Day two of of the two-day event saw a trio of panels that covered topics such as investment strategy and risk management, the interplay between fund types, and litigation finance as a tool for ESG.
The first panel of the day was titles “CIO Roundtable: Focus on Investment Strategy & Risk Management,” and was moderated by Steven Molo, Founding Partner of MoloLamken. Panelists included:
- Patrick Dempsey, Chief Investment Officer, US, Therium Capital
- Sarah Johnson, Co-Head Litigation Finance, The D. E. Shaw Group
- Aaron Katz, Chief Investment Officer, Parabellum Capital
- David Kerstein, Chief Risk Officer & Senior Investment Manager, Validity Finance
The conversation began with the rise of business interruption claims. Patrick Dempsey of Therium hasn’t seen much in the way of business interruption claims that have been successful yet. There was an initial interest in this case type, but then a lot of negative decisions came out of federal courts, and so interest waned. That said, you can build a portfolio of these claims and hedge your risk going forward.
Aaron Katz of Parabellum noted how his firm hasn’t been active in the business interruption space, though the pace of all other claim types is picking up, with interesting new product areas being developed, including credit-like structures, different stages of cases being presented, lower risk investment types, and even partial recourse feature investment.
Sarah Johnson of D.E. Shaw commented on the emergence of new entrants into the litigation funding space. Competition does affect pricing, and this has more of an impact in creative structuring—with new tranches of risk being created. David Kerstein of Validity jumped in to parse this out. He has seen more competition in pricing in larger size deals, however not so much in the more modestly-sized deals. There is still competition there, as claimants are approaching a lot of funders, just not as much price pressure in these types of claims.
The conversation then turned to bankruptcy. This was a very quick distressed cycle—given that there was a lot of sophisticated money chasing these deals, there wasn’t as much of a need for litigation funding. However, we may soon begin to see bankruptcies driven by litigation, which could prompt claimants to approach funders for partnership or monetization. And smaller cases might be a place for funders, given that these bankruptcy claims are typically underfunded. As David Kerstein of Validity noted, “When there are bankruptcies that are based on litigation assets or issues, litigation funders are well placed to come in and provide value.”
And on the issue of insurance, Aaron Katz noted that judgments are being protected with insurance, products are out there to preserve capital or even back some of the profit in a deal. That said, Parabellum hasn’t seen it as part of the bread and butter of their work. Yet Katz feels it’s only a matter of time before insurance permeates the space, but we’re not there yet.
Patrick Dempsey chimed in on his experience with insurance in UK-based claims. Adverse costs insurance is inherent in the jurisdiction there, and so insurance on a portfolio basis was being considered very early on. That was ultimately deemed unnecessary, but that discussion is starting to return, and will likely come back in full force. Therium only uses insurance for judgment protection in the U.S.
On the issue of regrets, Sarah Johnson noted how she wishes she had been more aggressive at the outset—doing more deals, and being less price sensitive. Having worked previously in distressed investments, she was used to price sensitivity being an issue, but she found that the industry grew a lot faster and provided much better returns than perhaps even she expected. This speaks well to the industry’s continued growth potential.
Later in the day, a pair of panels tackled topics such as fund types, deal structures and costs of capital, as well as ESG and impact investing. One interesting takeaway from the former discussion came from Sarah Lieber, Managing Director and Co-Head of the Finance Group at Stifel. Lieber commented on the large commercial bank syndication model that her firm is structured with. What Stifel does is essentially a merchant banking model—they use their own balance sheet and originate their own transactions. When they approach a partner, whether that is a litigation funder, insurance company, private equity or multi-strategy firm, they choose their partner based on the return profile. And they can syndicate their partnerships within a larger deal construct. Stifel generally operates in the $50MM+ range, and can take on multiple co-investors with various tranches. So Stifel operates in cooperation with many other in the space, in a syndicated investment model.
Stifel’s very presence in the market is emblematic of how prominent the funding industry has grown, and how much it has matured over the past few years. Doubtless there will be further maturation ahead, and likely more funding entities which enact a similar merchant banking model. As Tets Ishikawa Managing Director of LionFish noted (on the same panel discussion): “When the market started in the last 15-20 years, it really started as a litigation funding industry—as one single entity. But I believe this market will become like the commercial real estate market. There are many different types of real estate, just as there are many different types of litigation, so in the end there will be many different types of litigation finance investors.”
