The following is a transcript of a virtual speaking panel recorded by the Information Management Network (IMN), titled "Litigation Finance Insights: Easing Balance Sheet Pressure in Turbulent Times." The panel included Jay Greenberg (CEO, LexShares), Julia Gewolb (Director of Underwriting, Validity Finance), and Eric Blinderman (CEO, U.S., Therium Capital Management), and was moderated by Andrew Langhoff (Managing Director, Red Bridges Advisors).

Andrew Langhoff:

Hello, everyone. Thank you for joining us, and we hope you'll forgive the sound of dogs barking or babies crying. The coronavirus has obviously changed all of our lives, and is changing the litigation finance market as well. Over the next 50 minutes, we'll explore what those changes mean for those seeking litigation finance and for those providing it. It's no secret that litigation finance thrives in an economic downturn. As a reminder, the practice first took root in this country in the wake of the 2008 financial crisis. Since that time, the industry has grown in terms of the types of products it provides, and the amount of capital it makes available.

As such, it's easy to argue the current economic downturn will create a new inflection point for our industry. First, as companies and law firms search high and low for new sources of capital, litigation finance clearly merits a fresh look. Our central concept of treating litigation as an existing asset that can be unlocked now for immediate capital may never have been more appealing. Second, as investors look for opportunities not tied to the slowing global economy, the promise [that] litigation finance is fundamentally uncorrelated to global markets should prove quite alluring. Now, all of this might be right, but perhaps it's not that simple.

To find out, we have three of the best minds in our industry to help us understand what is actually going on, on the ground, in the marketplace. I'll ask each of them to introduce themselves in a moment. But first, a quick note on our agenda, which we'll take up in two parts. First, assuming some of you haven't used litigation finance before, we'll explore the various products now on the market for providing capital. These include case funding, corporate monetization, and law firm portfolios, among other products. Second, assuming some of you are funders or repeat users who are seeking to better understand changes in the market, we'll discuss what the new normal looks like. Our topics will include counterparty demand, investor appetite, delays in the resolution of cases, and other areas that may require recalibration by funders.

With that, let me start by asking Eric Blinderman to introduce himself, and then Julia Gewolb, and then Jay Greenberg.

Eric Blinderman:

Sure. Hopefully everyone can hear me well and the connection works. Thank you Andrew, thank you Peter, thank you Julia, thank you Jay, and thank you for everyone who is participating in today's conference. My name is Eric Blinderman, I'm the chief executive officer of Therium Capital Management USA's operations. I've been in this position for now four years. Prior to that point, I represented litigation funders and worked with litigation funders in the underwriting analysis and structuring of cases while I was at [Proskeler Rose???] in New York. Prior to that point, I was a federal prosecutor and diplomat in various parts of the Middle East. So it's been an eclectic career. Thank you, again, for organizing today's event.

Julia Gewolb:

Yeah, thanks Andrew. Hi to everyone. I'm Julia Gewolb. I'm director of underwriting at Validity Finance, which is a funder of large scale complex commercial claims. There, I'm director of underwriting, I oversee the underwriting process, manage all of our systems, and help monitor all of our funded deals. I've been in the litigation funding industry for about five years now. Prior to joining Validity a couple of years ago, I was at Bentham IMF, now known as Omni Bridgeway. Prior to that, I was a litigator at Boies Schiller in New York.

Jay Greenberg:

My name is Jay Greenberg, I'm the co founder and chief executive officer of the commercial litigation finance firm LexShares. We founded LexShares in 2014, and over the past six years, by all public accounts, have grown to become the most active commercial litigation funder in the United States. I'd say LexShares is unique in a couple of ways, one in how we capitalize our transactions. That's through a combination of a traditional closed and private equity fund and online marketplace. Two, how we originate our deal flow, which is primarily driven by our software called the Diamond Mine. I'm sure we'll touch on both of those aspects as we explore how this pandemic has affected our industry.

