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Commercial Special Features

Cesar Bello of Corbin Capital Discusses Litigation Funding as an Investment

On the most recent episode of the Litigation Finance Podcast, Cesar Bello, Partner and Deputy General Counsel of Corbin Capital, explained how he evaluates litigation finance investments, what his ROI expectations are, and how funders can mitigate risk. Below are some key takeaways from the discussion. What about the funding industry drew your attention and your interest? The stock answer here is that it’s non-correlated compared to a lot of other alternative assets. What else can you say about this asset class that really draws your interest—especially when compared to other alternative assets. Obviously that’s a big part of it. It’s differentiated—it’s particularly attractive in times of market volatility. When you expect more fat tails, we think there’s a good chance that that type of environment will persist in the near term. We’ve seen over the last year those kinds of spikes with meme stocks, heightened government intervention, obviously the pandemic, political climate, etc. So it was nice for us, we had some good outcomes last March and April when everything else was not working so great. So it really helps the portfolio. Beyond the uncorrelated nature of it, obviously the opportunity to earn outsized returns. Single case risk is generally structured to make a 3-5x return—so you’re getting paid well for the risk. Private lending for the more credit-oriented type of LitFin plays—you’re still getting paid, or overpaid since the sector is still largely underbanked—although increasingly less so. The underlying collateral is not well understood by traditional lenders. Back to the market as a whole, it’s still, I think, growing. The legal services industry is a $1 trillion industry worldwide. Litigation Finance has grown a lot. There’s a growing awareness among mainstream corporates, if they have assets on their balance sheets that they can monetize, Fortune 500 companies are awakening to this possibility of using Litigation Finance to bring cases without sucking up the budget or disrupting their cashflows.  How important is ESG to investors such as Corbin, and also to your LP investors?  Obviously, we do a lot more than just Litigation Finance, but with respect to Litigation Finance in particular, the easiest way to think about it is not necessarily equal access to justice in our legal system. Right? Litigation Finance helps level the playing field, so David can go after Goliath. That’s obvious and simple to understand. But it kind of flows through and manifests itself in different ways. Take mass torts—environmental cases, for example—there’s a long history of poor minority communities being used as toxic dumping grounds. We have opioids, we have sexual abuse cases, etc, so from an environmental, socioeconomic, social justice perspective—there’s a clear angle there. But back to how we think about it more broadly, our approach to ESG is focused on the thoughtful application of ESG factors to enhance our business and it takes a lot of work. We’ve been working on it over the last 2-3 years. With the help of leading experts in the space and consultants to help us navigate what remains of a pretty fragmented information environment. We believe in meaningful integration of material ESG factors that can lead to a more complete picture of risk and opportunity, driving more informed decision-making with the opportunity to get better risk-adjusted returns.  Let’s say I’m a commercial litigation funding manager. I approach you for an investment opportunity. Is there anything you wish these fund managers did more of or less of? Any advice you can give to them? I think it’s important to have a real understanding and self-awareness of where you sit in the marketplace and to be commercial—it’s hard to raise money. The safe thing to do is to give money to the bigger players, particularly if you’re just starting out. We’ve seen a lot of people try to raise funds with unrealistic expectations, and refusing to partner with people in creative ways because they want a fund and don’t want to do co-investments—not thinking about the long game, and not realizing the best path to unlock capital may not be the one that they came into the meeting with. So really listening and trying to figure out where that happy medium is, to find a way to work together. Back to the point about most of the money coming in is going to established players, that’s the nature of the asset management industry as a whole. So we also like people who can talk through a bad outcome—lessons learned—that buys some goodwill. ... Find a way to get in the door, build trust, and hopefully everybody gets more comfortable and it becomes easier to build a relationship.  When you look at this industry, what opportunities are you seeing down the road for the funding industry? How do you see this industry developing in the coming years? Good question. I think everybody would tell you it’s probably going to grow and there’s probably going to be some price compression as the asset class matures. Maybe something you won’t hear as much—I really would like it to evolve into having a more active secondary market, which would help with the duration issue. As anything that helps generate liquidity, we would view as a positive. And obviously, it would help with valuation price discovery as well. So there’s a lot of activity now in private equity funds and private credit funds in terms of secondaries and continuation funds, as some of the older vintages are getting long in the tooth. It would be interesting to have some growth there, and I think similarly there’s a good amount of the bigger funds that are running up against the end of their fund life and they’re going to be motivated to sort of solve for that. I think there are some characteristics here that are going to make it harder for secondary markets to flourish in the marketplace. This stuff is idiosyncratic and hard to underwrite. You’re not buying IBM bonds. But it’s doable, and I think it’ll happen eventually. When it does I think it will be a very positive signal for the asset class.
Announcements Commercial Deals

