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A Menu of Products for Investors and Lawyers (Series: Commercial Litigation Funding 101 2020)


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Litigation funding is an increasingly-popular tool for attorneys and clients to share the risk and reward of litigation with third-party investors, and for investors to capitalize on the uncorrelated returns generated by legal-driven revenue. However, the term "litigation-" or "legal-" funding actually encompasses a handful of products, which vary based on borrower profile, stage and sector of litigation, use of proceeds, and ultimately, cost of capital and risk-reward profile. This webinar examines three funding products -- case fundings, law firm loans, and portfolio fundings -- and aims to inform attorneys on best solutions for their firms and clients, and provide an overview for institutional investors looking to allocate capital to litigations.

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A Menu of Products for Investors and Lawyers (Series: Commercial Litigation Funding 101 2020)

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. 3 Thank You To Our Sponsor
  4. 4. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 5
  5. 5. Meet the Faculty MODERATOR: Jeremy Waitzman - Sugar Felsenthal Grais & Helsinger LLP PANELISTS: Dave Kerstein - Validity Finance LLC Christopher Freeman - Burford Capital Joel Cohen - Stout Jeffery Lula - GLS Capital, LLC 6
  6. 6. About This Webinar A Menu of Products for Investors and Lawyers Litigation funding is an increasingly-popular tool for attorneys and clients to share the risk and reward of litigation with third-party investors, and for investors to capitalize on the uncorrelated returns generated by legal-driven revenue. However, the term "litigation-" or "legal-" funding actually encompasses a handful of products, which vary based on borrower profile, stage and sector of litigation, use of proceeds, and ultimately, cost of capital and risk- reward profile. This webinar examines three funding products -- case fundings, law firm loans, and portfolio fundings -- and aims to inform attorneys on best solutions for their firms and clients, and provide an overview for institutional investors looking to allocate capital to litigations. 7
  7. 7. About This Series Commercial Litigation Funding 101 This webinar series discusses advanced topics in the field of litigation funding. Once a fledgling industry predominantly used in the Commonwealth nations, litigation funding has over the past ten years becomes a well-accepted and prevalent practice in the United States. As the industry has evolved, so too have the menu of available products, strategic decisions made by funders and practitioners, and types of investors. This three-part series is geared towards educating attorneys and clients on legal/ethical, strategic, and business decisions when considering litigation funding, and investors seeking to learn about an increasingly mainstream asset class. Panelists include preeminent experts in the field of litigation funding, including academics who have written on the topic, investment managers at preeminent litigation funders, litigators who have used funding products, and independent litigation funding advisors. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 8
  8. 8. Episodes in this Series #1: An Introduction to a New Yet Old Funding Alternative Premiere date: 5/12/20 #2: A Menu of Products for Investors and Lawyers Premiere date: 6/9/20 #3: Three Case Studies Premiere date: 7/14/20 9
  9. 9. Episode #2 A Menu of Products for Investors and Lawyers 10
  10. 10. Litigation Funding: A Broad Definition Litigation or legal funding is the “funding of litigation activities by entities other than the parties themselves, their counsel, or other entities with a pre-existing contractual relationship with one of the parties.”  Source: American Bar Association Commission on Ethics 20/20, “White Paper on Alternative Litigation Finance” 11
  11. 11. How firms and companies use legal finance Law firms • Maintain hourly clients and expand into new areas • Manage risk on large-dollar contingency or alternative fee matters • Use going-forward portfolios to offer faster, more flexible financing solutions to prospective clients • Leverage financing as a marketing and new business tool In-house legal teams • Reduce cost and risk of litigation • Monetize litigation assets at beginning of a case, or after judgment or appeal • Secure corporate debt facilities • Finance, sell, or collect uncollected judgments • Secure litigation-related insurance and risk solutions • Trace assets and enforce judgments against litigation debtors 74%Three quarters of lawyers whose firms have not used litigation finance expect to do so in the next two years 12
  12. 12. Typical Litigation Funding “Parties” • Plaintiffs • Attorneys and Law Firms • Funders • Investors 13
  13. 13. Litigation Funding: Segmentation • Consumer vs. Commercial Funding • Early vs. Late Stage Funding • Domestic vs. International Funding • Funder Structures • Lawyer & Law Firm Characteristics 14
  14. 14. Metrics for Analysis • Risk • Use of Proceeds • Alignment • Costs of Capital • Funded Party Profile 15
  15. 15. Metrics for Analysis: Risk • “Risk” is the probability of occurrence of losses relative to the expected return on any particular investment  Litigation is an inherently risky underlying investment  Risk varies dramatically based on type of litigation -- e.g., contract, intellectual property, antitrust  Litigation risk is not constant, but rather fluctuates based on litigation developments  Funded parties may own diversified litigation risk, depending on the circumstances  Risk also includes headline and regulatory risk 16
