Getting started: Private equity's guide to impact litigation

Scaling strategic litigation requires collaboration between public and private capital.This interview is designed for funds looking to enter the impact litigation space, offering clarity on key considerations.

Private equity is increasingly viewing impact litigation as a sustainable asset class, with the potential for both strong financial returns and measurable social and environmental outcomes. Capricorn Investment Group's investment in Aristata Capital , a fund dedicated to impact claims, highlights the opportunities for growth and impact in this emerging market.

In this transcript, you’ll find essential insights into the metrics PE firms use to evaluate impact litigation—from financial returns to social impact—as well as strategies to manage risk. For funds seeking to make informed moves in this space, understanding these frameworks is crucial.

To dive deeper into these themes, I interviewed Eric Techel, partner at Capricorn Investment Group, who led the way in recognizing impact litigation as a sustainable asset class.

The consolidated transcript of this interview is attached just below:

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1. Could you please introduce yourself and your fund?

I've been a partner at Capricorn Investment Group for 17 years. Capricorn is an investment firm offering advisory services and fund management, with a specialized focus on sustainable impact investment strategies.

The Sustainable Investors Fund, created in 2020 and finalized in 2021, was designed to be a strategic long-term investor providing growth capital and value-added services to scale mission-driven asset management companies. The fund focuses on key areas, including climate solutions, inclusive capitalism, health access and equity, and sustainable markets.

What particularly stands out is our investment in Aristata Capital, which is fully focused on impact litigation, a term with many definitions and interpretations.

2. How do you define impact investing and impact litigation ?

• Impact investing: Defining impact is not easy as it can take on many forms. For the Sustainable Investors Fund (SIF), we focus on what can produce systemic change in our core areas: climate solutions, inclusive capitalism, health access and equity, and sustainable markets. These areas address some of humanity’s biggest challenges, and they are interconnected—requiring multiple solutions to achieve systemic change.
• Impact litigation: Regarding impact litigation through an investment lens, which we encountered through Aristata, it refers to commercial claims that, when funded and resolved successfully, generate economic benefits for claimants to help them recover from harmful commercial activities and contribute to behavioral change on the part of the defendants. For example, if an oil spill causes quantifiable damage to a community, the company responsible often doesn't fully resolve the costs. In such cases, litigation finance supports the affected community, aids in damage repair, and aims for a fairer outcome for all parties involved.

3. How did you come across impact litigation as a sustainable investment? And how did Aristata and that scope of work fit your fund’s mission and objectives?

For the Sustainable Investors Fund (SIF), we seek early-stage managers with transformative strategies.We met Aristata's founding partners in London through a chance encounter and were immediately intrigued by their concept. The opportunity was large and exciting, with the potential for benefits beyond specific cases and towards altering behaviors of big companies.

• Impact litigation was a game-changer: Attracting private capital to address the justice gap had the potential for significant systemic change.
• Aristata aimed to be the first litigation fund dedicated to societal and environmental change while ensuring a commercial rate of return. Through litigation finance, they had the potential to: (1) level the playing field against large, well-resourced multinationals , (2) generate benefits beyond individual cases and potentially drive behavioral change in big companies.

4. It seems there are two key metrics for your fund: return on investment and potential impact. How do you define the success of this investment?

• Team: Trust and confidence in the team are crucial.
• Timeline: Litigation finance investments, like any other, take time to resolve, and the timeline can be uncertain. Currently, we're about two years into our investment, with the average case expected to last around 36 months, so it’s still early in our proof of concept.
• Impact theme: Each case is fundamentally different, so there isn't a single impact theme; instead, a broader perspective is needed.Capricorn has a long history of investing with a focus on climate change, which is typically our primary concern. However, in Aristata's case, we didn't want to limit the fund to one area—this is an impact litigation fund, not just a climate litigation fund.
• Aristata's active investments target a variety of impact outcomes, including: Indigenous rights, human rights, environmental damage from mining, oil spills, and human health.
• They successfully concluded several cases, such as: (1) Supporting low-wage workers in Australia. - (2) Addressing human rights abuses in a Southeast Asian community.
• Catalytic effect: Resolving the first case can have a catalytic effect on many others.

While we're excited about the progress, it's still early, and a comprehensive assessment of success can't yet be made as only a few cases have been resolved so far.

5. What were the key challenges your fund encountered when evaluating the decision to invest in this field? How do you mitigate the risks associated with this type of investment?

Impact or litigation finance is an emerging asset class that requires awareness: There is reduced awareness compared to private equity or venture capital, requiring more explanation to investors or portfolio managers on how this asset fits into their portfolios.

Advantages to this asset class:

• Shorter timeframes to resolve cases than typical venture seeding or even some semi-mature private equity opportunities.

Challenges faced:

• Aristata is a first-time fund, which means there was a lack of a proven track record and an operating budget. It’s easy to pass on opportunities with these additional risks.
• We were, however, compelled by their story and felt the need to dig deeper.