Andrew Langhoff:

Great. Thanks Jay. I'm Andrew Langhoff, just to reiterate. Three years ago, after spending five years in litigation funding industry, I founded something called Red Bridges Advisors. Red Bridges assists law firms and corporates as they seek to obtain litigation finance. All right, so that is prologue. Let's jump in. Our first part is focused on capital solutions available to those interested in financing. Jay, I'm going to give you the first question. I'm going to talk about straightforward case funding, something that I know you do a lot of at LexShares.

I was speaking to the head of arbitration at a major global law firm last week. Full disclosure, it was a Zoom cocktail hour. He told me that two of his major clients have instructed him to put his pencil down and stop work, as they're worried they're not going to be able to provide funding for his fees. To my mind, that was a pertinent opening to talk about litigation finance. So could you help us understand those that are concerned about paying their lawyers to bring their cases, how simple, straightforward case and expense funding works, how it gets priced, and then perhaps most interestingly, what you might expect to see, given the current downturn in terms of the types of cases presented to you?

Jay Greenberg:

Sure. So I'd say that the conversation that you had on your Zoom cocktail hour definitely tracks with what we're seeing at LexShares. From a mechanic's perspective talking about single case funding, single case funding typically involves providing capital to a claimant in exchange for a portion of the future proceeds of their lawsuit. Single case funding is usually non-recourse in nature, so strictly collateralized by the proceeds from those underlying legal claims.

If those legal claims do not end up being successful, the plaintiff would not owe the funder any return. Usually how single case deals are priced, they can be priced on a multiple of capital provided as time elapses, they might be priced on a straightforward purchase of a percentage of the gross recovery, or a combination of those two.

Typically, pricing is bespoke on a case by case basis. So underwriter for a single case would look at risk on the merits, they might look at counterparty risk, defendant credit worthiness, things of that nature. Sort of onto what you were talking about at your Zoom cocktail hour, a lot of what we're seeing here at LexShares, I think driven by the pandemic, our thesis, at least, is we're going to see origination really occur in two waves.

I think what the attorney that you were speaking to is really indicative of this first wave that we're seeing. These are case investment opportunities that are really driven by claimants who have pending litigation, where they may be unable to continue to pay for that litigation, or they may just not want to continue to take on the risk of paying for that litigation. So sort of the initial wave of deals that we began to see, I'd say, in mid March as the pandemic spread, were really similar to the typical demographic of cases that we usually see. So things like breach of contract, breach of fiduciary duty, antitrust, false claims act cases, things of that nature. Now I think we're sort of just at the precipice at this point of beginning to see litigation that is actually directly driven by the pandemic.

So I'm talking about commercial opportunities, or I should say, commercial litigation based on obligations by folks that cannot be met because of COVID-19. So case types that I think we're going to continue to see more of throughout the next three to six months are things like force majeure. I think we're going to see insurance policy holders litigate against carriers for claims related to business interruption. I think there is going to be a number of employment cases. I think there will be a number of cases in the healthcare industry.

I think we're also going to see a lot of restructuring and bankruptcy work, which will obviously be a mix of both corporate and litigation work for law firms. But I think those are definitely some case types that we're going to see. One thing to certainly keep in mind is obviously we are truly in unprecedented times. So I think all of these cases are going to have atypical fact patterns. Definitely not normal fact patterns that we'd previously seen. I'll speak for LexShares, and I know a lot of other litigation funders feel the same way is that, we typically don't like investing in things that are exotic or unprecedented. We typically like investing in matters that have extremely strong precedent. So I'm definitely curious to hear, at least, how Julia and Eric, and I'll send it over to Julia first, but at least how they are thinking about those case types that we believe we'll see an increase of going forward.

Julia Gewolb:

Yeah, thanks Jay. I agree with you. Especially with regards to the timing. I think you're right that there is going to be a delay, particularly with respect to force majeure, because I think a lot of businesses are contemplating long-term business relationships that are important to them, and don't necessarily want to pull the trigger just yet. But they're considering their options for doing so. I do agree with you, also, that it's going to be a deluge at some point, and it's going to be a mixed bag of good cases and bad cases. A lot of these are going to turn on the specific policies as written and exclusions that apply in the case of insurance. A lot of them are going to turn on the specific wording of a forced majeure clause.