  16. 16. Metrics for Analysis: Use of Proceeds • “Use of Proceeds” -- for purposes of this presentation -- will refer to how the funded party (the plaintiff or the attorney) intends to use the funding  Proceeds may be used for direct litigation costs, i.e., attorneys’ fees and/or costs  “Hard costs” includes discovery costs, experts’ fees, filing costs; basically anything other than attorneys’ fees  Funding arrangements may be used for non-litigation needs, such as operational needs of plaintiff or so that plaintiff can recognize revenue  In other situations, attorneys may seek funding for use across firm-wide activity, not just one specific litigation 17
  17. 17. Metrics for Analysis: Alignment • “Alignment” is the extent to which investor and investee have parallel incentives:  Popular new “buzzword” in investing world  Investors’ desire to protect downside by not dis-incentivising funded parties  Protection against information asymmetry between buyer and seller  Preserve upside in high-end, best-case scenarios  Create opportunity for recurring or repeated business 18
  18. 18. Metrics for Analysis: Cost of Capital • “Cost of Capital” is the required rate of return on a portfolio’s existing securities  Used to evaluate new projects  Minimum return investors/funders expect for providing capital--thereby setting a benchmark  Impacts the types of investments palatable to institutional investors  Impacts the “pricing” of individual funding products offered to clients 19
  19. 19. Metrics for Analysis: Funded Party Profile • “Funded Party” -- for purposes of this presentation -- will refer to the party, i.e., the attorney or the plaintiff, ultimately liable to repay the funder  Decision is driven by a variety of factors  Volume and diversification of litigation risk owned by Funded Party  Appetite for risk-sharing by the Funded Party  Willingness to contribute additional collateral to funding arrangement  Legal/ethical considerations--including champerty and attorney fee-splitting 20
  20. 20. Types of Products • Single case fundings • Portfolio fundings • “Other”- e.g. Loans, “insurance like” products, factoring 21
  21. 21. Product #1: Case Funding • “Case Funding” is providing capital for a case (or group of cases) owned by one particular plaintiff (or group of plaintiffs). 22
  22. 22. | 23 L A W F I R M Invest Portion of Fee Budget Portion of Recovery Client Recovery Pays Portion of Costs Invest Portion of Fee Budget Agreed upon Contingency Single-Case Risk Sharing H O W D O E S I T W O R K ? Funder 23
  23. 23. Case Funding Example • XYZ, a failing technology company, seeks $5M in litigation funding, potential damages of $50M  Alternative Fee Arrangement: $3M to support attorney, who is working under “hybrid contingency fee arrangement”  Hard costs: $1M for out-of-pocket expenses associated with litigation  Operational costs: $1M as an “advance” to plaintiff, secured by litigation proceeds 24
  24. 24. Case Funding: Risk • Two assumptions: (i) client is requesting funding before complaint and (ii) litigation is “bet the company” intellectual property and trade secret litigation  Type of litigation o Risky issues relating to intellectual property o Early phase of litigation means no benefit of defendants’ discovery  Phase risk o Litigation has not passed any substantive or procedural litigation hurdles o No meaningful track record of litigant behavior  Opportunity for diversification o Litigant not likely to be a repeat litigant o Each claim is likely correlated to first litigation; litigation may be scalable, but not diversifiable 25
  25. 25. Case Funding: Use of Proceeds and Alignment • Use of Proceeds & Alignment tend to be analyzed together  Alternative Fee Arrangements o Attorneys may invest in (take on contingency) the cases they “love,” and have funded the cases they “like” o The greater the attorney contingency, the greater the alignment o What is the optimal “skin in the game”?  Hard Costs o The greater the ratio of hard costs to attorney costs, the greater the alignment o Participation by client and/or attorney adds to alignment  Advance to Client o Client has final settlement authority o Amounts funded to client raise the “optimal settlement” figure 26
  26. 26. Case Funding: Funded Party and Cost of Capital  Inherent risk requires high cost of capital o Multiple of invested capital (MOIC) o Plaintiff must recover at least 10-figure recovery o Must satisfy funder’s principal plus priority return o Attorney’s contingency: further “equity” o Substantial “venture capital-like” risk is best suited for plaintiff, not attorney funding  Fee Splitting o N/A o “Advance” to client creates structural impediment to funding attorney 27
  27. 27. Case Funding: Take-Aways • Case Fundings -- typically thought of “Litigation Funding 1.0” -- are not perfect:  Case fundings entail substantial risk, which (i) requires high cost of capital, and (ii) is challenging to diversify  Use of Proceeds makes alignment challenging, further adding to risk  High cost of capital means case funding is best suited for investors seeking multiples of invested capital -- i.e., equity-, not debt-like returns 28
