What was your point of entry to litigation finance?
One of the people who came through the incubator was financing legal claims, primarily for consumers. We started doing diligence on that and saw the majority of those cases settled in favor of the plaintiff, and a very high percentage were financially successful. We thought it was unique and saw it as a new and emerging industry.
We did about eight months of due diligence on the legal aspects, then started a fund. I was one of the co-founders of American Legal Funding, which was primarily based on consumer-related litigation financing. In that we did our fair share of antitrust cases, we financed law firms, and became schooled on that model. We worked together for about 13 years and built one of the more successful consumer-based litigation funding companies in the country.
In 2013, I saw a real opportunity to do more commercial litigation, law firm investments. That’s why we created Pravati.
Pravati is a Sanskrit name that means to benefit, help, and protect. Our objective is to step into cases where somebody had been hurt or taken advantage of — the David and Goliath scenario is our focus. Now Pravati is one of the largest funders in our country. We don’t fund anything consumer related. But back in 2003, consumer financing was an education to learn the details and life cycle of a case. It was a good education for us.
“It’s the first time in the history of the United States that a nonlawyer can own a law firm. In some contexts, it’s good to have a CEO or finance person in a firm, looking at it from a commonsense business perspective.”
Founder and CEO
You’ve been in the space for a long time. How have you seen litigation finance evolve?
Law firms are now much more open to litigation finance and law firm financing. We’ve also seen a big change between nonrecourse and recourse contracts over the last two or three years as many funders have now seen how investments can go sideways. What we’ve seen is the acceptance of capital in the US and UK legal markets.
It’s been tremendous to watch how it used to take months to raise $100,000, and then another four months to convince and educate attorneys it was legal to use capital. Now we’re raising hundreds of millions of dollars and we’re putting that kind of money out on a regular basis.
Let’s talk a little bit about alternative business structures. Your headquarters are in Arizona, which gives you a novel perspective. What’s the outlook on the ABS front?
It’s the shiny object in the room, so it’s an interesting topic. Arizona is the first state, outside of Utah’s sandbox, that has passed this new law. It’s the first time in the history of the United States that a nonlawyer can own a law firm. In some contexts, it’s good to have a CEO or finance person in a firm, looking at it from a commonsense business perspective. That’s often different than a senior lawyer’s perspective that is in the weeds of trial preparation and other sophisticated tasks while trying to run a law firm.
ABS can also help attorneys who have cash flow constraints use capital to take a case to completion for their clients. But from a funder’s perspective, I’d much rather invest in a firm with a line of credit that has a senior lien position. In my experience, that’s a much better position than to be an equity member of a firm.
Now, it can do many different things for us. And we’re looking at it closely. We’ve been working with the powers that made this happen in Arizona for two years. We’re seeing a lot of gotchas, just like the DC law firm model that attorneys thought was the holy grail.
When you fund as equity into a law firm, you have serious conflict issues.
Where do you see things going over the next five years?
It’s going to continue to grow. Law firms are much better off working with a traditional litigation funder than hedge funds. A hedge fund will outsource case underwriting to a third-party law firm to review; now you have more of a privilege issue. Now you’re sharing nondisclosed data with a third-party law firm to underwrite, which creates significant nondisclosure data leakage.
Law firms and commercial entities seeking capital for a case dispute and investment should seek a bona fide litigation finance company that will keep case data confidential from a legal underwriting perspective, as well as confidentiality in the investment community. Pravati is a unique private equity company in that it underwrites and finances investments all in house. We see this industry niche continue to grow — we believe there will be more attrition fallout of investment firms as origination of assets and collateral management will be more involved and will require higher staffing needs.