A Menu of Products for Investors and Lawyers (Series: Commercial Litigation Funding 101)

Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™
Receive our free weekly newsletter at www.financialpoise.com/subscribe
Insert the cover image for this webinar on this slide entirely
1

Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
2

DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
3

MEET THE FACULTY
Moderator:
Jeremy Waitzman – Sugar Felsenthal Grais & Helsinger LLP
Panelists:
Ken Epstein – Bentham IMF
Evan Fried – Greybridge Capital LLC
William Weisman – Therium Capital Management
4

ABOUT THIS WEBINAR:
A Menu of Products for Investors and Lawyers
Litigation funding is an increasingly-popular tool for attorneys and clients to share the risk
and reward of litigation with third-party investors, and for investors to capitalize on the
uncorrelated returns generated by legal-driven revenue. However, the term "litigation-" or
"legal-" funding actually encompasses a handful of products, which vary based on borrower
profile, stage and sector of litigation, use of proceeds, and ultimately, cost of capital and
risk-reward profile. This webinar examines three funding products -- case fundings, law
firm loans, and portfolio fundings -- and aims to inform attorneys on best solutions for
their firms and clients, and provide an overview for institutional investors looking to
allocate capital to litigations.
5

ABOUT THIS SERIES:
Commercial Litigation Funding
The Litigation Funding webinar series discusses advanced topics in the field of litigation funding.
Once a fledgling industry predominantly used in the Commonwealth nations, litigation funding has
over the past ten years becomes a well-accepted and prevalent practice in the United States. As the
industry has evolved, so too have the menu of available products, strategic decisions made by
funders and practitioners, and types of investors. This three-part series is geared towards educating
attorneys and clients on legal/ethical, strategic, and business decisions when considering litigation
funding, and investors seeking to learn about an increasingly mainstream asset class. Panelists
include preeminent experts in the field of litigation funding, including academics who have written
on the topic, investment managers at preeminent litigation funders, litigators who have used
funding products, and independent litigation funding advisors.
6

EPISODES IN THIS SERIES
3/13/19 Episode #1:
An Introduction to a New Yet Old Funding Alternative
4/10/19 Episode #2:
A Menu of Products for Investors and Lawyers
5/8/19 Episode #3:
Three Case Studies
7
Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #2:
A Menu of Products for Investors and
Lawyers
8

LITIGATION FUNDING: A BROAD
DEFINITION
• Litigation or legal funding is the “funding of litigation activities by
entities other than the parties themselves, their counsel, or other
entities with a pre-existing contractual relationship with one of the
parties.”
• Source: American Bar Association Commission on Ethics 20/20, “White Paper
on Alternative Litigation Finance”
9

TYPICAL LITIGATION FUNDING
“PARTIES”
• Plaintiffs
• Attorneys and Law Firms
• Funders
• Investors
1
0

LITIGATION FUNDING:
SEGMENTATION
• Consumer vs. Commercial Funding
• Early vs. Late Stage Funding
• Domestic vs. International Funding
• Funder Structures
• Lawyer & Law Firm Characteristics
1
1

METRICS FOR ANALYSIS
• Risk
• Use of Proceeds
• Alignment
• Costs of Capital
• Funded Party Profile
1
2

METRICS FOR ANALYSIS: RISK
• “Risk” is the probability of occurrence of losses relative to the expected return on
any particular investment
✓ Litigation is an inherently risky underlying investment
✓ Risk varies dramatically based on type of litigation -- e.g., contract, intellectual property,
antitrust
✓ Litigation risk is not constant, but rather fluctuates based on litigation developments
✓ Funded parties may own diversified litigation risk, depending on the circumstances
✓ Risk also includes headline and regulatory risk
1
3

METRICS FOR ANALYSIS: USE OF
PROCEEDS
• “Use of Proceeds” -- for purposes of this presentation -- will refer to how the
funded party (the plaintiff or the attorney) intends to use the funding
✓ Proceeds may be used for direct litigation costs, i.e., attorneys’ fees and/or costs
✓ “Hard costs” includes discovery costs, experts’ fees, filing costs; basically
anything other than attorneys’ fees
✓ Funding arrangements may be used for non-litigation needs, such as operational
needs of plaintiff or so that plaintiff can recognize revenue
✓ In other situations, attorneys may seek funding for use across firm-wide activity,
not just one specific litigation
1
4