  28. 28. Case Funding: Take-Aways • In describing a shift from 100% case funding in 2009 to 5% case funding in 2017: • “The reason for this dynamic in the business is that single-case litigation finance is expensive. That’s because single-cases come with a significant risk of loss, so when you lose a single case investment, you lose everything.” -- Chris Bogart, CEO of Burford Capital, quoted in The Lawyer 29
  29. 29. Product #2: Portfolio Funding • A “portfolio funding” is a transaction secured by proceeds from a plurality of unrelated litigation due either to a law firm or a particular client 30
  30. 30. | 31 Portfolio Risk Sharing H O W D O E S I T W O R K ? L A W F I R M Legal Services Firm Receives Portion of Proceeds Invest Portion of Hourly Fees/Costs in Tranches Recover Agreed Upon Portion of Fees FUNDER Plaintiff Plaintiff Plaintiff Defense Client Case 4Client Case 1 Client Case 2 Client Case 3 31
  31. 31. Portfolio Funding Example • SmallBall LLP, a newly-formed firm of former BigLaw attorneys seeks $10M to support its fees and expenses of three, unrelated cases it intends to litigate under alternative fee arrangements 32
  32. 32. Portfolio Funding: Risk • Risk falls between Case Funding and Law Firm loan  Litigation risk o Litigations are typically commercial; individually, they entail risk similar to case fundings o But, collectively, they create a diversified portfolio  New risks: o Complexity of fee-splitting rules -- fundings are a “hybrid” o It is well-established that a funder can receive a capped multiple of invested capital o But, what about an uncapped percentage? o With plaintiff portfolios, no fee-splitting concern 33
  33. 33. Portfolio Funding: Use of Proceeds and Alignment • Confronting “alignment” among personalities  Use of Proceeds o Funds are best suited for a portfolio of cases among one or more attorneys or plaintiffs o Contracts can be difficult to structure--need to convene unrelated clients and/or attorneys  Alignment o Litigator incentives may differ from those of other attorneys at the firm o Funding contracts may require restructuring in the event of attorney shake-up o Funded Party must strike a balance between ability to service funding agreement with desire to have cash remaining 34
  34. 34. Portfolio Funding: Funded Party and Cost of Capital • Portfolio Funding is a healthy mix of risk, return, and aligned incentives  Funded Party achieve lower cost of capital than case funding o Uncorrelated assets provide lower risk profile, allowing lower cost of capital o Unsecured nature of assets commands cost of capital greater than law firm loans o Diversified portfolio means opportunity for early generation of cash to service funding agreement 35
  35. 35. Portfolio Funding: Funded Party and Cost of Capital  Funders have found promise in scalability o Major, mainstream funders have demonstrated some shift from case fundings to portfolio fundings o On law firm side, increasing acceptance of use of funding and comfort with legal/ethical concerns o On plaintiff side, large appetite for portfolio funding in bankruptcy and technology litigation 36
  36. 36. Product #3: The “Others” • An “attorney loan” is a loan secured by all or a portion of a law firm’s and/or the partners’ assets. • Adverse Costs “Insurance” are products that cover the adverse costs (e.g., attorneys’ fees) due to a prevailing party. • Legal Receivable Factoring is the purchase of a legal “receivable,” where the receivable is no longer subject to “litigation” risk, just collection and timing risk. • Litigation-driven special situations trade is the trade of a public equity (stocks, bonds, options) on the basis of a hypothesis concerning litigation impacting that company. 37
  37. 37. About the Faculty 38
  38. 38. Jeremy Waitzman - Jeremy Waitzman advises his clients on significant transactions and operational issues in their businesses. Described by clients as “an essential business advisor” and “a partner in the success of my business,” Jeremy has substantial experience representing businesses of all types and sizes from inception, guiding them through significant growth, and often through ownership’s exit. His clients include privately-held middle market and emerging growth companies, family offices/funds, investors, C-level executives, boards of directors, family-owned businesses and entrepreneurs. Jeremy counsels clients in the areas of corporate law, mergers & acquisitions, private placements, general contract law and often acts as outside general counsel for his clients. Jeremy represents individuals, closely held businesses, start-up companies and serves as outside counsel to several large corporations. His work with companies often includes strategies for creation of enterprise value. A big firm-trained corporate and M&A deal attorney, his experience is transactions-intensive and includes work involving business and capital structure, mergers and acquisitions, indemnification, private equity and venture capital, private placements and securities offerings, investor rights and preferences, licensing and subscription agreements, intellectual property protection, customer agreements and T&C’s, joint ventures, distribution and supply, executive employment, management equity and incentive compensation, corporate governance including board and advisory boards, and corporate contracts and agreements including enforcement. Jeremy has been included in various panels and lectured on topics related to corporate law, venture & angel financing and mergers & acquisitions. Industry sector experience includes software, healthcare, specialty chemicals, mobile, IT, eCommerce, transportation, insurance, marketing and public relations, construction, auto body, specialty consumer, real estate, manufacturing, distribution and tech-enabled services. Prior to law school, Jeremy worked at a Fortune 500 company where he gained invaluable insight into the operations of large business. 39
