Hulk Hogan, Gawker, and the future of litigation finance

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Hulk Hogan needed more than 24 inch biceps to beat the deep pockets of modern media.

As the celebrity professional wrestler’s invasion of privacy suit against gossip site Gawker progressed, Hogan’s financial limitations nearly put an end to the trial. When the plaintiff appeared close to settling, Peter Thiel, successful entrepreneur and co-founder of Paypal, emerged as a white knight, bankrolling Hogan with $10 million to pursue the litigation. With deep pockets, Hogan was able to ride out the case, ultimately winning $140 million and forcing Gawker into bankruptcy.

As this case showed, even presumably high net worth individuals can benefit from tapping outside sources of capital to fund their legal cases. Litigation financing levels the legal playing fields so that David can battle Goliath. And Thiel isn’t the only high profile investor to finance lawsuits: pop sensation Taylor Swift recently provided financial assistance to fellow performer Kesha thorough a protracted contract dispute. These examples of litigation financing may have been driven by social justice and not ROI, but there’s a whole field of financing that views litigations as ripe opportunities for investment.

The old-school litigation finance market

Around 6 years ago, I was living in Los Angeles and investing in small businesses. A broker pitched me on investing in personal injury lawsuits. He explained that his company fronted plaintiffs cash to be used for living expenses while their lawsuit progressed. Through the investment, his company purchased a portion of the settlement, with terms negotiated on a case-by-case basis.

I chose not to invest in the company for a variety of reasons, but my eyes were opened to this alternative form of investment. The industry’s growth since my meeting is impressive: the litigation financing market was estimated to be $1 billion in 2011, and since then, 4 times as many law firms have participated in litigation finance, according to a report from Burford Capital, an active investor in the space.

Third party litigation funders are divided into two groups. The small players are individuals like my buddy who pitched me — they’re small business owners or individual investors who fund cases on a deal by deal basis. Most of their cases are personal injury lawsuits — you may catch their commercials while watching high-quality early afternoon TV shows like Maury Povich and Jerry Springer.

Funders invest between 10%-15% of the litigation’s expected future value, and plaintiffs use funds as bridge loans to pay for bills and expenses they incur during the lifetime of the trial. Successful litigations of these sorts are typically worth less that $100k, and plaintiffs are charged interest by their financiers, to be paid out of the winnings. Return profiles differ on a case-by-case basis and of course are affected by the size and scope of the trial, but it’s not uncommon for investors in litigation financings of these sorts to see returns between 30%-40% annualized, according to Josh Schwadron, CEO of Mighty, a software firm that services litigation financiers.

On top of the litigation finance food chain are investment houses that back corporations in need of liquidity for legal expenses. Funders deal with the plaintiff directly or through lawyers working on contingency, and usually invest a minimum of $2 million, according to Burford Capital. Unlike personal injury cases, funds invested go directly to legal fees.

The largest fish in the litigation finance pond, Burford Capital, has raised over $500 million for these types of investments. To manage its risk and identify investment opportunities that on average receive $10 million per case, Burford employs a 5 stage vetting process, including legal and economic assessments of the litigation, multiple presentations to investment committees, and evaluations of outcomes and settlement prospects. The UK-based firm rejects the majority of the cases it reviews. This process must be working: recent financial filings show that the company claims an impressive 60% net ROI on its litigation finance portfolio.

Why invest?

Investors in litigation finance like the lack of correlation to other markets, according to Jay Greenberg, CEO of litigation finance platform, LexShares. Litigations exist in an economic vacuum, and changes in interest rates, currency values, and housing prices don’t seem to have an effect on court proceedings. Also, investors like the natural exit and liquidity – the average case lasts around 28 months, giving the investment a short-term life cycle. Finally, individuals with legal expertise, like attorneys, are able to convert their experiences into profits, passively observing court cases from the back of a courtroom.

“Attorneys have expertise that can help them become good lawyers, but outside of  their primary business, they can’t leverage their expertise,” said Mighty’s Schwadron. “Now for the first time through litigation finance, they have the ability to make money off an expertise they have.

