(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Alison Frankel
NEW YORK Dec 14 Christopher Bogart, the CEO of
the litigation financier Burford Capital, has a five-year plan.
Within that time frame, Bogart told me Wednesday, he believes
the litigation funding industry will become so well-established
that the CFO and general counsel of every major company
contemplating big-ticket litigation will engage in financial
analysis - just as companies do when they are deciding how to
fund tech investments. Sophisticated corporations, in Bogart's
assessment, are going to decide in many instances to use outside
capital to finance litigation.
To take full advantage of the anticipated boom, Bogart's
Burford announced Tuesday that it has acquired one of its
best-known competitors, the Chicago-based litigation financier
Gerchen Keller Capital.
Burford, which is publicly traded on the London stock
exchange and had total equity shareholders' funds of nearly $500
million as of June 2016, will pay $160 million to acquire
Gerchen Keller in a combination of cash and Burford shares and
Gerchen Keller's three principals will assume high-ranking
jobs at Burford and the two outfits will combine their staffs,
bringing Burford's total number of lawyers to about 40.
Even before the merger, Burford and Gerchen Keller described
themselves as the two largest litigation financiers in the
world. Between them, they've invested more than $2 billion in
litigation or arbitration. In combination, they are
unquestionably the dominant force in the litigation finance
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.
According to Burford's Bogart and Gerchen Keller principal
Travis Lenkner, Burford will step into Gerchen Keller's place as
the manager of Gerchen's existing funds. (The funds are closed
so Burford will not be a direct investor.)
Burford shareholders will benefit from the steady stream of
management fees and, assuming the funds' investments are
successful, eventual performance fees. Burford shareholders seem
to have welcomed the Gerchen deal: The share price rose 16
percent on Tuesday after the merger was announced.
"THERE HAS TO BE AN INDUSTRY"
The combination will also diversify the two funds'
Burford is best known for funding the cost of big-dollar
commercial litigation and arbitration, historically earning more
than 70 percent returns on the capital it invests. Gerchen
Keller similarly funds commercial litigation, with a particular
niche in intellectual property cases.
But it also has raised money for what it calls
post-settlement funding. Mostly, that means factoring law firm
billing receivables, whether those receivables are contingency
fees for plaintiffs' lawyers in personal injury litigation or
hourly legal bills for law firms that don't want to wait around
to collect from clients.
Typically, these post-settlement investments offer much
lower returns than litigation financiers can earn from backing
the winning side in a big commercial dispute: Gerchen Keller's
internal rate of return on its $400 million post-settlement
funding play, for example, has been 12.6 percent, according to
the merger announcement - less than the 52 percent returns it
has realized so far from its pre-settlement investments.
The post-settlement business is also less risky, which is
why institutional investors are attracted to it. Burford said
that adding Gerchen Keller's post-settlement funding expertise
"will permit Burford to continue to innovate and expand its
products and solidify its client relationships while also
managing balance sheet risk."
Bogart and Lenkner both emphasized that this combination is
good for their firms.
Each funder is staffed with lawyers with dazzling resumes.
Their client lists overlap but are also different enough that,
between them, Lenkner said, they've worked with just about every
law firm in the Am Law 100 and the prestige litigation
Litigation funding is a booming asset class, Lenkner said,
with all sorts of law firm lenders and asset managers steering
money into the space. In a crowded field, he said, the expertise
and experience of the combined Burford firm is a distinct
So it may come as something of a surprise that Bogart said
his ambition is not at all for the combined Burford and Gerchen
Keller to squish competitors. Quite to the contrary, he said:
Bogart wants the new Burford to strengthen the entire industry
of law firm finance.
In the U.K., several dedicated litigation funders such as
Harbour Litigation Funding, Calunius Capital and Therium have
invested hundreds of millions of dollars in British, European
and Asian cases.
Litigation funding was slower to catch on in the U.S.,
probably because of contingency fees and the American rule, and
remains a splintered, opaque business.
That will have to change if Bogart is going to realize his
five-year goal of making litigation finance a routine
consideration within big corporations. Even the newly combined
Burford and Gerchen Keller can't capitalize all of the
litigation in the U.S. that Bogart believes should be funded.
"There has to be an industry," he said.
The new Burford could be a model for the litigation funding
industry in the U.S. if other funders here follow its example of
(relative) transparency and investment due diligence. Or its
dominance could send competitors into the shadows, chasing shady
deals with desperate law firms.
I sure hope it's the former.
(Reporting by Alison Frankel. Editing by Alessandra Rafferty.)