METRICS FOR ANALYSIS: ALIGNMENT
• “Alignment” is the extent to which investor and investee have parallel incentives:
✓ Popular new “buzzword” in investing world
✓ Investors’ desire to protect downside by not dis-incentivising funded parties
✓ Protection against information asymmetry between buyer and seller
✓ Preserve upside in high-end, best-case scenarios
✓ Create opportunity for recurring or repeated business
1
5

METRICS FOR ANALYSIS: COST OF
CAPITAL
• “Cost of Capital” is the required rate of return on a portfolio’s existing securities
✓ Used to evaluate new projects
✓ Minimum return investors/funders expect for providing capital--thereby setting
a benchmark
✓ Impacts the types of investments palatable to institutional investors
✓ Impacts the “pricing” of individual funding products offered to clients
1
6

METRICS FOR ANALYSIS: FUNDED
PARTY PROFILE
• “Funded Party” -- for purposes of this presentation -- will refer to the party, i.e.,
the attorney or the plaintiff, ultimately liable to repay the funder
✓ Decision is driven by a variety of factors
✓ Volume and diversification of litigation risk owned by Funded Party
✓ Appetite for risk-sharing by the Funded Party
✓ Willingness to contribute additional collateral to funding arrangement
✓ Legal/ethical considerations--including champerty and attorney fee-splitting
1
7

TYPES OF PRODUCTS
• Single case fundings
• Portfolio fundings
• “Other”- e.g. Loans, “insurance like” products, factoring
1
8

PRODUCT #1: CASE FUNDING
• “Case Funding” is providing capital for a case (or group of cases)
owned by one particular plaintiff (or group of plaintiffs).
1
9

CASE FUNDING EXAMPLE
• XYZ, a failing technology company, seeks $5M in litigation funding, potential
damages of $50M
✓ Alternative Fee Arrangement: $3M to support attorney, who is working
under “hybrid contingency fee arrangement”
✓ Hard costs: $1M for out-of-pocket expenses associated with litigation
✓ Operational costs: $1M as an “advance” to plaintiff, secured by litigation
proceeds
2
0

CASE FUNDING: RISK
• Two assumptions: (i) client is requesting funding before complaint
and (ii) litigation is “bet the company” intellectual property and trade
secret litigation
✓ Type of litigation
o Risky issues relating to intellectual property
o Early phase of litigation means no benefit of defendants’ discovery
✓ Phase risk
o Litigation has not passed any substantive or procedural litigation hurdles
o No meaningful track record of litigant behavior
2
1

CASE FUNDING: RISK (cont’d)
✓ Opportunity for diversification
o Litigant not likely to be a repeat litigant
o Each claim is likely correlated to first litigation; litigation may be scalable,
but not diversifiable
2
2

CASE FUNDING: USE OF PROCEEDS
AND ALIGNMENT
• Use of Proceeds & Alignment tend to be analyzed together
✓ Alternative Fee Arrangements
o Attorneys may invest in (take on contingency) the cases they “love,” and have
funded the cases they “like”
o The greater the attorney contingency, the greater the alignment
o What is the optimal “skin in the game”?
✓ Hard Costs
o The greater the ratio of hard costs to attorney costs, the greater the alignment
o Participation by client and/or attorney adds to alignment
2
3

CASE FUNDING: USE OF PROCEEDS
AND ALIGNMENT (cont’d)
✓ Advance to Client
o Client has final settlement authority
o Amounts funded to client raise the “optimal settlement” figure
2
4

CASE FUNDING: FUNDED PARTY AND
COST OF CAPITAL
✓ Inherent risk requires high cost of capital
o Multiple of invested capital (MOIC)
o Plaintiff must recover at least 10-figure recovery
o Must satisfy funder’s principal plus priority return
o Attorney’s contingency: further “equity”
o Substantial “venture capital-like” risk is best suited for plaintiff, not attorney
funding
2
5

CASE FUNDING: FUNDED PARTY
AND COST OF CAPITAL (cont’d)
✓ Fee Splitting
o N/A
o “Advance” to client creates structural impediment to funding attorney
2
6

CASE FUNDING: TAKE-AWAYS
• Case Fundings -- typically thought of “Litigation Funding 1.0” -- are not
perfect:
✓ Case fundings entail substantial risk, which (i) requires high cost of capital, and
(ii) is challenging to diversify
✓ Use of Proceeds makes alignment challenging, further adding to risk
✓ High cost of capital means case funding is best suited for investors seeking
multiples of invested capital -- i.e., equity-, not debt-like returns
2
7

