This past Tuesday, Litigation Finance Journal hosted a special digital event, “Investor Insights into Consumer Legal Funding.” The panel discussion featured a trio of institutional investors, including Ben Kaplan (BK), co-founder of C9 Partners, Don Plotsky (DP), co-founder of Uinta Investments, and Michael Morris (MM), Managing Director of Northleaf Capital. Dan Avnir (DA), Managing Director of Bryant Park Capital moderated the discussion.
The panel covered a wide range of ground on Consumer Legal Funding as an asset class. Below are some key takeaways from the event:
DA: What types of investments do you target across the legal funding marketplace?
BK: We target investments in operating companies. Operating companies with direct or indirect exposure to underlying consumer litigation assets which can include funded assets, with medical liens being the core focus.
DP: We’re looking to basically get investment exposure to the asset—the way we do it is typically in some sort of structured transaction where we’re providing liquidity to the funding company. We’re definitely not plaintiff-facing…we’ll also buy cases directly and partner with funding companies that might be too large for their balance sheets.
MM: We’re about a 15 billion dollar AUM, operating a range of strategies across the credit to equity continuum to get exposure to underlying assets. Generally, we’re looking to deploy $25-200 million or so, in some sort of partnership form with the funder.
DA: What can you say about your experience with collections these days? Have there been any variants, as compared to pre-COVID levels?
BK: Interesting questions, pre-COVID versus post-COVID. Again, what I’m sharing is from the viewpoint of medical liens where there’s probably more volatility in and around that asset class depending on geography and a myriad of other circumstances—the nature of the treatment whether it’s surgery or MRI.
To summarize, when COVID hit, there was actually, we experienced across a few different areas, a massive acceleration. At the outset of COVID, the takeaway is that there was an acceleration of collections. What I would say is that COVID has advanced…what we’re starting to see now is a backlog of cases attributable to court closures and other issues, that I would say at the beginning of 2021 has started to slow down collections a bit. Insurance companies have taken more of an aggressive posture with respect to litigation and they’re fighting those a little bit more aggressively. So I think we’ve seen an acceleration early on in COVID, and a bit of a slowdown in early 2021.
DA: Don, what are you seeing out there from the funders you’ve been partnering with? Are trials in most states delayed?
DP: In many cases, if not most typically, there’s some sort of settlement involved, rather than necessarily a trial verdict. But we’ve definitely noted an extension of maturity of the assets in the portfolio. Statistically, we would look at an 18-month duration to a three-year final type of profile on the assets that we buy, and we’re seeing things really creep out there beyond three years. Some of the assets that we own, we expected to have gotten greater cash flows than we received so far.
We hear from the funding companies that business has definitely slowed down 20 or 30%, and we’re noting the extension of the portfolio. That certainly seems to be COVID-related.
DA: What are your current return expectations across these assets that you’re investing in? Have the results lived up to the expectations you had?
MM: There are two different lenses through which to look at it. I think in the space overall, in the two primary areas of the US…I do think over the last several years going back even before COVID, you seen some return compression at the asset level. As more money has come into the space, the search for yield that you can’t help but read about, it has made its way into the space a bit.
DA: Are you seeing origination levels still down across the board as compared to pre-COVID levels, or are we beginning to see an uptick as of late?
DP: Again, we’re not plaintiff-facing, so we don’t have people coming through the door. What we do see is fairly steady activity from the funding companies we deal with. What I’ll point out, is that more so than the actual volume of cases, it’s the condition of the financial markets surrounding this asset that are really driving supply.
DA: What is the typical ROI target for a facility to a pre-settlement funding company? What information would you look to review in consideration of a facility?
DP: From an investment perspective, we’re looking for a low-to-mid teen preferred rate of return…so in terms of total return on investment, we would hope to get perhaps slightly higher than that. When you look at all the components of the net return to investors, you also have to take into account that there are enormous cash flows here. We look to deliver 10-12% net annual return to our investors, and after that, 15% IRR.
MM: For us, we’re sort of looking for kind of the best run cleanest plain vanilla senior debt, to make high single digits, and go up from there.
DA: On pre-settlement funding side, if a group starting an origination platform today, what would you say would be the biggest challenges and opportunities?
BK: I think the greatest opportunity is probably that there exists enough people who have been involved with businesses that have become institutional at this point, that there’s some good talent out there in terms of people who really know how to run a business and manage balance sheets and understand the industry. I think it’s an opportunity as the industry has grown…there’s better human capital out there.