first and most important investigation must be, say asset managers,
how the suits are deemed investment-worthy.
Typically, say litigation asset managers, investors direct part of their
high-risk allotment to litigation investments. Because each case has
its own risk profile, one way to get acclimated to the category is to
sort through individual cases available for investment.
LexShares is a Boston-based electronic platform that lets
accredited investors do just that. “It’s our job to vet the cases,” says
Jay Greenberg, LexShares co-founder and CEO. “We break down
the legalese to show what actually occurred with the case.”
As with many of the litigation finance firms, LexShares offers
investors a chance to invest at several points in the legal process.
Greenberg explains that a typical case that settles within 12 months
of the investment might yield two times the investors’ principal,
while a recovery after 12 months might increase at a rate of 1x the
Or, investors can simply buy a percentage of the gross recovery,
for a return of, say, 20%. Since the firm launched in November 2014,
six LexShares cases won or settled, providing a payoff to investors.
One case was lost, resulting a loss to investors.
New York based Halcyon Capital Management, detected an
opportunity in lawsuits as it managed portfolios of distressed assets,
says John Greene, partner and managing principal.
Halcyon’s expansion into corporate litigation investments
evolved into t wo separate litigation funds of undisclosed size, he says.
The key skill, Greene believes, is crafting each litigation opportu-
nity on its own terms. “These are bespoke investments, driven by
process and privately negotiated. We’re buying into a situation, just
as we do with other outcome-driven processes, whether that’s bank-
ruptcy or liquidation,” he says. “Results are driven by process, not
valuation. Think of them as small, middle-market private-equity
deals. You can’t do these in a broad way.”
Another player grounded in private equity is Houston-based
Virage Capital Management, founded in 2013 by Edward Ondarza.
Ondarza is a serial entrepreneur and developed financial and other
derivatives for Enron. He declined to comment for this article, but
in 2015, told an asset managers’ roundtable that Virage structures
debt for law firms to use for expenses as they represent plaintiffs
in third-party cases. At the roundtable, he said the return on the
notes ranges from 18% to 24%. Virage is expanding into a variety of
loans for lawyers leading large class-action suits. At the time of the
presentation, he said Virage had $260 million of institutional capital,
including pension funds, insurance companies, and endowments.
Too Small for Comfort?
Precisely because litigation investments are so complex and idiosyncratic, it might be beyond the scope of a CIO’s office to invest in
specific suits, say litigation investment managers. An essential due
Returns for Litigation Assets Key to the Legal Process
Litigation investments offer a classic risk-reward scenario: risk and rewards are highest early in the legal process when
a case is in discovery. Settlements and verdicts offer lower risk because the cases essentially are in collection. The first filter
is the investment structure: publicly held asset management firm or private capital; portfolios of cases or individual cases.
Asset managers say they usually choose to invest in plaintiff’s cases that are likely to be decided within 18 to 48 months.
Appeal touches off another round
of investment analysis and another
round of potential investment.
If the plaintiff loses, investors lose, too.
These are no-recourse investments.
If the plaintiff wins, it’s a matter of how
much and when the awards will arrive.
The risk shifts from the legal process of
the active case to the collection process.
Settlements are good news
because they guarantee investors
If the case is dragging on, law firms
might seek investors to buy a slice of the
anticipated verdict so they can divert
cash to new cases.
The class has been
defined and the
parameters of the case
are being built, but the
case has not gone to
trial. Asset managers
say they concentrate
on cases where the
appear to have strong
legal precedent and
moral or sympathetic