CASE FUNDING: TAKE-AWAYS (cont’d)
• In describing a shift from 100% case funding in 2009 to 5% case funding in 2017:
• “The reason for this dynamic in the business is that single-case
litigation finance is expensive. That’s because single-cases come
with a significant risk of loss, so when you lose a single case
investment, you lose everything.” -- Chris Bogart, CEO of Burford Capital,
quoted in The Lawyer
2
8

PRODUCT #2: PORTFOLIO FUNDING
• A “portfolio funding” is a transaction secured by proceeds from a
plurality of unrelated litigation due either to a law firm or a
particular client
2
9

PORTOLIO FUNDING EXAMPLE
• SmallBall LLP, a newly-formed firm of former BigLaw attorneys seeks $10M to
support its fees and expenses of three, unrelated cases it intends to litigate
under alternative fee arrangements
3
0

PORTFOLIO FUNDING: RISK
• Risk falls between Case Funding and Law Firm loan
✓ Litigation risk
o Litigations are typically commercial; individually, they entail risk similar to case
fundings
o But, collectively, they create a diversified portfolio
✓ New risks:
o Complexity of fee-splitting rules -- fundings are a “hybrid”
o It is well-established that a funder can receive a capped multiple of invested
capital
o But, what about an uncapped percentage?
o With plaintiff portfolios, no fee-splitting concern
3
1

PORTFOLIO FUNDING: USE OF
PROCEEDS AND ALIGNMENT
• Confronting “alignment” among personalities
✓ Use of Proceeds
o Funds are best suited for a portfolio of cases among one or more attorneys or
plaintiffs
o Contracts can be difficult to structure--need to convene unrelated clients
and/or attorneys
3
2

PORTFOLIO FUNDING: USE OF
PROCEEDS AND ALIGNMENT (cont’d)
✓ Alignment
o Litigator incentives may differ from those of other attorneys at the firm
o Funding contracts may require restructuring in the event of attorney shake-up
o Funded Party must strike a balance between ability to service funding
agreement with desire to have cash remaining
3
3

PORTFOLIO FUNDING: FUNDED
PARTY AND COST OF CAPITAL
• Portfolio Funding is a healthy mix of risk, return, and aligned incentives
✓ Funded Party achieve lower cost of capital than case funding
o Uncorrelated assets provide lower risk profile, allowing lower cost of capital
o Unsecured nature of assets commands cost of capital greater than law firm
loans
o Diversified portfolio means opportunity for early generation of cash to
service funding agreement
3
4

PORTFOLIO FUNDING: FUNDED PARTY
AND COST OF CAPITAL (cont’d)
✓ Funders have found promise in scalability
o Major, mainstream funders have demonstrated some shift from case
fundings to portfolio fundings
o On law firm side, increasing acceptance of use of funding and comfort
with legal/ethical concerns
o On plaintiff side, large appetite for portfolio funding in bankruptcy and
technology litigation
3
5

PRODUCT(S) #3: THE “OTHERS”
• An “attorney loan” is a loan secured by all or a portion of a law firm’s and/or
the partners’ assets.
• Adverse Costs “Insurance” are products that cover the adverse costs (e.g.,
attorneys’ fees) due to a prevailing party.
3
6

PRODUCT(S) #3: THE “OTHERS” (cont’d)
• Legal Receivable Factoring is the purchase of a legal “receivable,” where the
receivable is no longer subject to “litigation” risk, just collection and timing risk.
• Litigation-driven special situations trade is the trade of a public equity
(stocks, bonds, options) on the basis of a hypothesis concerning litigation
impacting that company.
3
7

ABOUT THE FACULTY
3
8

Jeremy Waitzman – jwaitzman@sfgh.com
Jeremy Waitzman advises his clients on significant transactions and operational issues in their
businesses. Described by clients as “an essential business advisor” and “a partner in the success of my
business,” Jeremy has substantial experience representing businesses of all types and sizes from
inception, guiding them through significant growth, and often through ownership’s exit. His clients
include privately-held middle market and emerging growth companies, family offices/funds, investors, C-
level executives, boards of directors, family-owned businesses and entrepreneurs.
Jeremy counsels clients in the areas of corporate law, mergers & acquisitions, private placements, general
contract law and often acts as outside general counsel for his clients. Jeremy represents individuals,
closely held businesses, start-up companies and serves as outside counsel to several large corporations.
His work with companies often includes strategies for creation of enterprise value.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/jeremy-waitzman/
3
9

