How AxiaFunder Now Blunts Investors’ Key Risk

You'd think that learning from mistakes and improving would be a given for those who are finding and offering investments to you, but it really isn't.

Not all the providers 4thWay covers manage to learn from their past mistakes.

But I have here an example of a provider called AxiaFunder that is well and truly learning from the past. And it continues to implement a variety of changes to minimise the risk further.

For a brief explanation of AxiaFunder: people using its online platform do so to fund legal cases that are being brought by law firms that partner with AxiaFunder. As you fund the cases, you take a cut of the returns when your claimants win. The goal is to achieve high, double-digit returns on as many cases as possible, with a target annualised return greater than 20%.

At present, AxiaFunder and its partners mostly batch dozens of small housing-disrepair claims. You fund them all at the same time to instantly spread the risk.

The mistake it made led to half a million pounds of losses in housing-disrepair claims, as one of its law-firm partners collapsed, having gone hell-bent for growth that it couldn't sustain.

By the time of its collapse, AxiaFunder had already made changes that would likely have spotted and prevented that particular loss in future partnerships.

But AxiaFunder's CEO felt that it should previously have emphasised that particular risk more before people put their money in. He therefore decided to repay that hit, so that no-one funding that law firm's cases lost money.

Without AxiaFunder taking the hit, it would have reduced overall annual returns on resolved housing-disrepair claims by around 10 percentage points. That hit, plus the lack of gains on the collapsed firm’s claims, would very substantially dent the returns otherwise enjoyed to date of 21.50%.

You can read more about what happened in AxiaFunder To Cover £500,000 In Losses, published in July 2024. It's best to start there, because that same page will also tell you about substantial changes AxiaFunder had already made to spot and minimise similar incidents in the future, as well as new changes it had made in the immediate aftermath.

But AxiaFunder had promised further improvements to lower risks. They weren't kidding about that. Here's an update on what additional steps they have taken since then.

A bigger team with more training and experience that's relevant to assessing and monitoring law firms

AxiaFunder* now has a senior equity research specialist, which means someone who can assess the value and prospects of a company. In this case, it means assessing the law firms that AxiaFunder is considering partnering with or already partners with.

That specialist is qualified as a chartered financial analyst, just like AxiaFunder's CEO. The two of them designed the structure and framework of what is needed to assess and monitor the law firms.

Since the law firm went bust, AxiaFunder has added four more full-time people to the team. Three team members are studying to qualify as chartered financial analysts.

Better data from the law firms

Small law firms aren't necessarily the best at accounting. That not only makes them harder to assess, due to their accounts not being as clear or useful. It also means the law firms themselves can be at greater risk of making dubious or risky business decisions.

For AxiaFunder, over the past 18 months, it's been a lot of work with the finance directors, accountants and senior managers of the law firms to get meaningful monthly accounts from all of them. They now contain the information that AxiaFunder needs.

It's a bit technical, but, in short, it has switched the numbers so that it is able to answer these questions:

1. What would the law firm's cash receipts and costs look like each month if AxiaFunder stopped funding them?
2. How much cash does the law firm invest into new claims each month?
3. How much cash does the law firm generate from its existing book of business and is that enough to cover their fixed costs?

AxiaFunder also now looks at the economics of every single settled housing disrepair claim each month for every law firm, even though it's approaching 200 per month. The point is to ensure that each law firm itself is making money every time they settle a claim.

AxiaFunder shares anonymised data on that analysis with all the law firms to enable them to become more efficient.

On top of that, every month AxiaFunder* goes through the law firms' bank statements line-by-line to look for anomalies.

AxiaFunder continues to speed up its monitoring of ongoing cases

AxiaFunder needs to individually keep track of around 5,000 ongoing housing-disrepair claims, but it's still able to do this every two to three months.

Soon, it will be able to do so once a month or even potentially weekly.

This doesn't just have monitoring benefits but can help spot ways to improve efficiency, get claims settled faster, or give AxiaFunder the opportunity to insist that a law firm swaps non-performing cases with good ones – which the law firms have to do for free.

Weekly meetings

AxiaFunder* has weekly video calls with each firm to go through the quality of the cases in progress, and to discuss items and trends in their monthly accounts.

It also follows up any anomalies found in the bank statements with the managing partner.

Private investigator for new potential partners

Before AxiaFunder funds cases through a new law firm, it now engages a private investigator to check out their backgrounds.

It also carefully asks around its network to try to get as much relevant information as possible, e.g. about any shadow directors, potential conflicts of interest and so on.