Until now, all sizes of litigation financing investments have been reserved for those close to the legal system. Just like most secondary market investments, litigation funders need to know a guy, who knows a guy…who knows a guy. But with new startups emerging, the market for investing in litigation finance is opening to everyone.

Fintech brings technology to litigation finance

Litigation finance remains more focused on sourcing quality cases than technological advances. But there are fintech startups trying to bring this industry into the 21st century. Founded in 2015, Mighty originally acted as a 3rd party funding platform for personal injury cases, but eventually pivoted to service professionals and organizations in the litigation finance industry, helping small individual funders organize and optimize investments with its software.

Lexshares is a crowdfunding platform for litigation funding, focusing on litigations between $100K and $1M in value. Founded in 2014 and with offices in New York and Boston, Lexshares attempts to strike balance between advice and guidance when investors use their platform.

Investors using the Lexshares platform don’t always have a legal background. In order to properly educate users, Lexshares provides its case-analysis to investors. Using a vetting process similar to Burford Capital’s 5 point checklist, Lexshares analyzes prospective cases applying for funding and approves only 4% of litigations for investment. When a potential investor accesses investments on the startup’s platform, he can review the findings of the underwriting team, including a case’s background and details, relevant court documents, and actual pleadings. An investor with a legal perspective can choose to read all the nitty-gritty documentation, and if not, he can use the findings of the Lexshares’ vetting committee to help make an investment decision.

The magnitude of the Hogan/Gawker case brought litigation financing into the general public’s eye, and Lexshares CEO Jay Greenberg has seen an uptick in investors since Peter Thiel got involved. “Funds have been taking advantage of litigation financing behind opacity,” Mr. Greenberg remarked. “This is the first time investors are able to participate in the asset class.”

So far, investors on Lexshares have funded 13 cases, 11 of which are awaiting resolution. Two cases were settled in under a year, netting 93% and 88% IRR on a tiny sample size — great for returns but not for capital gains taxes (which should be any investors worst problem). Lexshares monetizes in a similar fashion as a hedge fund, taking 20% of profits from investors (after principal is paid back), and between 5-10% from plaintiffs for raising funds.

An investment with hair on it

Litigation financing claims big yields and IRRs, but the investment isn’t all sunshine and moonbeams. For anyone with a basic understanding of economics, high yields come with high risks – it’s the same reason why mortgage rates are so low and student loan rates are so high. The risks that come with yields as high as a 60% return on capital and 93% IRR are not negligible.

Investors should consider the actual litigation — settlements can give a high yield in a short amount of time, but they aren’t gimmies anymore. “Insurance companies are much less interested in quick settlements than they used to be and will often run the clock at the expense of claimants and those funding them,” said Ethan Benovitz, partner at NY based investment firm Genesis Capital Advisors, A longer litigation also puts pressure on the plaintiff to settle for less money, affecting investor yields. Mr. Benovitz agrees: “Many risks associated with delays and extensions of timelines for settlement or resolution can impact rates of return measurably,” he wrote in an email exchange with Tradestreaming.

Investors also have to contend with the binary nature of litigation finance. Just like being a little pregnant, you can’t win a little of a court case — you either win or lose. Unlike a real estate or business investment, there aren’t assets to sell off if the deal goes south. Money fronted to plaintiffs is non-recourse, eliminating any chance for a claw-back in the event of a loss.

Some investors feel uncomfortable profiting off of someone’s (or something)’s loss. The social aspects of investing in litigation finance may turn some investors away.

Opening doors

Proponents of litigation financing embrace the social aspect of helping the little guy seek justice, while simultaneously pulling in a nice yield. Others would say investors are taking advantage of the legal system, and that investments are too binary and risky. Either way you look at it, fintech companies have brought litigation financing out of the shadows, and investors can chose if they want to participate or not. The fact that investors have more access and choices helps keep it real in the investment marketplace.

It will be interesting to see if litigation financing becomes more mainstream or if it continues as a peripheral alternative investment. The jury’s still out, and only time and dollars will give the marketplace a true verdict.