Ken Epstein – kepstein@benthamimf.com
Ken Epstein is an investment manager and legal counsel at Bentham IMF, responsible for leading the
company’s investments in bankruptcy and insolvency-related matters. He serves as a resource for debtors,
creditors (including hedge funds, private equity funds and alternative asset managers), bankruptcy estate
representatives and other stakeholders seeking to maximize the value of litigation claims. Ken has extensive
experience advising and managing debtors-in-possession, individual creditors and creditor groups (ad hoc and
UCC’s) and financial institutions in insolvency and bankruptcy-related litigation matters nationally and
internationally. He began his career as a lawyer in the financial restructuring group of Cadwalader,
Wickersham & Taft. Prior to joining Bentham IMF, he was managing director in the restructuring and
remediation group at MBIA, a publicly listed financial institution.
Ken’s prior experience also includes restructuring work both in and out of court across various industries. He
taught bankruptcy law as an adjunct professor at Cardozo Law School and has served as a panelist and author
on bankruptcy-related topics. He has testified on several occasions before the Michigan House of
Representatives, Financial Liability Reform Committee and is certified as an insolvency and restructuring
advisor by the AIRA. Ken earned his J.D. from Brooklyn Law School in 2000, where he graduated cum laude
after serving on the Journal of Law and Public Policy. He currently serves on the board of Friends of the
Children NY, a NY non-profit, and has other for-profit and non-profit board experience.
4
0

Evan Fried – efried@grbridge.com
Evan Fried is an attorney who has worked in litigation finance since 2007. He is currently a
Principal at Greybridge Capital LLC, a commercial litigation funding outfit, and Slarskey
LLC, a boutique commercial litigation firm. Mr. Fried was previously a partner at 1624
Capital, a specialty finance company focused on investments in technology/intellectual
property litigation. He has written and spoken on ethical considerations of litigation
finding. Mr. Fried began his career in the New York office of Winston & Strawn LLP and a
family office that was an early player in litigation finance.
Mr. Fried received his J.D. from New York University School of Law and his B.S. in
Industrial and Labor Relations from Cornell University.
4
1

William Weisman – william.weisman@therium.com
Will is a highly experienced litigator who joined Therium Capital Management from
Liberty International Underwriters Inc. At Liberty, he oversaw high exposure matters on
behalf of the company’s Directors & Officers insurance business. Will began his legal
career as a litigator at Proskauer, where he was a member of the firm’s financial services
practice group and specialized in complex commercial litigation. Will subsequently joined
the law firm Gordon & Rees, where he handled all aspects of high-stakes litigations at the
trial and appellate levels. Will earned his law degree, cum laude, from Brooklyn Law
School, where he was Notes & Comments Editor of the Brooklyn Law Review. While in law
school, Will externed for the Honorable Edward R. Korman, Chief Judge of the United
States District Court for the Eastern District of New York.
4
2

QUESTIONS OR COMMENTS?
If you have any questions about this webinar that you did not get to ask during
the live premiere, or if you are watching this webinar On Demand, please do
not hesitate to email us at info@financialpoise.com with any questions or
comments you may have. Please include the name of the webinar in your email
and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
4
3

ABOUT FINANCIAL POISE
DailyDAC LLC, d/b/a Financial Poise™ provides
continuing education to attorneys, accountants,
business owners and executives, and investors. Its
websites, webinars, and books provide Plain
English, entertaining, explanations about legal,
financial, and other subjects of interest to these
audiences.
Visit us at www.financialpoise.com.
4
4
Our free weekly newsletter, Financial Poise
Weekly, educates readers about business,
business law, finance, and investing. To receive
it simply add yourself by going to:
https://www.financialpoise.com/newsletter/
Email addresses are never sold to or shared
with third parties.

A Menu of Products for Investors and Lawyers (Series: Commercial Litigation Funding 101)

Recommended

Recommended

More Related Content

More from Financial Poise

More from Financial Poise (20)

Recently uploaded

Recently uploaded (20)

A Menu of Products for Investors and Lawyers (Series: Commercial Litigation Funding 101)