So as funders, and as underwriters, our job is always to sift through the good and the bad, and find the good. I think that's going to become more challenging and we're going to have a heavier load to lift. I would add a few more things that I think we're going to see. Not arising out of coronavirus directly, but just out of market and economic conditions, I think we're going to see a lot more demand for basic business to business commercial claims, as businesses start to hesitate to cover the legal expenses and cost they've been covering to date, maybe, and try to move those off their books. Another one I've heard kicked around a lot is corporate fraud cases, because when the economy does go south, a lot of companies that may have been engaging in questionable accounting practices, if not outright fraud, are going to see that revealed, and have that weakness revealed to the public. So I would add that as another case type we'll see more of in the future.

Eric Blinderman:

I think this is very helpful and very educational, and fully consistent with what we're seeing here at Therium. I think it's important to note that this is a global pandemic, so at least here at Therium, we have operations across the globe, New York, London, Australia, Italy, Germany, Norway. The issues that we're discussing here, whether it's insurance recovery litigation, breach of contract, force majeure, securities litigation that is going to be percolating as stock prices drop, and people seek to hold people accountable, and on the insurance side we have seen a deluge.

So I don't even think we're at the tip. I've pulled three straight all-nighters over the last week just dealing with very large portfolios of claims directly related to COVID-19. That's important, because as you're reviewing these matters, people are facing instant cashflow issues, and not only do they have the claims that they're trying to seek to get financing on, they need the cash quickly. So to be able to pivot and to be able to be responsive, we've jokingly referred to the new normal as Mario Andretti on a Formula One race track, being able to cope with all of the different issues that come to the fore, so you can basically protect your clients, who are going through a very difficult time.

To that end, it's not just single case litigations that we're seeing. Fortunately, and every funder has a different proclivity, but we've got a very large balance sheet. So we've got our ability and assets under management, so that allows us in many respects to take larger, bite-sized type portfolio products, and to provide real operating capital, both to law firms and to Fortune 500 companies, whose liquidity has basically gone from X to zero instantly.

Andrew Langhoff:

Thanks. By the way, if you're pulling all nighters, I feel even worse about my Zoom cocktail hour. Regardless, there is a product beyond just simple case funding, which Eric has just referred to. Which is the monetization of claims, which I think could be wildly important in this moment where so many companies are looking for an immediate hit of working capital to bridge to wherever the future takes us. This is a product that has nothing to do with legal fees, simply has to do with the value of a piece of litigation and unlocking that now. Can you help folks understand how they could access that kind of capital, and what would be involved, and how that might even be structured or priced?

Julia Gewolb:

Litigation funding is a great liquidity tool. It's also a risk management tool, it's also a tool for managing uncertainty. As we've talked about, that's true in commercial markets, it's even more true now when a lot of these needs are intensifying. So in the funder's arsenal of tools, claim monetization or working capital, and that's a distinction I'll explain in a moment, is probably the best way to give liquidity to a business that has litigation assets. We make a distinction between the two that I think is important. So working capital can be part of a deal, a single case investment, or a portfolio, which we'll get to in a moment, where fees and expenses are also being covered. It really depends on the size of the claims.

So if the claim is big enough to justify a large enough investment, a funder can also give working capital directly to the business. Claim monetization, we think of as a little differently, although in some ways they work the same way. Claim monetization, we think of as a claimant with a judgment that's either on appeal or out in the enforcement world, that they're trying to collect on. We'll purchase a piece of that claim. Validity won't purchase a claim outright, we like to keep that under 50% in order to keep incentives aligned, and keep the claim holder interested in pursuing a payout at the end of the day. But that's the posture of a claim monetization as we think about it.

The distinction is important, because the pricing will vary. So if you're giving working capital in a single case or portfolio deal, the pricing is likely to track whatever the terms are, and Jay summarized how those are typically structured. I wouldn't add anything to that. In a claim monetization where there is a judgment on appeal or an enforcement, the litigation risks are typically more definite and narrowed, hopefully. So the pricing is going to be a little bit better, usually. It depends on the case. Everything is bespoke. But as a general rule, the pricing is better. It might be a capped multiple and not a percentage. That capped multiple might be a little lower than what you would see in a single case investment.

