On Thursday, Litigation Finance Journal held a special digital conference on how litigation funding and the broader legal services sector have been impacted by COVID-19. Ed Truant of Slingshot Capital moderated an expert panel, which included Eric Blinderman, CEO (U.S.) of Therium Capital, Paul Haskel, Partner at Richards, Kibbe & Orbe, LLP, and Ralph Sutton, Founder and CEO of Validity Finance.
The conversation opened on the macro implications of the COVID-19 pandemic, and how the broader legal industry is being impacted.
Paul Haskel, the one practicing attorney on the panel, opened the discussion by explaining that firms are experiencing a decline in revenue, and anticipate that continuing. Staff reductions and hiring freezes have become commonplace. And due to financial scarcity, firms that have never before considered third party funding, are now taking a close look at industry utilization. In line with what’s happening across industries, law firms both large and small are also focusing on investing in tech tools to reduce costs, and reevaluating the need for real estate, as working from home becomes more palatable for many roles.
Mid-way through the hour-long conference, the topic shifted to COVID-19’s impact on litigation funding. Below is a small sampling of the Q&A that took place:
Ed: How do you see the changes in Force Majeure claims in the future, given that many such contracts don’t include clauses specific to pandemics?
Paul: Force Majeure has to be specifically cited, and it’s rare to see a clause that refers to a pandemic. Historically these claims have been read narrowly. What will be fascinating to see, is how courts interpret this going forward. What happens if a contract wasn’t specific about pandemics, and was this unforeseeable?
Ed: Are Force Majeure claims a good bet for lit funding? Or are they too subjective in nature?
Eric: This turns on the four pillars of underwriting. Likelihood of success on the merits, damages, timing of recovery, judgment of the lawyers. Most FM clauses still trigger payment obligations even if other obligations are negated. The question then becomes whether or not they have the ability to pay.
Ralph: I think firms that only dabble in funding would do better to focus on their own houses.There will likely also be fewer new firms getting into lit fin for the foreseeable future. Those who are funding can be much pickier as there will be so many opportunities to fund.
Ed: How will hedge funds impact the markets?
Paul: Over the last five years, hedge funds have created platforms in litigation finance. Overall, everyone is waiting to see what happens with the market. I represent a lot of multi-strategy hedge funds, and they are all hesitant to enter into new investments right now. I agree that there is much more opportunity out there, it just depends on who is putting capital to use.
Ralph: I would expect that hedge funds that dabble in litigation finance and don’t have an entire dedicated unit, but maybe just one person or two people looking at the space, that they’d rather focus on their corse business and ensure that they are keeping their powder dry to focus on things they understand much better.
I also think there will be fewer new litigation finance companies launched in the near future, because the capital will be more frightened of folks who do not have track records. That said, folks with strong track records can expect to find limited partners willing to fund them.
Ed: Where would you expect to see the most activity over the next 6-12 months?
Ralph: The majority of claims for us are still commercial. 25% or so is patent, which will probably continue. I think we’ll do a lot more insurance recovery.
Eric: There’s an immediate need to look for revenue streams, and insurance policies is an area everyone is turning to. We can expect a wave of class action suits as well. People are hurting and plaintiff-side lawyers are looking for someone to blame.
Ed: For new opportunities, have your underwriting procedures changed at all, or is there more emphasis on certain underwriting aspects today than there was a month or two ago.
Ralph: We haven’t changed our criteria at all. Most funders turn down over 90% of the opportunities that come to them. I don’t think that’s going to change dramatically.
Eric: I agree exactly with what Ralph said. The fundamentals matter. There’s no shortcuts, no secrets. You need to focus on the core basics of what makes you successful, and if you do that, you’ll make it through this crisis.
Ed: Last question, if there is a significant increase in cases, is there sufficient capital in the marketplace to meet demand?
Paul: There will be less capital in the market, and what’s there will be more selective and seeking a higher rate of return than is currently there. So I think there will be an opportunity for funders to be even more picky, going forward.
Eric: I agree with Paul, although I don’t generally foresee us changing our capital structure. We’re pricing risk. There is a tremendous ability for litigation finance companies to be more selective, as opposed to less.
Ed: What about you, Ralph, are you going to run out of money or are you good?
Ralph (laughs): I think we’re good.