Kerberos Capital Management Announces World’s First ESG-Linked Debt Product for Litigation Finance Markets

Kerberos Capital Management announced today the introduction of a groundbreaking new direct lending product to law firms with a margin ratchet linked to ESG targets – the first debt product of its kind in Litigation Finance markets. The program is intended both to recognize and reward firms that have already established a commitment to advancing ESG factors in their work, and to incentivize qualifying firms to continue those efforts into the future. To qualify for the program, firms must (A) demonstrate a material and ongoing commitment to providing pro bono legal services, (B) generate a threshold amount of revenue related to ESG-advancing case types, and (C) establish that they do not prosecute cases or otherwise conduct business in ways that run counter to ESG principles (a negative screener test). Key Performance Indicators related to each of these three primary qualifying factors will be assessed at the loan’s inception and monitored throughout the duration of the loan period, with downward margin adjustments ranging from 50 to 100 basis points. “At some level, most plaintiff-side litigation can be thought of as advancing social interests, as it is through this work that individual rights are vindicated and accountability is imposed. In the same vein, litigation financing in general has ESG attributes, because the capital provides increased access to justice. But we wanted to go further,” said Joe Siprut, CEO & CIO of Kerberos. “Certain categories of cases warrant special acknowledgment for advancing ESG interests to a unique extent, and Kerberos’ new ESG product is intended to incentivize the prosecution of those cases. Building these incentives into our debt products will drive better ESG practices and outcomes.” About Kerberos Kerberos Capital Management is a boutique alternative asset manager. We seek to provide our clients excess return at every point along the risk-reward spectrum with an emphasis on yield, opportunistic, and hybrid strategies. Kerberos’ flagship strategy is providing innovative capital solutions to law firms. The depth of our private credit and direct lending platform has enabled us to generate differentiated absolute and risk-adjusted returns in litigation finance markets, regardless of the business cycle or economic environment. Kerberos’ investment team is comprised of senior members from both the legal and private credit industries, including former principals of the world’s leading law firms and multi-billion dollar private credit funds. In 2020, the independent, London-based Private Debt Investor magazine named Kerberos Capital Management one of its Top 3 Global Newcomers in the private debt fund category. Kerberos manages both separate accounts and pooled vehicles for institutional and high net worth investors worldwide.
The LFJ Podcast
Hosted By Cesar Bello |
In this episode, we sat down with Cesar Bello, Partner and Deputy General Counsel of Corbin Capital. Cesar described how he evaluates litigation finance investments, what his ROI expectations are, and how funders can mitigate risk. He also discussed funding as an ESG investment, and highlighted the growth of a secondaries market as a harbinger of the funding industry's future growth and maturation. [podcast_episode episode="8647" content="title,player,details"]
Commercial Fundraising

