These elements are particularly relevant to the construction industry, as recent events have highlighted.
Matthew Denney is the Managing Director of Chancery Capital.
ReCreate project reuses concrete in new buildings
Reconciling the carbon conundrum in construction will not be a quick fix but researchers at Finland's Tampere University may have hit on a way of deconstructing concrete elements and reusing them in new buildings.
Its four-year ReCreate project, which has received €12.5 million of funding under the EU’s Horizon 2020 programme, involves universities and regional company clusters in Finland, Sweden, the Netherlands, and Germany. All the country clusters will carry out their own pilot projects where they deconstruct precast concrete elements intact and reuse them in a new building.
“By reusing concrete elements, we can save an enormous amount of energy and raw materials,” says Satu Huuhka, adjunct professor at the Faculty of Built Environment at Tampere University, who leads the ReCreate project. “We are specifically looking to reuse the concrete elements as a whole, not as a raw material for something new."
Researchers at the Faculty of Built Environment have been carrying out ground-breaking research into the circular economy in the construction sector for a decade.
Long-term research on renovation and the lifecycle engineering of structures provides a solid foundation for the development of quality assurance procedures that will ensure the safety and integrity of the reused elements. This time, the researchers are set to explore not only the technical implementation of the solutions but also the business perspective.
Huuhka acknowledges there are many unanswerered questions, from assessing structural integrity to building code requirements - and ultimately how to turn ReCreate into a viable business. "We must also consider the social aspects: does the process require new skills or new ways of working?” he adds.
Tampere University researchers will also bring to the project their specialist expertise in circular economy business models, building regulations and law, and occupational sociology. The Finnish country cluster comprises Tampere University, Skanska, demolition company Umacon, precast concrete company Consolis Parma, engineering and consultancy company Ramboll, architecture firm Liike Oy Arkkitehtistudio and the City of Tampere. The communications partner is the Croatia Green Building Council.
Buildings generate nearly 40% of GHG emissions and the rising pace of construction - up to 2 trillion square feet could be added by 2060 - means finding a sustainable concrete solution is essential.
Graphene concrete on firm foundations, CarbonCure accelerates growth and Nexii expands in US
Nationwide Engineering is claiming a world first today as it lays the world's first graphene concrete slab engineered for sustainability in a commercial setting. The new material is strengthened by around 30% compared to standard concrete and so significantly cutting material use.
It has partnered with the University of Manchester's Graphene Engineering Innovation Centre and structural engineers HBPW Consulting; graphene is an allotrope of carbon and the resulting mix with concrete produces a substance that area for area, is stronger than steel, it claims.
CarbonCure manufactures a technology for the concrete industry that introduces recycled CO₂ into fresh concrete to reduce its carbon footprint without compromising performance. It was named one of two winners in the US$20 million NRG COSIA Carbon XPRIZE and the money will be used to accelerate its mission of reducing 500 million tonnes of carbon emissions annually by 2030. Carbon Cure believes the use of CO2 in concrete is expected to become a US$400 billion market opportunity.
Nexii designs and manufactures high-performance buildings and green building products that are sustainable, cost-efficient and resilient in the face of climate change. It recently teamed up with actor and Pittsburgh native Michael Keaton, who will have an ownership stake and play an active role in Nexii’s upcoming manufacturing plant, which will be its second in the United States and sixth overall.