If there is one thing that is almost always guaranteed in an economic downturn, it’s an increase in litigation. A recent article from The New York Times shows that increased litigation leads to investors willing to finance that litigation – for a chance to make serious money, of course.
In the article Pandemic Is Expected to Bring More Lawsuits, and More Backers, written by Paul Sullivan, the author discusses litigation finance, which an esoteric, high-risk investment strategy that lures with the potential of double-digit returns. It’s an industry with a few publicly traded “behemoths”, but it remains the preserve of private-equity-style funds that invest in cases, back law firms and act as financial intermediaries when settlements have been reached.
And the pandemic could be its time to emerge from its little-known niche. Some of this will come from coronavirus-related suits, like business interruption claims and lawsuits against landlords who do not fulfill their obligations to safeguard their buildings.
But a larger amount could come from litigation that arises when there is less economic opportunity and businesses begin fighting for what is left. Most of the litigation finance funds are set up to step in when one side is running low on money to continue a claim that could bring a substantial win.
“We have the wind to our backs in this unusual environment,” said Howard Shams, the chief executive of Parabellum Capital and an early practitioner in the industry.
The market can deliver returns of 30 percent or more. The type of claims and the law firms that seek financing vary. But so, too, does the investor base, which includes wealthy individuals and families, as well as college endowments and sovereign wealth funds.
Bill Parizek, a partner at Pentwater Advisors, a business consulting firm, said he had one-third of his net worth in LexShares, which just raised its second litigation finance fund but also invests in one-off cases.
“At its core, it’s a level-the-playing-field type of thing,” Mr. Parizek, 59, said. “They’re backing the weaker spouse, as it were, in litigation.”
Since 2016, he and his brother, John Parizek, have made 49 investments at an average of $13,000 each. He said he had calculated that even if they lost 25 percent of the cases and recovered nothing, they would still have solid returns.
With 32 cases outstanding, he said, only four cases have lost money, while the other 13 have paid returns. They were up 30 percent last year.
LexShares got its start as a fundless sponsor in 2014. Bigger firms are primarily backed by pension funds and sovereign wealth funds, but LexShares counts many individuals as investors. They all have to be accredited investors, which means they have more than $1 million in investable assets or an annual salary greater than $200,000. It is raising a second fund, at $100 million, only two years after its first $25 million fund.
Another investment group, Therium Capital Management, funds only 3 percent to 5 percent of the cases it reviews in regular times, said Eric H. Blinderman, the chief executive. But with increased volume, it will be more selective and fund fewer now.
He added that the firm needed to believe there was at least a 70 percent chance that the case would succeed, that the case would resolve in a set amount of time and that the losing party would be able to pay the judgment.
“To survive, you need discipline,” Mr. Blinderman said. “You cannot take a flier. We’re not funding on coin tosses. We’re not funding on maybes.”
Only in America, right? Where lawsuits mean investors funding the lawsuits – as long as they think they have a good shot of winning and making money, that is. If only I had a “spare million” to invest – just kidding… 😉
BTW, just a reminder that on Wednesday, July 15, ACEDS will conduct the webinar Seeing 20/20: Reasonable and Proportional Discovery in 2020 at 1pm ET (noon CT, 10am PT). Come join Mandi Ross of Prism Litigation Technology, Martin Tully of Actuate Law and me where we’ll discuss challenges with “right-sizing” discovery proportionally and defensibly, what can be leveraged from the rules and relevant case law regarding proportionality, and what best practices can be deployed for quick evaluation of potentially relevant custodians and data sources. Don’t miss it!
So, what do you think? Are you surprised that there are investment companies out there investing in litigation? And, as always, please share any comments you might have or if you’d like to know more about a particular topic.
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