So given all of that, liquidity is important. I would just note, quickly, two additional benefits. One is really risk management. It's basically a collar strategy when you do this, because you're guaranteeing dollars in the door now in exchange for capping your upside in the case. So by guaranteeing the dollars in the door now, you're changing what might be a binary litigation outcome of either you hit the ball out of the park and collect the total value of your claim, or you lose and you get zero. You're changing that to whatever the funder is giving you in dollars right now in exchange for lowering your ultimate return at the end of the day, because you're going to owe the funder a return on the dollars they invested.

The other one is an accounting benefit. I won't bore anyone with too many of these details, also because it's not my forte either. But the biggest accounting problem from covering litigation fees and expenses on a company's own books is that you have to pay fees and costs as expenses, but you don't get to record a litigation asset until the money comes in the door, and even then it's usually an extraordinary item that gets recorded below the line.

So it can really drive profits down, and it can actually permanently drive profits down, depending on how it's recorded. If you're doing a single case investment where your fees and costs are covered, that's an obvious benefit, because you get to take those expenses off the books. But even if you're just taking working capital, that money coming in from the funder can typically be recorded as investment gains or company income, whereas litigation proceeds can't. So that's another benefit of monetizing now, as opposed to waiting for a litigation outcome at the end of the day.

Andrew Langhoff:

I'll just sum up very quickly, Julia, by saying I believe that there are a lot of larger companies right now that have been sitting on portfolios of litigation and are actively looking at those to decide whether or not ... I mean, a collar strategy aside, they just need money in the door right now, and to bring in some cash right now in return for an existing win three, five years down the road is appealing. Great, thank you.

Eric, the third area I wanted to approach was solutions for law firms. We're reading a lot in the legal press about law firms taking some extraordinary steps to take care of their capital and their cash flow. There are at least a couple of different solutions here. There is the famous law firm portfolio, which deal with contingency fees. There is the acceleration of fees, which might be an option. There is even just suggesting to your slow-paying clients that they take up litigation finance. Could you quickly just help law firms understand what might be available to them if they were to walk in your door?

Eric Blinderman:

Sure. So there are multiple different ways that law firms can cope with the present liquidity crisis that is impacting everyone as a result of COVID-19. The most usual and normal course in ordinary times would be what I call an open portfolio in which a law firm has a specific practice group, or maybe they're not necessarily created to carry cases on contingency because their capital structure is dependent on hourly fee rates. And what law firms can do is provide a non-cross-collateralized portfolio to a litigation funder, in which as a result of taking matters that they would otherwise not be able to bear on a contingency fee, they can refer that to the litigation funder, and the litigation funder can permit the law firm to share in the upside of the funder's economics, which thereby increases the firm's profit margin, while ensuring that they're not taking on the full amount of contingency risks that they're otherwise not capable of doing.

The law firms with strong balance sheets in a COVID-19 impacted environment, that is a product that I think everyone should be looking at, depending upon whether they have the ability to weather the present financial storm. So that's one bucket of products that we can provide. A second type of product, and we have been seeing, frankly, a huge uptick in demand on this, is law firms saying, "We've got a bunch of aging receivables, we're concerned that clients are no longer going to be able to pay our hourly rates. Is there a tool that you might provide to allow us to continue to handle those matters, such that the client doesn't have to transition, and we can still maintain the ability and effectiveness of ourselves as law firms to prosecute the matter?" The answer to that is absolutely yes.

You can do that on a single, one-off basis. You can do that on a cross collateralized basis, meaning a law firms bundles a series of claims, and the law firm enters into an arrangement with each of the individual lawyers, whatever the percentage of contingency fee risk that the law firm is willing to take on, and then transfer that cross collateralized risks in a plume of cases to a funder like Therium, and then to avoid fee splitting issues, because you're not fee splitting on a single one off case. You're cross collateralizing the pool. Then these types of products are usually copying the returns at a simple multiple. You're avoiding New York City Bar Association type concerns. By the way, which are wrongly decided.