  39. 39. About The Faculty Dave Kerstein - As Chief Risk Officer and Senior Investment Manager at Validity Dave brings unparalleled experience helping clients and law firms mitigate litigation risks with innovative funding models. Prior to joining Validity, Dave was an Investment Manager for four years for a leading litigation finance company. In addition to designing financial solutions to litigation, Dave provides strategic advice in cases funded by Validity. With fifteen years experience handling complex commercial disputes at Gibson Dunn, Dave has litigated on behalf of both plaintiffs, for whom he has recovered substantial sums, and defendants, for whom he has achieved trial court victories or favorable outcomes. He also possesses extensive experience across jurisdictions, having tried cases in state and federal courts and before arbitration panels across the US and internationally. Dave earned his J.D. from Penn Law where he was a Toll Scholar, and his B.A. in diplomatic history from UPenn, where he was a BFScholar. 40
  40. 40. About The Faculty Christopher Freeman - Christopher Freeman is a Vice President with responsibility for assessing and underwriting legal risk in patent matters. As part of Burford’s investment team, Christopher evaluates intellectual property cases and patent monetization campaigns and crafts investment structures that align incentives between funder, law firm and claimant. Prior to joining Burford, Christopher was Vice President and Head of Litigation at Blackbird Technologies, a company he co-founded in 2014. At Blackbird, Christopher oversaw all business operations and successfully built and managed one of the most prominent patent acquisition and licensing entities in the US, growing the firm to a dozen employees and a portfolio of over 100 patents and applications. Earlier in his career, Christopher was an IP partner at Kirkland & Ellis and practiced at Latham & Watkins and at Quinn Emanuel. Christopher graduated from the Boston University School of Law and earned an undergraduate degree from Northwestern University in Industrial Engineering and Economics. 41
  41. 41. Joel Cohen - Joel Cohen is a Managing Director in the Dispute Consulting group. Joel comes to the firm with over 17 years of experience in the dispute, forensic, and insolvency practice areas, most specifically focused in the financial services and asset management industries. His experience encompasses a number of significant cross-border insolvency and litigation matters, where he has served as financial advisor and consulting expert to fiduciaries, offshore liquidators, bankruptcy, and litigation trustees. He has assisted these clients in a variety of litigation consulting services, including asset tracing, fraud, Ponzi schemes, industry custom and practice for investment managers, and forensic analysis. Joel has also led several internal investigations within the context of family office, investment advisors, and various corporate structures. Before joining Stout, Joel was a Managing Director at a boutique financial advisory and consulting firm. Prior to that, he spent a number of years with a global financial advisory firm in its Dispute & Investigations group where he helped manage a team of CPAs, economists, attorneys, and finance professionals in executing a diverse array of complex engagements related to the various hedge fund/private equity fraud, insolvencies, and litigations that characterized the global financial crisis of 2008-09. He was a leader in the disputes practice at a Big 4 accounting firm and senior vice president at a prominent investment bank in charge of internal investigations. Joel has worked with premier law firms on accounting malpractice, business insurance disputes, fraud detection, and economic investigations. Joel has expertise in managing the expectations of various stakeholders involved in insolvency proceedings, liquidations, litigation settlements, and receiverships, namely in his capacity of assisting a board, trustee, receiver, or official liquidator with their duties, including U.S. and cross border considerations. He has extensive experience within the offshore world, regularly handling cases out of the Caribbean. 42
  42. 42. Jeffery Lula - Jeffery Lula serves as a Principal at GLS and is responsible for due diligence and monitoring of commercial litigation and arbitration-related investments. Prior to joining GLS, Jeff was a litigation partner at Kirkland & Ellis LLP in Chicago. During his nine years at Kirkland, Jeff’s practice focused on a wide variety of complex commercial litigation, including contract disputes, bankruptcy litigation, corporate mismanagement, fraudulent transfer litigation, and insurance litigation. His experience extends to all stages of litigation and appeal, and he also counseled clients during internal investigations prior to litigation or arbitration. He has represented clients in a variety of fields, including private equity firms, insurance carriers, and large Chapter 11 debtors. Jeff holds a J.D. from the University of Chicago Law School, where he served as an Articles’ Editor of the University of Chicago Law Review, and a B.S. from University of Illinois. 43 About The Faculty
  43. 43. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 44
  44. 44. About Financial Poise 45 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: