Trinity Term · MMXXVI · 7 min
Duration-Banded Return Floors
Four bands, a minimum multiple and a minimum percentage in each, and the reason the funder prices against the band rather than the forecast.
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By Jonathan Adeyemi, Head of Underwriting.
A litigation matter is not a bond. It has no coupon, no maturity, and no covenant that compels the borrower to pay on a schedule. What it has, instead, is a duration that no one can promise and a payoff that no one can guarantee. The instrument that funds it must, nevertheless, be priced. The Duration-Banded Return Floor is the mechanism by which HLC translates the two variables the funder cannot control, time and outcome, into a single discipline the funder can.
The four bands
Every deployment falls into one of four duration bands, assigned at underwriting and recalibrated at each semi-annual review. Each band carries a minimum multiple on invested capital (MOIC) and a minimum share of net recoveries. Whichever produces the greater return at resolution is the number HLC is paid; whichever is smaller is the floor that the deployment must clear to be approved in the first place.
- Zero to eighteen months. Minimum 2.5x on invested capital, or forty-five per cent of net recoveries. Reserved for matters with a scheduled hearing, a pending motion likely to be dispositive, or a settlement window already opened by the respondent.
- Nineteen to thirty-six months. Minimum 3.0x, or forty per cent of net recoveries. The standard band for commercial arbitration through award, and for complex commercial litigation through summary judgment or trial.
- Thirty-seven to sixty months. Minimum 3.5x, or thirty-five per cent of net recoveries. Matters with a plausible appellate tail, or awards expected to require enforcement litigation in a second forum.
- Sixty months and beyond. Minimum 4.0x, or thirty per cent of net recoveries. Sovereign or sovereign-adjacent respondents, matters with structural enforcement resistance, or claims that will pass through more than one appellate layer.
Why the floor is duration-banded, not fixed
A single MOIC across all matters would misprice both ends of the book. A twelve-month resolution at 4.0x is a windfall that no serious claimant would accept; a sixty-month resolution at 2.5x is a loss on any risk-adjusted basis, because the capital could have been deployed twice over in the interim. The bands correct for the time value of the deployment. They also correct for the compounding risk of duration itself: every additional year introduces a further chance of setback, of adverse ruling, of counsel departure, of respondent restructuring. The multiple must widen to compensate for the widening distribution of outcomes.
The percentage floor exists alongside the multiple for a different reason. In a matter that resolves at a fraction of the modelled damages, a multiple-only structure can become oppressive to the claimant, taking a disproportionate share of a smaller pie. The percentage floor caps that arithmetic. In a matter that resolves at or above the model, the multiple governs. The greater-of construction aligns HLC with the claimant on the upside and protects the claimant on the downside without softening the underwriting.
How the band is assigned
The Investment Committee sets the band using three readings. First, the procedural posture: a matter one motion away from dispositive resolution belongs in a different band from one still in pleadings. Second, the Enforcement Score: a claim against a sovereign, however meritorious, cannot credibly be priced in the eighteen-month band regardless of the tribunal's calendar. Third, the record: a documentary case with a small witness list resolves faster, in the aggregate, than a case that turns on credibility findings and expert battles.
The band is not a prediction. It is a floor. A matter assigned to the nineteen-to-thirty-six month band may resolve in twelve months or in forty; the pricing discipline holds either way, because the multiple was set against the band, not against a point estimate. That is the point of banding rather than forecasting: the underwriting does not depend on being right about duration, only on being disciplined about it.
Recalibration
A matter migrates between bands during its life. A case that settles a dispositive motion favourably in month fourteen may compress from Band Two to Band One; the multiple does not change (the term sheet is fixed at commitment), but the Committee's view of expected return rises, and the matter is reclassified for portfolio reporting. A case that suffers a scheduling order pushing trial by two years migrates upward, and any follow-on capital call is priced against the new band. The bands govern new capital; they do not retroactively reprice deployed capital.
