INSUBCONTINENT EXCLUSIVE:
If you haven''t heard much about litigation finance, that may change soon
The practice dates back decades, though it been picking up momentum since 2006, when Credit Suisse Securities founded a litigation risk
strategies unit that it later spun off.
What is litigation finance? In a nutshell, the idea is to fund plaintiffs and law firms in cases
where it looks like there will be a winning ruling
When everything goes the right way, the capital that helps fund the lawsuits is returned — and then some — in return for the risk taken
Litigation finance firms — and there a growing number of them — basically want to estimate as accurately as possible the risk involved
so they can bet on the right horses.
Interestingly, one of the newest entrants onto the scene wasn''t founded by career attorneys or spun
out of a hedge fund or private equity group
Instead it a young, 11-person company called Legalist that run by a 23-year-old Harvard dropout named Eva Shang, who cofounded the company
with her college classmate Christian Haigh (who graduated).
As interestingly, the pair, who say they honed the idea as part of a Y
Combinator batch in 2016, just secured $100 million to put to work
That roughly ten times the $10.2 million they raised for a first fund that tested out their ability to find and finance civil lawsuits that
pay.
We talked with Shang late last week to learn more about new fund, which was raised from non-profit endowments, family offices, and
institutional investors (including an insurance company) and that styled like a private-equity fund with a traditional management fee and
carry structure.
TC: First, how do you find these plaintiffs that you&re backing? Do you reach out to them?
ES: We don''t reach out to them
They&re the repeat players in litigation funding industry; they&re seeing a lot of cases.
TC: And who are they telling you about? Who fits
your criteria?
ES: The plaintiffs who we work with are involved in smaller cases, meaning they require less than a million dollars in
It a lot of money to pay a lawyer, but in the world of litigation, it akin to seed-stage investing
Once [we&ve found candidates], then the algorithms [do the] diligence.
TC: What kind of information or patterns are they seeking out?
ES: We
scrape state and federal court records and look for indicators, like whether a court is favorable to plaintiffs, if particular case types
tend to win, who the judge is
We also check for points at which the case could be dismissed
We&re focused exclusively on commercial cases, so often breach-of-contract [disputes] where it a David and Goliath situation and the smaller
company is typically underfunded
When there litigation, we help pay for attorneys& fees and if it successful, we recover and if not, we don''t.
TC: How many cases have you
backed so far, and how many have you won?
ES: We&ve funded 38 cases, half of them have been resolved, and of those, we&ve had above an 80
percent success rate.
TC: And that has translated into what kind of return for your investors?
ES: We can''t talk about fund returns, but we
scaled up our funds 10x [based on that performance].
TC: That a lot of cases to churn through
When do you step into the process in the lifespan of a lawsuit?
ES: The cases we&re [involved with] are more advanced and are showing
success indicators, so we have a shorter time frame
We also fund smaller cases than most other litigation funders
Because of our approach, where we&re using tech to speed due diligence, we can do that.
TC: You can''t discuss returns but can you tell me
what your investors expect to see back? We aren''t talking venture-like returns, presumably.
ES: Not venture-type returns but high-yield
returns.
TC: There is movement in a small but growing number of states that want more transparency into third-party litigation funding
It aims mostly to protect consumers, but it sounds likesome outfits that fund commercial litigation aren''t so thrilled about it, either
What are you thoughts?
ES: We actually don''t mind disclosure regulation so much
As long as litigation funding is becoming more widely accepted, that a good thing and the rules shouldn''t impact us so much
I also think in the long run that it inevitable and won''t be a huge problem.
TC: Do you syndicate deals? Do you go it alone?
ES: It not
When we invest in a case, we&re [aren''t teaming up with other sources of funding].
TC: Who owns equity in Legalist? You went through Y
You raised a little venture funding
But you also now have this fund.
ES: Y Combinator owns 7 percent of the company [because Legalist went through its accelerator program,
intending to become a legal analytics company]
[Other stakeholders] include VY Capital and Refactor Capital .
TC: How will they eventually liquidate their stakes? Does a company like
Legalist go public?
ES: There are two publicly traded litigation private finance companies
We&re a tech company; there are exit opportunities.
TC: How long will it take you to invest this $100 million?
ES: Our time horizon is five
years and we expect to fund between 100 and 200 cases.
TC: What have you learned in those cases where your investment has gone to zero?
ES:
That there idiosyncratic risk in the court system that can''t be anticipated
If a jury likes you, they&ll find a way to drape the law over you so you win, and if they don''t, you won''t
There also luck involved, as well as having a meritorious case
That why we want to diversify across a larger number of cases.
TC: You dropped out of Harvard because you were accepted into Y Combinator
Around the same time, you also received a Thiel Fellowship, wherein recipients are provided with a $100,000 grant to work on something for a
What do your parents think of all this?
ES: They really don''t understand it, but they can see that I like what I&m doing
My mom does keep asking me when I&m going back to school
She like, &I thought the Thiel fellowship was over after two years!