We will probably never know how much those two steps reduce risk, if at all, but it's good to know AxiaFunder does those checks.

Controls that prevent law firms paying too much to their top people

Through a combination of the accounts – especially seeing the cash the law firm is generating – and through regular contact with managing partners, AxiaFunder believes it “typically” has a good understanding of how each law firm's non-AxiaFunder cases are performing.

The reason that is important is because, if the law firms are taking too many risks with other cases, or not processing them correctly, the firm could fail and thereby create substantial risks for everyone. That's even if AxiaFunder has ensured that its own cases are being very well looked after.

AxiaFunder doesn't have direct visibility of non-AxiaFunder cases, however, for reasons including client confidentiality.

To try and understand these potentially hidden risks, AxiaFunder* increasingly now focuses on each law firm’s staff costs. This includes how much the partners and senior executives get paid, including any dividends (which are additional cash payments from annual profits).

Beyond that, it now has covenants (legally binding promises) from all law firms limiting how much cash can be paid to the senior team.

Slightly tighter security in your favour

In AxiaFunder To Cover £500,000 In Losses, I explained already that AxiaFunder now has legal charges on all law firms, but I need to explain those better than I did in that piece and update you on a minor change.

You use legal charges to make it easier to recover amounts owed to you. Rather like how a bank takes a charge over your own home, so that it ensures it is repaid if it has to repossess and sell your property. It will get its money back, plus interest, before you get anything from the sale.

The charges AxiaFunder uses are not as solid as that, although they are still useful.

AxiaFunder uses fixed-and-floating legal charges with you in first rank.

What this means is that AxiaFunder cases at the law firm are “fixed” assets that are specifically defined and have a measurable value, even if they are still in progress. If the law firm goes under, another law firm would likely take over running the cases. Those funding their claims through AxiaFunder would get their money back and the rewards of their investments before any other person or company that the law firm owed money to.

On top of that, you will also get paid first from any “floating” assets, which means anything else of value the company has left, whether it's cash in its bank account, sales of small items of equipment or anything else.

AxiaFunder* has slightly improved these charges by attaching them to debentures. That is basically more of a formal loan structure. Overall, this debenture with a fixed-and-floating charge will typically help you to recover more of your money, but normally it still doesn't recover everything. It's just not as solid as a first-ranking charge on a residential property.

Restrictions on further borrowing

Charges within debentures turn all the law firms’ assets into “security” on your behalf.

“The law firms are not allowed to offer security to any other person or business without AxiaFunder’s permission.

While, they are allowed to take on unsecured lending without permission, AxiaFunder is at the top of the queue, ahead of the law firms’ other lenders.

This means that if anyone else is owed money by the law firm, they will likely always be behind you in the queue.

It also means AxiaFunder has more ability to discourage law firms from borrowing too much and thereby creating greater risks that they collapse under the weight of their debts.

Small firms with sensible growth trajectories that are at least partly controlled by AxiaFunder

AxiaFunder has learnt to work with small law firms that it can effectively monitor – and even maintain a fair bit of control over through its contracts with them. This is opposed to bigger law firms that are relying on other funders that are controlling the firm.

Each of AxiaFunder’s law firm partners has routine, constant monthly costs (such as support staff and office rent) below £300,000, so they are clearly not big businesses. I believe this makes them substantially smaller than the largest 200 law firms.

AxiaFunder strongly prefers law firms that grow slowly and steadily. In general, growth is negatively correlated with risks, with high growth rates a real red flag.

AxiaFunder* regularly restricts the funding it will provide law firms if it sees they're growing too quickly.

The final contingencies

If all else fails, AxiaFunder* is currently in the process of setting up a contingency plan whereby, if needed, it will have an administrator available who can quickly step in if needed to work on moving claims from a struggling law firm to a group of other law firms with pre-agreed economics. With some luck it will succeed, with this plan ready and on standby later this year.

AxiaFunder estimates – from the very beginning – that there is a risk of around 5% per annum that its law firms could go under and that those funding the still-outstanding cases could take a 25% hit.

On that estimate at least, if a law firm failed you would likely have a negative return for that year but most of the money you put in would still be intact. The impact on returns could be smaller than you'd probably expect if you're spreading your money across a lot of cases and all of AxiaFunder's law firms.

AxiaFunder says that, if no law firms go under, the returns on housing-disrepair claims will come in just a little higher – approximately 2% – than the figures it projects to you at the start.

Visit AxiaFunder*.

Read the AxiaFunder Review.

 

Pages linked to above

In AxiaFunder To Cover £500,000 In Losses.