The law’s delay: in the list of burdens that Hamlet cites as capable of driving one to suicide, he includes the slowness of courts. Shakespeare, it seems, ranked this suffering equally with the pangs of despised love; the U.S., with its 50 state jurisdictions and overarching federal law, ever-growing legal codes, and proverbially inefficient government employees, seems to be doing its best to justify the words of that famous complaint. Dockets stretch interminably into the future. Once you’ve been awarded a judgment, months or years can go by while the wheels grind, appeals are filed, claims prioritized.
This unhappy fact has created need and opportunity — and Law Finance Group, a boutique legal- and financial- services company doing business since 1994, has seized the latter and fulfilled the former. The need is a simple and universal one: the need for capital. As LFG founder and CEO Alan Zimmerman puts it, “You cannot participate in the civil justice system in America unless somebody on your side has capital. Period. That’s it.” He first realized this decades ago when, after a successful career spent founding and running a traditional law firm, and following a stint on the finance and corporate side of the movie business, he was looking for a new challenge and encountered an intriguing proposition. A lawyer he knew had a client who had won a $450,000 judgment against an Oakland law firm for sexual harassment. The firm was appealing the judgment, but the client needed cash right away, and her lawyer asked if Zimmerman could think of some method to provide it. Zimmerman researched the issues around such transactions and found that the state of California considered legal judgments a special form of intangible personal property, in which an interest could be conveyed, and made the lawyer and his client a proposition. He would hand over 6.6 percent of the value of the judgment upfront in cash in exchange for a bit more than 11 percent in return, if and only if the woman won her appeal. In the event of a loss, she would keep the cash. As it turned out, the firm settled (scared in part, Zimmerman says, by the newfound flushness of the plaintiff), Zimmerman got a stellar return on his investment, and a new business model was born.
In the 22 years since that first case, LFG has originated, underwritten, and funded more than 1000 legal transactions to the tune of more than $325 million. Anyone who has been awarded a judgment, or is in a legal contest over an estate, can present his or her case to LFG and — if it meets the parameters for risk they have established — the firm will deploy capital in exchange for an ownership share in a successful legal outcome. They use proprietary due-diligence techniques combined with a deep knowledge of the law and historical court results across jurisdictions to estimate the risks attached to any given transaction. Some they turn down because they carry too high a risk — the company currently rejects about 66 and 2/3% percent of those cases brought to it from legal-system participants looking for financing. They invest in transactions deemed viable, via deployment of capital in appeals financing or offering actual loans and lines of credits to firms in settlement finance. This quixotic-sounding business has another side, one that faces not hard-up litigants or law firms but investors with a less-conventional mindset than their peers. The company structures the transactions it invests in into a variety of funds and then makes them available to its backers – with whom it has a close, almost familial relationship, according to Zimmerman.
The first financial product LFG offered was financing judgments on appeal — a service that, when Zimmerman started, was offered by no other firm. LFG branched out as it grew, and now offers a broader range of financing tools. One is financing settlements (such as the one emanating from the BP oil spill), when a predictable payment can be delayed simply by procedural issues, while plaintiffs and their lawyers — who often operate on contingency fees — wait. Another is in trusts and estates, where LFG will fund the legal bills and other expenses of heirs contesting the execution of wills or the administration of trusts in exchange for a share of the eventual inheritance. They also offer a portfolio service, which allows applicants with multiple judgments or settlements to cross-collateralize them. LFG has had third-party investors since its first days and offers a series of funds, each holding a diversified portfolio of transactions.
Performance has been sterling. According to the company, in appeal financing transactions over two decades, LFG has delivered a gross IRR of 37 percent with an average duration of 18 to 24 months, providing on average a multiple of capital of 1.75. In nine years of settlement-finance funding, gross IRR’s have been 24.1 percent. On estate transactions, gross IRR’s have been 23.1 percent. LFG charges fees in line with alternative asset managers, and investors seem to be receiving very attractive, risk-adjusted returns (albeit over a short duration) in an asset class entirely non-correlated to the financial markets. Indeed, the asset class comprising judgments, settlements, and estates is a unique one. Commodities gluts or dearths, retreats in credit markets, elections, wars — investment in the kind of assets LFG has on offer are largely insulated from these. There is some exposure to interest-rate changes — LFG collects in addition to its tranche of any judgment or estate the statutory interest that has been accruing on it, which in turn can depend on the strength or weakness of treasuries — but that’s fairly marginal. As Zimmerman points out, during and after the crash of 2008, he did not experience significant turbulence in terms of returns, though there was, he notes, an increased hesitance on the part of investors skittish about putting money into unconventional vehicles while the economy falling down around their ears.
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.