On Wednesday, December 15th, Litigation Finance Journal hosted a special digital event featuring insights from new entrants into litigation funding. A panel featuring Charles Schmerler (CS), Senior Managing Director of Pretium Partners, Zachary Krug (ZK), Director of Signal Capital Partners, and Mark Wells (MW), Co-Founder of Almatura, discussed deal sourcing fundraising and hiring from a new entrant’s perspective.
Below are some key takeaways from the panel discussion, which was moderated by Ed Truant, founder of Slingshot Capital:
Broadly speaking, how do you view the current investor landscape for fundraising in the jurisdiction in which you’re involved? Also, what sort of goals do LPs have when approaching the litigation finance space, and how should new entrants into the space prepare when speaking to prospective investors?
MW: Our first fundraise really was a slow burn between 2008 – 2010 when we closed the first fund. You’ll remember when we arrived in the market then, pretty much everyone was a first time manager. There was very little in the way of seasoned product, or to say nothing of the type fund 2 fund 3 type of opportunities. So the investors who were attracted in those days were the pioneering investors and they really had no choice but to commit themselves to first time managers.
I think if we fast forward to 2021, it’s a much more mixed environment. There’s a lot more players. My experience is mainly on the European side, but I understand this is also true on the west side. And a number of the players have now matured and are on fund 3, fund 4, fund 5, so investors are presented with a more complete offering ranging from first time managers all the way through to repeat managers.
ZK: In some respects, I think the high returns that are uncorrelated to the market remains, and is even a stronger factor in terms of investor appetite, particularly when you look at a landscape where many asset classes are at historically high valuations and it’s difficult to achieve the kind of multiple style returns that you can potentially achieve in litigation funding. So I think that attraction remains there and is quite strong. I think the difficulty for anyone who’s trying to raise money, there’s certainly a lot of money out there, and interest—but the difficulty is, if you’re a new entrant without a track record, you may be an excellent litigator with a long track record of trial victories, but I think without a track record of successful realizations, it can be difficult. Given the asset class and how it performs, it takes a while to develop a track record that’s worth anything because of the long tail risk in these assets.
CS: My advice at first was ‘don’t try to raise a lot of money at the beginning of a global pandemic.’ But once you get past that, I think these are key points. Mark touched on something important in that there’s been a significant change in the way investors are able to approach the asset class from the way it was ten years ago. There’s much more data available right now. It’s not a mature industry yet, but there is empirical data out there. So investors are able to diligence this very carefully and they have a number of choices, there are a lot of players as Mark and Zach said. So I think anyone who is looking to raise capital has to be extremely well prepared.
Let’s turn our attention toward deal sourcing. Where are you currently originating deals from, and to the extent that you’re willing and able to respond—what methods have you tried and what have yielded the best and worst results?
MW: I think we’d say probably four channels of deal flow, the most important deals are from lawyers, and then the other sources would be claimants coming to us direct typically via advertising, LinkedIn, Google, media mentions, stuff like that. And then brokers and intermediaries; both specialist brokers and some of the ad hoc intermediaries.
ZK: Mark hit on the key channels from my perspective. I do think it remains very much a relationship driven business, and in terms of what works and what doesn’t work. There is, I think in terms of the lawyers and even the brokers and intermediaries, and I suppose with the funders as well, an aspect where there’s a fair amount of relationship building, business development, what have you, that’s important to maintain those relationships.
Let’s shift into a different topic: Hiring. How do you think about organizational design for your firms in terms of a combination of finance, legal, quants type of expertise. Mark, how do you tackle that, historically?
MW: Yeah, that’s interesting how you list the financing and the legal and quantitative skills. I think I’d add one more characteristic which can really cut across all those disciplines—and that’s factual curiosity and factual inspection. In our experience over the years, when we look back and look very long and hard about why we lose cases., often it’s singular one-off factors. Something that we get a few times is that we lost the case because the facts that were eventually found deviated from what we’d assume when we were underwriting the case. I think really probing the facts and thinking about what can fill in any blanks in the claimant’s narrative is a really important part of the picture that needs to apply to everyone involved in underwriting the cases.
ZK: It’s an interesting question, one that I’m grappling with as we speak, as a relatively new strategy within what is otherwise a very quantitative and numbers-driven organization. My experience is that most litigation funders are staffed by ex-litigators or have many lawyers on staff. They tend to bring that litigation mindset with them, which obviously is important from an underwriting and diligence perspective. But often when you put a bunch of litigators into a room to discuss a case, we can be very good at identifying the risks of what could go wrong, but less good at being creative about how to structure for those risks or to price for those risks, or be willing to take those risks. So my sense in terms of organization and hiring is—it’ll be more important to find folks who are creative about deal structuring and pricing more than simply smart lawyers. It’s more important to have that commercial acumen.
Charles, can you comment about what the market for talent is like at the moment and what’s the general professional background that you’re seeing from some of your hires?
CS: This feeds off the discussion you were just having with Mark and Zach. The market is good, there is always opportunity to find smart capable lawyers. We have a lot of analysts and quantitative people at the firm already. So we are less in need of hiring those. But I think you already touched on what is the ongoing debate—which is, where should you focus your energies? Should it be on the analytical side, the financial analytical side, or the legal side? We find that you can hire—but the question is: What’s the best way to go about hiring?
So for us, we are looking more for people who are not just creative in structuring, but who understand how to recognize value. And that can mean different things in different contexts. For example, we have a particularly strong patent team. Between our two senior-most people, only one is a lawyer. Both have extensive experience monetizing patents over decades, and they understand how to assess the value of a portfolio in ways that most other people cannot.