The discipline behind the bands
A funder that prices every matter at the same multiple is not underwriting; it is quoting a rack rate. A funder that prices bespoke to each matter without banding is underwriting each deal but not each book, and the book is what pays returns. The Duration-Banded Return Floor is the instrument by which HLC underwrites both. It refuses the pretence that duration can be predicted, and it refuses the pretence that duration does not matter. It says, instead: we do not know when this will resolve, but we know what the deployment must return for each band of when, and we will not commit capital that fails to clear the floor for the band the matter belongs to.
❦
J. Adeyemi
Jonathan Adeyemi, Head of Underwriting.
A litigation matter is not a bond. It has no coupon, no maturity, and no covenant that compels the borrower to pay on a schedule. What it has, instead, is a duration that no one can promise and a payoff that no one can guarantee. The instrument that funds it must, nevertheless, be priced. The Duration-Banded Return Floor is the mechanism by which HLC translates the two variables the funder cannot control, time and outcome, into a single discipline the funder can.
The four bands
Every deployment falls into one of four duration bands, assigned at underwriting and recalibrated at each semi-annual review. Each band carries a minimum multiple on invested capital (MOIC) and a minimum share of net recoveries. Whichever produces the greater return at resolution is the number HLC is paid; whichever is smaller is the floor that the deployment must clear to be approved in the first place.
Why the floor is duration-banded, not fixed
A single MOIC across all matters would misprice both ends of the book. A twelve-month resolution at 4.0x is a windfall that no serious claimant would accept; a sixty-month resolution at 2.5x is a loss on any risk-adjusted basis, because the capital could have been deployed twice over in the interim. The bands correct for the time value of the deployment. They also correct for the compounding risk of duration itself: every additional year introduces a further chance of setback, of adverse ruling, of counsel departure, of respondent restructuring. The multiple must widen to compensate for the widening distribution of outcomes.
The percentage floor exists alongside the multiple for a different reason. In a matter that resolves at a fraction of the modelled damages, a multiple-only structure can become oppressive to the claimant, taking a disproportionate share of a smaller pie. The percentage floor caps that arithmetic. In a matter that resolves at or above the model, the multiple governs. The greater-of construction aligns HLC with the claimant on the upside and protects the claimant on the downside without softening the underwriting.
How the band is assigned
The Investment Committee sets the band using three readings. First, the procedural posture: a matter one motion away from dispositive resolution belongs in a different band from one still in pleadings. Second, the Enforcement Score: a claim against a sovereign, however meritorious, cannot credibly be priced in the eighteen-month band regardless of the tribunal's calendar. Third, the record: a documentary case with a small witness list resolves faster, in the aggregate, than a case that turns on credibility findings and expert battles.
The band is not a prediction. It is a floor. A matter assigned to the nineteen-to-thirty-six month band may resolve in twelve months or in forty; the pricing discipline holds either way, because the multiple was set against the band, not against a point estimate. That is the point of banding rather than forecasting: the underwriting does not depend on being right about duration, only on being disciplined about it.
Recalibration
A matter migrates between bands during its life. A case that settles a dispositive motion favourably in month fourteen may compress from Band Two to Band One; the multiple does not change (the term sheet is fixed at commitment), but the Committee's view of expected return rises, and the matter is reclassified for portfolio reporting. A case that suffers a scheduling order pushing trial by two years migrates upward, and any follow-on capital call is priced against the new band. The bands govern new capital; they do not retroactively reprice deployed capital.
The discipline behind the bands
A funder that prices every matter at the same multiple is not underwriting; it is quoting a rack rate. A funder that prices bespoke to each matter without banding is underwriting each deal but not each book, and the book is what pays returns. The Duration-Banded Return Floor is the instrument by which HLC underwrites both. It refuses the pretence that duration can be predicted, and it refuses the pretence that duration does not matter. It says, instead: we do not know when this will resolve, but we know what the deployment must return for each band of when, and we will not commit capital that fails to clear the floor for the band the matter belongs to.