How has the litigation finance market evolved in recent years?
There’s been a huge increase in the number of funders, the dollars available and the number of law firms taking funding. Law firms are more aware that they have this option and it expands the types of cases they can take. Historically a lot of the “white shoe” firms have not done as much contingency fee work, but some are gradually opening up to new arrangements. The value-add is becoming inherent. There are certain cases that these firms really like, and hourly billing arrangements are beginning to feel restrictive.
Also, the complexity and structural options have really evolved. In the past, law firms typically had two options: a straightforward recourse law firm loan, or nonrecourse funding against a single case with funding needs that would be considered modest relative to certain current fundings.
Nowadays, more of the interest seems to be in individual cases or portfolios of cases that are very large, and complex, and offer three to four times returns, and loans to the increasingly capital-intensive mass tort sector. The trend has been to go after bigger and bigger deals.
“A lot of funds and investors are intrigued by what litigation finance can offer, but they don’t know how to access the space.”
Associate Director, Legal Finance
Yieldstreet
Has the impression of litigation finance changed among top-tier firms?
It’s come from a place of being somewhat stigmatized to some firms opening their arms to it. In my opinion, it’s a matter of time before the industry is going to have to embrace this. Corporate clients typically see litigation as a cost center with many assets that are never monetized, so the ability to offload that risk seems like a no-brainer. Law firms that refuse to utilize a funding model may not be able to win as much business as they could. I believe that defendants are more likely to put forward palatable settlements if they know the plaintiff is funded and prepared for a long fight, if need be.
Let’s talk about your Prism Fund. What’s the theory behind opening this area up to nonaccredited investors? This is pretty rarified territory.
Our mission statement is “prosperity for all.” It’s about democratizing access to hedge fund–like private market investments that typically have multimillion-dollar minimums. It’s a natural corollary that we want to move investment opportunities to more tranches of accreditation. Prism is about providing access to the broadest audience possible. You don’t have to be an accredited investor, you can write a check as low as $500, and you can get access to a diversified fund of eight or nine different alternative asset classes. Where else can a retail investor get this exposure?
Let’s talk about opening this area up to nonaccredited investors.
Whether it’s investors, corporates, or law firms, what don’t people know about the secondary market?
A lot of funds and investors are intrigued by what litigation finance can offer, but they don’t know how to access the space. Secondaries are a natural evolution of the asset class and going to be a huge piece over the next decade. More and more funds are going to want to utilize secondaries to enhance economics while managing risk and diversification.
When we say secondaries, it can mean two things. One is a syndication — when the deal is closed and the funder places it with other investors. We do a lot of that. We work with other funders who are the face of the deal, who close and manage the deal. We sit behind them and they run point.
But there are other situations when it could be a year, two years, three years down the road, where you’re buying an investment or a piece of an investment off of another manager. It’s a re-underwrite and it’s complicated, because you need to know all the twists and turns of the underlying cases. Pricing can be a challenge, and it’s subjective. How much do you think this case has improved in value? Have the facts of the case improved or deteriorated since initial funding?
There’s a lot of information asymmetry to get over. And you have to understand the seller’s incentives, because for the most part, people want to build their AUM in the space. Why are you looking to get out? Maybe it’s the end of the life of the fund or the funder needs to manage concentration risks. That would make sense. You have to approach it with a lot of caution and skepticism.
Where are you seeing the most opportunity right now?
IP is great for those who have true expertise because it is its own animal. It’s a quarter to a third of the litigation finance market. It has its own players and it’s a little bit separate. We have a fund dedicated to IP at Yieldstreet.
The mass tort space has attracted a lot of attention. It’s highly scalable; it’s the closest thing to a commodity in the space in terms of asset collateral. So, it’s a good place to deploy large amounts of money. If you’re coming into the legal finance space, and you need to deploy $200 million to make it worth it to your fund, you’re probably going to look at mass torts.
I think the best opportunity right now is small-dollar cases that are sub-$4 million. That used to be the sweet spot, but as funders have raised increasingly large funds, the sweet spot has been moving up, so a lot of people just aren’t touching these smaller cases.
Also, certain European jurisdictions have really interesting opportunities with follow-on competition claims and group actions. When a ruling handed down by a regulatory body says X defendant violated competition law and operated a cartel, liability is effectively established. So, it becomes a damages exercise, essentially. What quantum can be established?
Those can be big numbers. We’re looking in the space, we like it. Also, the general expansion of the class action system over there has really improved. They’re probably where the US was with class actions 30 years ago — before the courts became more defendant-friendly.
From a very high level I like competition enforcement in Western Europe, and I like some of the smaller opportunities in the US. It may be more vanilla litigation, but far under the radar of the guys who have raised so much money that they need to deploy it. In general, Yieldstreet trusts the funders on our platform and I’m always interested in looking into new opportunities where they have conviction.
We’re in a volatile period right now, economically and politically. What’s your outlook?
I have the benefit of regular roundtables with the other portfolio managers at Yieldstreet who cover commercial real estate, consumer credit, art finance, commercial lending, etc. I get to hear many different perspectives which may not be the case for a manager solely focused on a single asset class.
Our asset class is pretty well insulated from public market and interest rate fluctuations. Business could be really good over the next six to nine months. It really shouldn’t impact us. Times of economic strife tend to unearth fraud. That in itself may spur litigation requiring funding.
Duration has always been a risk in the space. Many funders were negatively impacted during COVID when the courts shut down and cases stalled. But assuming funders’ investments were adequately collateralized, most should push through.
In order for the cyclicality of the broader economy to materially hurt the industry, you would need there to be a black swan event, something like an implosion in the insurance market. Even if the defendants are struggling financially, plaintiffs are going to collect from the insurance company. As long as we’re looking at an investment-grade counterparty, the portfolio is diversified, and we’re managing our basis relative to the damages, I’m not nervous about it. 