LCM Fund Attracts Investor Interest

The pandemic has made an unwitting impact on nearly every industry. Its impact on litigation funding was largely positive. Since the first COVID shutdowns began, funders around the world have been besieged with interest from investors, businesses, and clients hoping to launch individual or collective actions. Litigation Capital Management (LCM) has seen exceptional progress, even within the funding industry. Investors Chronicle details that LCM persisted even as COVID brought about huge court delays and disruptions to arbitration, depositions, vetting, and other facets of law usually conducted face-to-face. In last the 12 months ending in June of this year, LCM assessed nearly 600 funding applications and made investment commitments of more than AU $100 million. While that represents a small dip from the previous year—these numbers are impressive within the context of a pandemic. LCM is launching a new fund that’s expected to double profits this year. The $150 million fund currently has 88% commitments, including projects in the due diligence phase. The first close is expected before the end of 2021. LCM’s fund is supported by the cornerstone investors of the first fund. That may be because LCM maintains a portfolio return rate of 78%. LCM gets 25% profit on each fund investment, plus an outperformance return fee of 35% over an IRR of 20%. Choosing the right cases to fund is one of LCM’s strongest suits. A single case brought in a 300% return after a 30-month deployment of AU $6.2 million. With an average duration of 27 months per case, and more than a third (18 out of 44) past the 25-month mark—it appears that settlements or awards will be forthcoming sooner rather than later. LCM is poised to invest in new projects given their gross cash holdings (AU $49 million), along with another $20 million in credit. With insolvencies and disputes on the rise, LCM has a bright future ahead.
Commercial

Manolete Partners: Onward and Upward

Manolete Partners has been called the top insolvency litigation funder in the UK. In the midst of a major growth spurt, Manolete currently boasts greater than a 50% share of the insolvency funding sector. Vox Markets details that one of Manolete’s main strengths is its vertical expertise, which puts them in an ideal position to price risk. Insolvency cases tend to result in higher awards—with fewer than 5% going all the way to trial—so they reach completion sooner than complex litigation cases. Next week, the moratorium on medium and large company insolvencies will be lifted. This could mean a flood of new business for Manolete, and a dramatic reduction in case duration.
Announcements Commercial Fundraising

Longford Capital Raises $682 Million for New Investment Fund

Longford Capital Management, LP, a leader in commercial litigation finance, announced the final closing of its most recent fund (including a parallel fund, “Fund III”), at $682 million.  Longford’s assets under management now exceed $1.2 billion, placing it among the largest private equity firms focused on investments in legal assets.  Fund III is the third private investment fund Longford has closed since the firm began operating in 2013.

Fund III includes repeat investors from Funds I and II, as well as many new investors, attracting capital from state and municipal pension funds, university endowments, foundations, single and multi-family offices, and high-net-worth individuals.  Fund III will invest in the outcomes of commercial disputes, antitrust and trade regulation claims, and intellectual property claims that Longford believes to be highly meritorious and have a strong likelihood of success.  Fund III has already committed nearly $270 million to new investments.

“Litigation funding continues to gain acceptance among law firms, their clients, and investors alike,” said Timothy S. Farrell, co-founder and managing director of Longford Capital.  “We have seen significant growth in interest in litigation finance from leading institutional investors and high-net-worth individuals eager to put their money to work in an uncorrelated asset class.

“The significant capital we have raised gives us the latitude to be flexible and to innovate,” he added.  “Groundbreaking agreements with top law firms – like our arrangement with Willkie Farr & Gallagher – are hallmarks of our innovative approach and how we seek to generate returns for our investors.  We are grateful for our investors and our law firm and corporate partners.”

Since 2017, Longford has doubled the size of its underwriting team to manage the growing demand for its capital and added several talented business executives to scale its business.

“We’ve assembled an exceptional team of former first-chair litigators from leading law firms and experienced executives from great companies, and our team is the wellspring of our success,” said Farrell.  “Private practice litigators and corporate general counsel bring their matters to Longford because our team has walked in their shoes, and each member dedicates his and her thoughtful, diligent and individual attention throughout the lifespan of a matter.  This will remain a key element of our culture as we continue to scale our business.”

About Longford Capital

Longford Capital is a private investment company that provides capital to leading law firms, public and private companies, research universities, government agencies, and other entities involved in large-scale, commercial legal disputes.  Longford was one of the first litigation funds in the United States and is among the world’s largest litigation finance companies with more than $1.2 billion in assets under management.  Typically, Longford funds attorneys’ fees and other costs necessary to pursue meritorious legal claims in return for a share of a favorable settlement or award.  The firm manages a diversified portfolio and considers investments in subject matter areas where it has developed considerable expertise, including business-to-business contract claims, antitrust and trade regulation claims, intellectual property claims (including patent, trademark, copyright, and trade secret), fiduciary duty claims, fraud claims, claims in bankruptcy and liquidation, domestic and international arbitrations, claim monetization, insurance matters, and a variety of others.