Mitigating risks and due diligence:

• Capricorn has a history of providing first-time capital to funds, so this wasn't new to us or the Sustainable Investors Fund.
• The process involved thorough due diligence, which included: (1)Reviewing the backgrounds of Aristata's team members. (2)Researching their previous work, cases, and interviewing character references. (3)Spending significant time with them to understand how they operate as individuals and as a team.
• Testing the model with them: We warehoused their initial cases, working directly between Capricorn and Aristata before the fund launched.This allowed us to observe the cases they selected, their diligence process from both a financial and impact perspective, and their overall underwriting process.

Seeing the model in action, both as an investment company and as observers of their investment committee, gave us confidence. While there will always be risks with a first-time fund, we felt comfortable that Aristata had the process and pipeline in place for a strong chance of success.

6.What advice would you give to other impact funds that are considering investing in these types of lawsuits but may be unsure of where to start or hesitant due to risk concerns? What metrics should they consider, and what steps should they take to mitigate risks effectively?

Impact litigation has a multiplier effect because a successful case not only generates immediate benefits for the claimants but also sets a precedent that can be scaled and replicated across industries and geographies, driving broader systemic change.

Impact litigation offers clear outcomes:

• When a claim is successful, Aristata can capture both primary and secondary impacts in detail. This allows the claim to be scaled or replicated across similar industries or geographies, creating a multiplier effect that is truly exciting.
• If a claim is unsuccessful, while the direct impact is less significant, it can still act as a wake-up call for businesses, signaling that changing damaging behaviors is better for their operations.
• This pushes the opposing side to invest time and resources to address their actions, making it clear that you can't simply litigate your way out of trouble indefinitely.

Every case matters even those unsuccessful:

• While every case should be appropriately underwritten for a successful outcome, even a loss can bring valuable awareness to the issues at hand.If a claim is unsuccessful, while the direct impact is less significant, it can still act as a wake-up call for businesses, signaling that changing damaging behaviors is better for their operations.

Litigation finance as a maturing asset class:

• The intersection of litigation finance with measurable impact outcomes is attracting more investors. As litigation finance matures, more capital is flowing in from private equity firms, hedge funds, and others active in legal assets.
• This increased capital flow will lead to greater opportunities in the impact litigation space, with the potential for outsized returns and impact.

Advice for other impact funds:

• Explore this asset class actively, as there is significant growth potential.
• The initial hesitation often comes from uncertainty, but impact litigation provides clear pathways to track both ROI and impact.
• Each case is unique, so understanding the nuances is key to effectively measuring outcomes and mitigating risk.

7. How can funds develop a model to predict potential ROI in cases and implement specific impact metrics to measure outcomes effectively?

Due diligence process for each underlying case:

• Having talented lawyers who understand the specific legal space is crucial.
• Financial controls must be prudent, ensuring the right amount of funding to keep the case going without offering a "blank check."

Financial returns:

• There needs to be a fair balance between profitability and addressing injustices.
• The approach is not to take an excessive share (like 50%) of any settlement; instead, Aristata aims for a lower share than industry standards to maintain fair profit sharing, while still achieving market-attractive returns.

Impact metrics:

• The key is to build a track record and history in the field.
• As the litigation finance industry matures, the lawsuits will also mature, producing more measurable impact and results.
• Over time, this will help establish both qualitative and quantitative impact metrics, as well as provide greater certainty on returns—encouraging more impact funds to consider litigation finance as a viable asset class.

8. There has been a recent rise in climate litigation against corporations and governments. How do you foresee this field evolving in the coming years?

• The landscape is shifting, as seen in the insurance industry, which is radically changing how it prices climate-related risks.
• Climate issues demand justice, reform, and attention, and combined with the growth of the impact litigation finance space, the field is poised for significant growth over the next decade once more cases have been tested.?

9. Do you foresee the possibility of creating portfolios of claims to balance and mitigate risks? Specifically, could more financially viable claims offset the risks associated with non damage based claims?

Yes, I do believe there’s potential for this. It’s important to continue exploring both highly profitable cases and those that may not show immediate financial returns but address necessary change. However, finding the perfect balance is challenging; for a for-profit fund, it’s difficult to lead in areas without clear attractive returns. To address this, we need to catalyze more capital into the space and test cases alongside foundation capital.?

10. Any advice to give to funds interested in entering the space ??

• Need and interest align: There is both a need in this space and a growing interest on the investment side, which creates favorable conditions for change.Investors should be open to exploring and taking calculated financial risks.
• Catalytic change requires belief and calculated risks: To drive transformative change, it's essential to take informed risks and have a belief in the impact these investments can create.
• Supportive market forces: Market conditions are increasingly supportive of this type of investment, providing a foundation for those willing to take the leap.