Opening up access to new investors in litigation finance

investing in litigation

Jay Greenberg is co-founder and CEO of LexShares, a new online investment platform for investing in litigation finance. While investing in legal claims has long been done, it hasn’t been easy for investors to get exposure to this asset class.

Tradestreaming recently discussed litigation finance with Jay and how different types of investors are turning to his crowdfunding platform of sorts to access investment opportunities.

What is litigation finance?

jay greenberg, ceo of LexShares, litigation finance platform
Jay Greenberg, Co-Founder and CEO, LexShares

At its most basic level, litigation finance, also called litigation funding, is the practice in which a third party unrelated to a lawsuit provides capital to a plaintiff in return for a portion of any financial recovery from the lawsuit. Litigation finance unlocks the value of legal claims by providing capital to plaintiffs before their cases are resolved. Investing in legal claims creates a new asset class out of disputes, allowing investors to purchase portions of future proceeds from litigation for an upfront payment. LexShares’ model helps connect accredited investors with pre-vetted investment opportunities.

How were cases financed before LexShares? Who invested in litigation?

Prior to LexShares, a number of institutional investors were investing in litigation using more traditional models. Litigation funders have typically included large investment banks and hedge funds. Similar to private equity in the early 1980s, the litigation finance market has been highly capital constrained with a large number of high quality legal claim investment opportunities and a dearth of capital. LexShares is aiming to fix this imbalance by allowing a greater number of investors access to this innovative asset class.

How does LexShares work?

Plaintiffs apply to have their cases posted on LexShares. Cases are then reviewed by LexShares’ team of experienced legal and securities professionals. Once posted, accredited investors can review a case and decide if they want to invest. Investors are able to track litigation activity related to their investment. If the plaintiff wins, the investor receives a portion of proceeds; if the plaintiff loses, the investor forfeits their investment.

How has LexShares changed the model with crowdfunding? Can you talk about progress since you launched?

Prior to LexShares, investments in litigation were primarily reserved for institutions and ultra high net worth individuals. Now with crowdfunding, individual investors are able to invest in the same asset class which these institutions have been taking advantage of for years.  On LexShares, investors can participate in funding legal claims for as little as $2,500.

LexShares focuses on a segment of the market where most other dedicated litigation funders do not currently invest. LexShares typically posts commercial cases with a one hundred thousand to one million dollar funding requirement, whereas most commercial litigation funders are unable to deploy less than three million dollars per case.

Since LexShares launch we have provided a diverse set of litigation finance investment opportunities to our investors. Our investment opportunities have ranged in size from $85,000 to $1,000,000. Types of cases funded through LexShares include breach of contract, fraud, whistleblower, business torts and civil rights.

Is this just for retail investors or can institutional also participate?

We opened LexShares to institutional investors this past July.  After our launch, it became clear that this innovative asset class, that is not correlated with capital markets or macroeconomic factors, was appealing to institutional investors. The LexShares model of crowdfunding lawsuits hasn’t changed. What has changed is that individual investors are now investing alongside institutional investors. The additional funds will enable us to help more plaintiffs.

What’s in the product pipeline? What can we expect to see from you guys down the pike?

We see LexShares as a platform that enables investors to generate uncorrelated returns by helping plaintiffs access justice. We will continue to develop LexShares product to be able to help a wider number of plaintiffs and provide our investor base with a larger number of high quality litigation finance opportunities.

If you are looking to learn more about LexShares and litigation finance in general you can visit our Litigation Finance 101 page or Investing in Justicewritten by LexShares Chief Investment Officer Max Volsky, also provides an excellent introduction to legal finance, lawsuit advances and litigation funding.

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Investing in litigation finance — with LexShares’ Jay Greenberg

invest in litigation finance

LexShares, a new investing platform co-founded by Jay Greenberg, allows individuals to invest in litigation.

Known as ‘litigation finance’, this form of investing hasn’t been available to a wide investor base but returns have been as high as 50%. Jay talks to Zack Miller, Tradestreaming’s host, about the origin of litigation finance and how investors can now use LexShares to get access to a very exciting asset class.

Listen to the FULL episode

About Jay Greenberg

Jay Greenberg, CEO of LexSharesJay is the co-founder and CEO of LexShares.

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