But let's park that. That allows a law firm, frankly, in a transaction we're doing right now, on a cross collateralized pool of cases, we're providing an instance liquidity hit of significant dollars of eight figures on a pool that's worth nine figures to a law firm, so frankly they can not just retain associates, they can hire associates to prosecute new and existing lines of business. Then finally, what firms can do is simply come to funders on a one off basis as cases come through the door, and allow those firms to literally take on those matters, otherwise. Or alternatively what those firms can do is they can sell off or factor receivables that they might have on cases that are fully resolved, such that they can again, monetize those cash flows that might otherwise be delayed.

Normally these are the types of transactions you would see coming through at the end of the year. But if a law firm literally has some type of liquidity stream that's coming through on cases that are resolved or paying over the course of time, you can basically transfer, take that risk on in some interest rate type analysis, some interest rate type product, and literally ensure that the law firm's lights and related can stay on. So those are the sort of four main products that I see. But there is an infinite variety of permutations. Every situation is unique, and I think, I probably speak for Jay and I speak for Julia, but any sophisticated funder who is working with a law firm that has issues or problems, you're going to be working with them to cop solutions-

Andrew Langhoff:

I'll interrupt and build on that, because we're at the end of our first part, which is discuss solutions available to those in the market. There is no question, we've simplified things, we've had a very limited amount of time. These situations are all bespoke, and sophisticated funders can work with clients that have the cases which have real merit. But in short, we talked about law firm solutions, solutions to monetize working capital, and solutions to actually pay for either existing claims or claims that arise, if you will, out of the pandemic economics.

Now we're going to switch to a conversation bout what's going on within the litigation finance industry. The first question, it's so interesting I'd like to quickly pose it to all three of you. That is, what do you see in terms of demand? What does your pipeline look like right now? I've heard different reports in the industry, that some people are, "drinking from fire hoses." I've heard others say pretty much business as usual, until things get to another level. So just in the interest in sharing and having folks have data points, maybe starting with Eric, and then Julia, and then Jay, any just broad sense as to [the demand?] I guess, Eric, you've already said in part that you're not sleeping. But can you help us with that a bit?

Eric Blinderman:

I think the insurance law deluge has already hit. It's hit dramatically. We're seeing across every industry sector a broad increase in individuals, entities, law firms, and corporations coming to Therium, and seeking monetization solutions for all of the different litigations they have that are ongoing. I'm curious to see how Julia and Jay react as well.

Julia Gewolb:

Speaking for Validity, we track our new leads, and we have since our inception. So we have some stats behind it. Our average new lead for the last month is about triple what it normally is, and about triple what it was last year, to give you a sense. Some interesting trends we're seeing, it doesn't account for a huge amount, but patent is actually growing. Some of that may have to do with sort of changing rules favoring patent claimants.

But I think some of that has to do with the fact that patents are business assets that people are looking to monetize, too. We're seeing a lot more interest in law firm portfolio deals, I think, as law firms are taking a hit now. Hopefully the law firms that are already thinking about recovery are probably going to have a foot up on the competition, at the end of the day. So a lot of firms are wisely thinking about funding and ways they can use working capital now. As I mentioned before, I'd expect to see, and we are seeing a lot more business to business general litigation interested in funding.

Jay Greenberg:

LexShares, on a quantitative basis, is seeing a similar share increase in volume as Julia's firm has seen. I think one of the interesting things is that share increase in volume contains both cases that are investible, and cases that are certainly not investible. The question coming out of this increased volume, at least at LexShares, is what does that do to the quality of investments that litigation funders are able to obtain? We're operating under the guise right now that we think quality of investments made by litigation funders is actually going to increase across the board.

I think that's really not going to be driven by COVID-related litigation, but it is going to be driven by the fact that there is just more litigation in general. Plaintiffs and law firms how may have been reticent before are now going to be receptive to using our product, maybe out of necessity. So that's going to be fairly interesting for our industry, and have a ripple effect for a number of things. But I'd say that overall, at least coming out of this, I think [it's] likely a net positive on the quality side of litigation investments that we see made across the board.

