The Power of Perspectives

The Canadian Bar Association

Yves Faguy

Third-party litigation funding enters a new chapter

December 22 2016 22 December 2016

Last week, Burford Capital, the world’s largest litigation finance company the world, Ltd., bought its main rival Gerchen Keller Capital for $US 160 million. The tie-up is being hailed as  a sign that the litigation funding industry is maturing in the U.S (it is far more established in other jurisdictions, namely Australia and the UK).

Alison Frankel reported on the reasoning behind the tie-up:

The two companies operate via different business models - and the combined Burford plans to continue to use them both. Burford's management owns 13 percent of its publicly traded equity, so its principals make money alongside investors when the firm's investments pay off.

Gerchen Keller, by contrast, is structured like a hedge fund. It has raised more than $1 billion in a handful of closed-end investment vehicles, mostly from large institutional investors such as university endowments and public pension funds, including Michigan and Texas municipal employee funds.

Gerchen Keller earns a stream of income from the 1-to-2 percent management fees it charges for deciding how to invest the money it has raised. It may also bring in performance fees of 15 to 50 percent if its investment decisions pay off. Gerchen's funds have not been in operation long enough to have kicked off performance fees, which will belong in the future to the combined entity.

Michael McDonald at ATL tried crunching the numbers, concluding that Burford likely paid a hefty price for GKC.  But he offers some speculation as to why:

The most likely explanation for Burford’s willingness to pay a premium for GKC is that the acquisition is an aqui-hire deal typical of the type seen regularly in Silicon Valley. Litigation funding is still in its infancy, and there are relatively few experienced litigators that want to move into the space. By the same token, because the space is dominated by attorneys, it’s hard to bring experienced alternative-finance experts in.

The acquisition helps Burford with talent on the legal side, but probably ignores the most important issue in the industry – gaining institutional acceptance. Burford has roughly 60 employees pre-deal, and GKC has 20 – of those 80 total, 40 are attorneys. The remaining 40 are going to be a mix of different functional areas. It’s clear then that GKC and Burford are heavily oriented towards a legal perspective of the industry rather than a financial perspective.

Kevin LaCroix calls the acquisition a watershed development, but shares some concerns:

Larger, sophisticated, and well-capitalized players like Buford and IMF Bentham can plausibly make the case that they have appropriate due diligence procedures in place in order to ensure that they are investing and supporting only meritorious litigation. (Indeed, they can convincingly argue that they have a financial incentive only to support litigation activity that will produce appropriate investment returns).  Because these firms are now well-established and are well-capitalized, they seem likelier to see the better opportunities.

The concern is that as new players that neither as well-capitalized nor as disciplined engage in supporting litigation, the cases the new players support may not be as well-grounded. (This is not just a conjectural concern on my part; for an example of a recent U.K. case in which the court had to deal with these very issues, refer here.)  The danger is that marginal litigation that might not otherwise go forward will ensue or continue, with potentially adverse consequences for all.

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