Case Developments Commercial

Contingency Fees vs Group Cost Orders in Victoria

The Supreme Court of Victoria declined to allow a 25% contingency fee. The decision represents the first time the court has used its power to make a Group Cost Order—which the court determined was preferable to a “no win, no fee” arrangement. Ashurst details that an exception to the prohibition against contingency fees, the power to make a Group Costs Order in class actions, was introduced in Victoria in June of 2020. Thus far, Victoria is the only jurisdiction in Australia to allow this.   A Group Costs Order is a type of contingency fee that requires approval from the court. It necessitates that claimants will pay a portion of the contingency fee out of an award or settlement. This new legislation came about to allow plaintiff law firms to compete on level ground with third-party legal funders. In the first application since Group Costs Orders became law, courts had to determine whether the lawyer’s request for a 25% contingency fee was in the best interests of group members and whether it would be an improvement for claimants over the funding agreement already in place. Lawyers for the plaintiffs compared the Group Costs Order to a TPF agreement, saying it would be better for claimants. The court determined that because of the ‘no win, no fee’ agreement, the comparison should be between the agreement versus the Group Costs Order. Ultimately, the court ruled that the plaintiffs would not be better off with a Group Costs Order. After the decision, the court allowed the parties to take time to reconsider and reapply if desired. While it’s unclear whether courts will grow more welcoming to Group Costs Orders in the future, it seems that plaintiff law firms still find these orders attractive.
Case Developments Commercial

Business Interruption Class Action Filed Against IAG

A class action has been launched against insurer IAG after it denied business interruption claims related to COVID-19. The case has been likened to a test case in Australia. Insurance News explains that Slater and Gordon launched the suit after recognizing that IAG has adopted a strategy to ‘divert, deny, and delay.’ Some businesses have been waiting a year or more for remuneration from their insurers. The action is being funded and managed by ICP, with the goal of having claims vetted and paid out quickly. IAG has stated that it stands by its decisions to hold back payouts, but will abide the court’s ruling. IAG further stated that this industry-wide test case is the best way to gain clarity into the expectations of insurers during a pandemic.
Commercial Deals

UK Legal Firms Join Forces with Litigation Funders

In the early days of litigation funding, legal firms and funders were separate entities. As the industry has grown more widely accepted, an increasing number of law firms are teaming up with funders to offer clients an array of new services. Now some are questioning whether this is really a positive development. Financial Times explains that while lawyers are known to be risk-averse, respected firms like Mishcon de Reya, Rosenblatt, and DLA Piper have their own agreements with funders, or have launched their own funding arms. The UK has experienced an expansion of the funding landscape—with Britain doubling its litigation funding assets within the last three years. As third-party funding is largely self-regulated, conflict of interest is a concern. Globally, TPF is a $39 billion industry, worldwide. Law firms like Mishcon and its upcoming stock market listing bring even more scrutiny. In the UK, damages-based agreements with lawyers have only been legal since 2013. Litigation funding takes this concept one step further, helping increase access to justice. Of course, for a DBA or funding agreement to work, there has to be enough profit potential to make the risk worthwhile. According to the law, and stated industry ethics, third-party funders are not permitted to control strategy or decision-making in the cases they fund. Recently, Rosenblatt decided to prohibit its LionFish Litigation Finance arm from funding its own cases to avoid the appearance of conflict. Elena Rey, partner at Brown Rudnick, suggests that standardized funding agreements would be better for transparency. She asserts that high standards should be the norm for the industry and that this will translate to increased confidence and fewer concerns about conflicts of interest. Therium’s Neil Purslow affirms that even though industry regulation is sparse, courts can invalidate a funding contract if it finds the contract unfair or contrary to the interests of justice. Meanwhile, demand for funding and interest from investors continues to increase.