Community Spotlight: Jason Bertoldi, Global Team Leader, Litigation & Contingent Risk Insurance, Alliant Insurance Services

Although litigation funding has grown into an increasingly mainstream sector of the broader legal services industry, the strategies that shape funders’ business models are often quite opaque to those outside the funding market.

A recent episode of the Alternative Fund Insight (AFI) podcast provided useful insights from Fabian Chrobog, founder of NorthWall Capital, who discussed the firm’s approach to legal assets and their strategy for scaleability in a wide-ranging discussion.

In the interview, hosted by Will Wainewright, Chrobog outlined NorthWall’s overall legal assets strategy: “We’ve had a lot of fun running that strategy, it’s been hugely successful. It’s generated some fairly outstanding returns for LPs and it’s something we continue to be very active in. So really what we are looking for, what we are good at, is the underwriting of complex collateral. Sometimes it’s a situational complexity, it could be these asset-backed situations which are fairly complex. 

In this case we provide loans to law firms that are secured by very large pools of potential proceeds from legal assets claims. These could be litigations that could generate in some cases hundreds of millions of revenues per case or over a dozen different cases. So, what we do is we can provide working capital to the law firm without taking security over any specific case, just saying we will get paid back from the first one, two, three cases you win or settle. 

This is not exactly rocket science because you can tell which cases are most likely to settle, because there is a lot of legal precedent or there might have already been settlement discussions. So, you provide that working capital and you effectively just underwrite the cases that you have a high degree of confidence could be successful, you zero everything else, and then you severely haircut the cases that you believe could be won or settled, and you lend against those at a very low loan to value.

At the end of the day, you just have to believe that one, maybe two, of these cases resolve and sometimes these dockets have 12, 15, 20 different cases where you should have a very high degree of certainty that you’re going to get repaid. We got into this because we started looking at one of these situations and we realised there was more to do, and we’ve been very successful in originating deal flow here.”

Asked by Wainewright about NorthWall’s decision-making process when it comes to choosing which legal situations to focus on, Chrobog said: “You’re trying to remove yourself from having to be right more frequently than you’re wrong. You’re trying to create a situation where there is really a very asymmetric risk-reward profile.

But then the way that you do it is, and what is different about NorthWall and how we approach this space, is that we’re credit investors predominantly. We’re looking at how can we reduce our downside. We always pair a credit analyst with a lawyer internally, and then we get external litigation advice to help us with the individual cases.

The credit analyst’s job is to make sure the firm doesn’t run out of money, the lawyer’s job is to make sure that we really truly understand these cases, and then the investment committee’s job is to make sure that we’ve been conservative in our underwriting process.”

Prompted by Wainewright on this being an example of the idiosyncratic strategy that you find within alternatives, Chrobog went on to expand on how NorthWall’s ensures its approach is attractive to investors.

“What you have to remember is that scalability is important. Scalability is important because the people that we have are very good and they expect to be compensated, so it’s a relatively expensive strategy to run. But our investors don’t want to invest small capital, they want to invest substantial amounts of money and they want to see it deployed. 

So, what we are really focused on is we only finance large portfolios of cases because it provides downside protection, a diversification of potential revenue streams, but it also allows for a certain element of scalability. There’s no point being in a niche strategy that you can’t scale to be meaningful.”

The full interview is available on the AFI website.