Andrew Langhoff:

I'll just add, having watched this space for eight years or so, acceptance within the legal market is always slow. Right? Just fundamentally, the legal community is conservative, and slow to change, and slow to adopt. We've seen various breakthroughs in the last eight years. But when I mentioned an inflection point at the offset, I did mean that. I do think this is a moment where a lot of folks, out of necessity or otherwise, will see the advantages, really drill down into what's possible for litigation finance, and I think we'll have an uptake, and I'll think we'll plateau, and we'll stay at that plateau and continue to build. So it's a fair point. I think it's good news, sadly, for the industry.

One thing I'm just going to note in passing, for everyone to be aware of, is the availability of capital. I'll just share anecdotally that, especially funders that are funded from multi-strategy hedge funds, there is some concern that as the economy has changed, the desirability of investments other than litigation finance has changed, or they have become more attractive. Meaning, litigation finance, which a couple of months ago might have been enormously alluring, is no longer seeing the same capital flows that it might have previously. Now, for the three of you, I don't think that's an issue. But I just wanted to make that comment as we move forward, that as folks look to find funders, that in this market, they should be concerned with the actual capital that is committed and dedicated as litigation finance, as opposed to capital that can find other forms of investments.

That leads me to my next question, which relates to pricing. When this all started, I had a major capital provider call me and say, "Look, Andrew, I want to be clear, we're in this market. We like this market. But given what's going on, pricing of funding is definitely going up." I understood that to mean this player, which has other investment opportunities, is seeing attractive opportunities across the board, and is going to expect higher returns from its litigation funding than it did just two short months ago. So my question to you is are you seeing any change in pricing? Does a change in pricing make sense to you?

Eric Blinderman:

So I understand the observation. The observation comes from an opportunity cost analysis. So if you are deploying capital into a variety of different asset classes, you are pricing risk. So to the extent that you can put your money into bonds right now, that are providing some increased yield in conjunction or in comparison to a litigation finance asset, then you need to ensure that your litigation finance asset has attractive returns compared to what is perceived to be the lower risk bond investment. Litigation finance is traditionally perceived as non correlated, and I think the experience that everyone is talking about on this webinar confirms that non-correlated, in an academic perspective, wasn't really brought to the fore until practically we all learned the deluge hit, and we really are not correlated.

I can understand from an investor perspective why that argument was made to you. But from a Therium and funder perspective, I'm not quite sure that it make sense. We have our framework agreement with our traditional funds structure. The capital is committed to Therium. Therefore, we are meeting the historic returns of the fund in our pricing models, and to monkey around with that would, one, make us not competitive with respect to what our other funder are doing. And two, as long as we're ensuring that we're meeting the returns that more than beat whatever the other asset classes are presently providing in terms of their yield, then I think you're putting yourself at a significant disadvantage, and frankly, it has an element of profiteering, which I just think is unfair and not necessarily appropriate. Whether that ultimately trickles down in a different way to the market, possibly. But I think it's not an appropriate way to handle the present situation, and it is not something that Therium is doing.

Julia Gewolb:

I happen to agree, and I think we at Validity agree as well. I think to the extent we're optimistic about anything in this unfortunate situation, it's going to be the new opportunity to become a more established industry and to prove our value in times of economic turmoil and the quality of the cases. We aren't looking to hike up our prices in this time. I think part of that, on a more practical level, is while there are a few established and reputable funders, there is a lot of capital behind them, to go back to your earlier point. So we have capital to deploy. It's not as though we need, at this point, largely to pick and choose among cases. So I think our MO so far has just been business as usual, let's find the best investments we can and go from there.

Jay Greenberg:

I do agree with Eric and Julia. I'm not aware of any other new uncorrelated asset that has been brought to market during this pandemic. So in speaking to those multi-strategy funds specifically that have the ability to deploy capital into other asset classes, or now have the ability to look at more attractive distressed opportunities, I don't see any of those opportunities that lack the beta that litigation finance lacks, and not being correlated to the market. So those funds might want to switch to invest and look at other opportunities that seem to be higher yield. But those opportunities still contain some systemic risk that litigation finance doesn't. So I don't think pricing is going to change. I also don't think the majority of deals getting done in our space are being done by multi strategy funds. The majority of litigation finance deals getting done are being done by litigation funders. From an empirical standpoint, I can say that the average minimum return for the last four deals that we've done at LexShares has nearly mirrored that average for the last 40 deals that we've done. So I'd say similar pricing on our end.

