Courting Capital: LFG's Macro-Proof Opportunity

The opportunities generating these numbers for investors are, in Zimmerman’s words, esoteric. He and the company had some trouble in their early years on the conceptual side of his pitches to investors, especially as the field was more or less empty when he entered it. But as LFG became more established, as other firms became bigger players in the field, and as it started to catch the attention of legal academia, that hurdle to educate potential investors grew lower and lower. Partly because of the very low overall jurisdictional risk to the integrity of the legal system and its processes in the U.S., where the majority of their assets are located, and partly because the factors affecting their value are internal to a large and complicated governmental segment, more and more money has flowed into the space. In the medium-term, the business may even have benefited from the financial crisis dislocation: broad-scale economic crises can bring with them tightenings in government spending, which can, in turn, through personnel losses or court closures increase the legal-system delays that serve as a foundational force driving legal-consumer demand for LFG’s business.

The long-standing relationship LFG has built with its investors should attest to the quality of their offerings. Prior to 2009, they had a single hedge fund investing in them; since then, they’ve built close relationships primarily with high net-worth individuals and family offices -- though Zimmerman points out that among their current investors are members of their original hedge fund backers, still wanting to do business with LFG years after the fund itself was shuttered. And when the company has offered investors the opportunity to get into transactions that have already hit their concentration limit within any given fund, those special offerings, says Zimmerman, have always been oversubscribed.

Since the early days, the legal finance field has become more crowded. Bentham US, a New York City-based office of an Australian firm, Lake Whillans Capital Partners, Burford Capital, and Parabellum Investments (a spinoff of Credit Suisse), among others, have all become players in financing commercial litigation. LexShares brings a crowdsourcing platform to the space for those looking for a more direct means of investment. But LFG is confident both in its own survival and in the shaky status of its competitors. Zimmerman, in fact, sees the increase of entrant firms and capital into the space primarily as an opportunity for LFG to buy up investments in cases that become distressed due to bad management and shoddy risk analysis. If you look at their track record in appeals finance, it’s very hard to argue with that optimism: LFG has a .809 batting average on successful transactions out of total transactions across the history of their company. A focused business model, serious expertise, and an innovative way of thinking about markets can be explosively powerful in any industry. Guess Hamlet can cross at least one of his fardels off his list.