When asked whether a tension exists in litigation finance between those who come from a finance background and the former litigators that most often run funds, Tets Ishikawa does not mince words.
“This is a financial services industry, not a legal service one,” he says. “Clearly, legal experience and expertise are vital to the process, but doctors would not manage a healthcare fund, amazing IT coders would not manage a tech fund, and builders would not manage a real estate development fund. Investing in litigation is fundamentally about investing, not litigating.”
It should be noted that this unvarnished opinion was offered with a broad smile, at allegro tempo, and in good humor. It was nonetheless unambiguous.
“I don’t really buy the logic that this is legal services,” Ishikawa continues. “Are we invoicing clients? No. Are we advising clients? No. Are we controlling cases? No. We just provide money. Why do I think that tension exists? Because the industry has grown out of litigators, and understandably so, who often struggle to let go.”
The fund leaders interviewed for this article all acknowledged that, if not outright tension, the differing skill sets, mindsets, and working styles of those who come from one background or the other are a reality. Whether that leads to fruitful collaboration or one side taking the lead is subjective. What is certain is that as the litigation finance space matures, this contrast will come into fuller view, and meeting in the middle will become increasingly important.
“I love being challenged and being told I’m wrong because it means I am more likely to end up with a more considered conclusion.”
An Evolving Landscape
Ishikawa is Managing Director of LionFish, a litigation funding subsidiary of RBG Holdings plc, which started as a City of London law firm. A former investment banker with stints at ABN AMRO, Goldman Sachs, and Morgan Stanley, he has been involved in litigation finance since 2011, and notes the accelerating ingress of finance professionals to the space.
“Litigation is a highly specialized area, so of course litigators were the initial drivers of the market,” he says. “I feel like it’s still 90% lawyers and 10% finance people at this point, but the general trend you’re observing is correct. There are more financial services people coming in than even the traditional litigation funders recognize.”
As litigation finance evolves and matures it draws interest from more investors. Some hedge funds, special situation funds, and family offices were early players in the space, and more are becoming interested. Some are traditional litigation funders; others have new and nuanced strategies. As the spectrum of parties and interests expands, conventional lines blur and an increasingly diverse range of skills and experience is required.
“I have a legal background and our CFO has a background in banking, private equity, venture capital, and hedge funds,” says Michael Nicolas, co-founder and Managing Director of Longford Capital. “Different, but complementary perspectives.”
A former corporate litigator, Nicolas says that to build a well-rounded company, a diverse array of skill sets is necessary. That means not just litigation and finance experience, but operations as well.
“It’s critical to have these diverse backgrounds,” he says. “It’s essential to understand and value different perspectives. Not only with respect to our investments, but also the management of the company. A collaborative approach leads not only to an appreciation of different perspectives, but the best possible decisions.”
He’s not the only one who feels that way.
“A collaborative approach leads not only an appreciation of different perspectives, but the best possible decisions.”
Co-founder and Managing Director
Intersection of Experience
“I’ve always loved the intersection of finance and law,” says Cindy Chen Delano, a co-founder and Partner of Invictus Global Management. “That’s why I became a bankruptcy lawyer. It’s neither fish nor fowl. You’re not a pure-form litigator. But you’re not a pure-form corporate lawyer. You’re a dealmaker in a distressed situation where things are falling apart and you have to take different seats given the relative stakeholder paths. You have to figure out the puzzle and it’s always a limited pie. You have to understand finance, you have to understand the leverage points so you can negotiate. And you also don’t have a lot of time.”
Chen Delano says that she did find tension between law and finance at large institutions. She previously served as Associate General Counsel at AIG, and practiced at Kirkland & Ellis, at Weil Gotshal, and at Milbank, representing both debtors and creditors. The tension she observed was a part of why she co-founded Invictus.
“People often say lawyers are expensive and they’re not revenue drivers,” she says. “People also think principals on the business side are risk-takers and you have to rein them in. That’s a myopic way of looking at it. Everyone has a common goal.”