Andrew Langhoff:

That makes sense. Julia, you're an underwriter, and in the context of this economic downturn, we can't help but focus on what underwriters refer to as collection risk, which is, if you're going to invest in something, you want to be sure there is a pot of gold at the end of the litigation, to make it worth your while. Could you just briefly touch on how the changing economic circumstances and the fact that a lot of defendants are obviously suffering through some kind of economic hardship is going to affect either your underwriting going forward or your evaluation of existing cases?

Julia Gewolb:

Sure. You're right, this is such an important question right now, that I'm sure every funder out there is thinking a lot about. By the way, there is both the risk of the defendant's insolvency, and also the funded party's insolvency or financial troubles as well, because you're partners in litigation. Litigation takes years. So the question naturally arises, is our partner going to be around for the next three to five years to see this through?

The problem exists on both sides of the V and our real ability to limit our exposure is, as you mentioned, in the underwriting stage. There, we've always looked at counterparty credit risks. We've always looked at collectability. So we're not necessarily doing anything too new. We may be giving it a little more scrutiny in looking at the state of the defendant's industry, given coronavirus, or looking more closely at their financial performance. For matters we've already funded, it's another critical issue, and there we have a little bit less ability to control our exposure. Most funders have the right to stop funding at some point, if the case becomes unviable. But beyond that, we're committed partners in litigation. So we're sort of in it for the long haul. But we are monitoring that closely, as well, and trying to stay on top of it.

Julia Gewolb:

I can say in terms of Validity, we've either been lucky or it's too soon to say, but we haven't seen any real issues yet. Some of that is keeping in mind that some defendants post bonds. So if you fund an appeal, and the defendant's posted a bond, there is not really an issue. Or if the theory of collectability is the insurer is going to pay out on a policy, that's not really going to be impacted by the defendant's financial condition. So there are some where we're pretty confident, notwithstanding things. Then a lot of larger corporations with deep pockets are fine. Companies have been sitting on a lot of cash for a long time. So there is that as well.

The last thing I'll say is in the abstract, there has been some discussion about options for hedging against collection risks. There are some insurance products out there for some types of deals that funders can purchase. Another one that's been kicked around is if the defendant is a publicly-traded company, you could potentially purchase CDS protection, which is, in effect, a form of insurance that they go through in an event of default. But in either of those cases, the right time to have done that was probably before funding. So I'm not sure those tools are going to be that useful to funders who haven't thought about them yet anyway. But those are two that are being kicked around.

Andrew Langhoff:

One last question before we jump to questions from those who are viewing. There has been a lot of talk in legal press about delays of judicial proceedings, and if there are delays, it could affect not only the funder's expected return, but also the price paid by the counterparty, as the time value of money is often accounted for within the pricing mechanism. There has been some talk of haircuts, or disputes between counterparties and funders already. Any thoughts on how this all might play out, or whether this is a meaningful distinction?

Jay Greenberg:

I don't think the impact is really going to be material over the duration of these assets, and in the context of the duration of these fund vehicles. Now do I think that some specific cases will be impacted? Absolutely. Cases in a funder's portfolio, where there was a jury trial scheduled in the next couple of months or so that is going to have to be continued, without question, that is going to impact that case. That is going to impact the timing, and that is going to impact the pricing. But I would say on the whole, the percentage of those cases in funder's portfolios is fairly low, or at least it is in LexShares' case. So that being said, on the whole, I would say from a duration perspective, the impact of these closures and restrictions that are now set on courts will be fairly minimal overall.

Eric Blinderman:

I think the legal industry is evolving as a result of all of the things that we're doing on this webinar. To participate in hearings via teleconference makes it very difficult to assess the credibility of a witness, or otherwise engage in the art of advocacy. It's a very different type of animal. When that ends, all of a sudden, lawyers need to make determinations as to whether they want to trade speed of judicial resolution for the takeaway of not being able to assess or cross-examine someone in person. That's a struggle. Then lastly, whenever the courts really do open, if you've ever been down to New York Supreme, it's not exactly a bastion of judicial efficiency on a good day. Let alone how judges are going to cope with the backlog of what hasn't gone on now versus the new cases. So at its core, the judicial system is a fundamental pillar of American society, and that's not collapsing. So if timing delays are the worst thing we have to deal with, then I think we're okay. But it's certainly something we need to take into account.

