A panel consisting of Sarah Johnson, Senior VP and Co-Head of Litigation Finance at D.E. Shaw, Aaron Katz, Co-Founder and CIO of Parabellum Capital, David Kerstein, Managing Director and Senior Investment Officer at Validity Finance, and Joe Siprut, CEO and CIO of Kerberos Capital Management, discussed the various investment aspects of litigation funding as an asset class. The panel was moderated by Steven Molo, Founding Partner of MoloLamken.
The conversation began with new trends in the industry. Price compression came up early. Joe Siprut of Kerberos Capital Management noted he has witnessed price comparison over the past couple of years, including having seen multiple term sheets that were mis-priced. Litigation finance has always been about attractive risk-adjusted opportunities, yet if the risk remains the same and price compression remains, that reduces the attraction of the asset class. Moderator Steven Molo was surprised there hasn’t been more fallout in this regard.
Aaron Katz of Parabellum pointed out how things are opening up after COVID, and that helps a lot, given that a pipeline of cases awaiting trial quickly burns through ROI. Katz countered the price compression argument, stating that he hasn’t witnessed real price compression and hasn’t found his firm to be competing on raw price. Of course this depends on which segment of the market you are looking at.
The conversation then steered toward ESG, and David Kerstein of Validity noted how there are green shoots of funders getting involved in impact litigation. Yet for most commercial funders, ESG would maintain the same type of analysis as any other case–that said, funders like to have a ‘good story’ for the case, and ESG can bring that to the table. Aaron Katz mentioned Parabellum is very cautious about ESG in particular. “We think people need to be careful about labelling things incorrectly,” said Katz. There are real impact players out there, and litigation funders should be careful about loosely claiming the mantle.
The next question was pretty blunt: Is there a secondary market right now? Aaron Katz thinks not “I pray for it daily.” There is a network of well-resourced institutional players who like to look at claims, but the transactions are laborious (DD challenges, information asymmetry). The secondary participant is not going to be in a direct conversation with the counter-party, and that could cause complications.
One final point: Joe Siprut noted that the evolution of a secondary market is one of the main things that can really unlock a lot of investment for the industry. One of the main barriers to investment is the long lockup period investors are staring at, and if a secondary market were to materialize, that would make fundraising a much easier sell.