When her co-founder, Amit Patel, approached her with a simple idea, it resonated with her experience in distressed assets. He asked what would happen if the lawyer didn’t come in after things had broken, trying to restructure it, or after the deal was done, trying to pay for it, but rather at the very beginning, where you work side by side so you can identify risk early.
That takes a different way of thinking, but, Chen Delano says, it grows the pie. Working with like-minded people affords creative opportunities to avoid zero-sum conventions and create more, as opposed to trying to simply take the biggest slice of the smallest pie. The secret to this approach, she says, is empathy.
“One of the best ways to negotiate and do a deal is to think about what the other side would feel if faced with the proposition you give them. Also don’t be afraid about not knowing something. There’s often an assumption that you’re supposed to know everything. But the reality of it is, what can we learn? And what do we not know?”
That openness can help collaborators with different skills and experience let their guard down and find fresh insight.
“Lawyers are taught to be risk averse,” she says. “It’s about understanding where the guardrails are. In finance, you’re constantly thinking risk-reward; a calculated risk. If you put the two together, a calculated risk with the necessary guardrails to make sure you don’t do something terrible, that’s phenomenal.”
Finding that balance can be both an art and a science. For one fund leader, the science is science.
“People often say lawyers are expensive and they’re not revenue drivers. People also think principals on the business side are risk-takers and you have to rein them in. That’s a myopic way of looking at it.”
Co-founder and Partner
Invictus Global Management
Bridging the Gap
Cayse Llorens began his career as a computer engineer. That led to an investing career and his current role as CEO of the funder LexShares.
“The way an engineer thinks about technical matters, in many ways, mirrors how a lawyer or a finance professional questions law or structuring a deal or portfolio composition,” he says. “Engineering and law and finance all require precision, but also meeting theory with practice. For some that can be an uncomfortable leap, but it’s necessary across all three.”
Llorens says there’s a lot of common ground. Venture capital requires similar skills and traits, and the ability to take a long view. Results are measured in years, not quarters or months, requiring a broad view of the landscape. Shrewd venture investors routinely measure the quality of vision of the leadership teams, making good on market opportunity and growth trajectory.
“The vernacular may change, but the fundamentals are crosscutting,” he continues. “Perhaps it’s less about skill sets or jargon, and more about finding common ground in what we’re driving toward. We want to render a good service to the ultimate clients of the law firm; we want to have a good cost of capital; we want to have a win-win in how we structure things and how we deal with others.”
A cross section of disciplines lends itself to innovation, Llorens says. But ultimate success comes down to people.
“If you look at who’s fast moving, who’s reputable, these are going to be the qualities that really build mindshare as the industry evolves. As much as we can talk about the finance side, the legal nuance, we can talk about the people and the reputations you build for the long run.”
“Perhaps it’s less about skill sets or jargon, and more about finding common ground in what we’re driving toward.”
Perhaps, in the end, it’s not an either/or proposition. One side dominating or another asserting its strength. Rather, as the litigation finance sector matures, more and more perspectives will be folded into an increasingly diverse and malleable offer. On that, even Ishikawa agrees.
“I can seem very opinionated, but I love a good old healthy debate, which is only possible with opinions, especially outliers,” he says. “I love being challenged and being told I’m wrong because it means I am more likely to end up with a more considered conclusion. In the financial world you challenge people all the time — not just on the wisdom of any investment you want to make — but everything. Does this make sense? Does that stack up? Have we considered everything? If we all agree, are we all missing something?”
That means that success in litigation finance may hinge on, of all things, acknowledging the prospect of failure.
“Litigators love talking about wins and therefore as an industry, we’ve grown up overplaying how great and easy it is, which explains a lot of the criticisms the industry attracts,” Ishikawa says. “But it’s far from easy and I doubt few, if any, of the critics would ever invest their money into litigation risks. We all lose cases and when we do, it hurts. But that’s like any other financial asset class. Having that financial acumen earlier may have helped the industry avoid some of the challenges it has faced in its rapid growth.”