Julia Gewolb:

I take a middle ground. I think the delays are going to be substantial. Maybe one exception is arbitration. Part of the reason is not just the uncertainty of when courts open back up, how quickly they're going to get through that backlog, or what's gong to happen. It's hard to tell. But also on a very practical level, most lawyers are home right now, without childcare, with their kids. They're not billing the way they used to. That's going to result in delays, even if you're just in document review, or discovery. Some of the work is going to take longer. At the end of the day, though, I don't think it's a huge threat for funders, because most of us price time in. So it may change our projections, it may change some of our own cash flow projections. But I'm not convinced that it's going to result in wholesale losses to the industry.

Andrew Langhoff:

I'm interested in what the panel thinks of the value that can be added by a good broker or adviser, as I prefer to be known. I'm seeing a lot of opportunities that require work to be carried out before they are investment ready. I hope that good advice from advisors on how this can be achieved will be welcome by funders. So with my tongue firmly in my cheek, let me ask you Eric, what do you think?

Eric Blinderman:

The brokers with whom we work act as trusted advisors, not only for the funders, but for the clients. They add a tremendous amount of value. The brokers have an understanding of what each funder is looking for in terms of substance, economics, and similar type matters to get the deal funded. They can guide the expectations of the clients to ensure in terms of climbing, and pricing, and all of those individual aspects that-- to Jay's point earlier, we fund 3-5% of what comes through the door. That's a very, very narrow window. If a funder is able to package and put together [opportunities] in a manner that allows me to do my job efficiently, so me and the people at Therium across our entire team don't have to pull all-nighters, then that's a really good thing. It allows us to be better at our job, to be more efficient, and to service our clients. So I can't stress enough about the benefit of working with a qualified, intelligent broker and advisor.

Andrew Langhoff:

What effect, if any, is all of this economic turmoil going to have on the funding of the defense side of cases and how they might be structured?

Julia Gewolb:

That's a great question, and one we've been thinking about as well. So we talked a bit about law firm portfolios. But corporations or businesses can also do portfolios of cases if they have both plaintiff-side and defense side work. Depending on the size of the expected value of the plaintiff side cases, that might be large enough to justify a big enough investment of working capital to help defray defense-side funding, too. In other words, you can use the plaintiff side stuff to help pay for the defense-side stuff. Law firms, to some extent, can try to do that too. Again, if their contingency fees on the plaintiff-side work are big enough that they can justify a large investment of working capital onto the firm, that can help defray or enable them to offer discounts or more alternative fee arrangements on the defense side.

Andrew Langhoff:

Given the turmoil, Jay, do you see any incremental change in what's known as the secondary market, or situations where established cases that have already been invested in are then sold to a third party?

Jay Greenberg:

I think we're going to see an increase in secondary market opportunities. The reason I say that is just looking at the past few deals that we've funded on the LexShares.com platform, and seeing the demographic of investors in those deals, I would say that the institutional investors that are active on our platform have remained active. I'd say the retail investors have been a bit more tepid. But I think one of the interesting things for an investor demand perspective that we're seeing, and one of the metrics that we track, is really the percentage of new investors in our deals. That percentage of new investors in each of our most recent deals is larger than earlier in the year.

What that indicates, to me at least, is we're going to see a new cohort of investors that are looking for exposure to our asset class. I think a large part of that new cohort are going to be institutional investors whose secondary transactions are much easier for them to obtain, because they don't have the in-house underwriting expertise. They don't have the in-house origination capabilities. Secondary transactions make it very easy for them to gain exposure to our asset class. So coming out of this, with new smart money flowing into our space, we will see increased secondary activity.

Andrew Langhoff:

Thank you all so much for your time. I thought this was informative, and hopefully it was for the folks who joined us today.