VPC Legal Finance Strategy Quarterly Newsletter
May 08, 2023
What is legal finance?
“Simply put, legal finance is the provision of third-party capital to law firms or to parties involved in legal disputes” says Luke Darkow, VPC Principal dedicated to the legal finance strategy. Legal financing comes in all sizes, from large-scale law firm loans to single cases, and the underlying disputes vary across claim types, including mass tort, high volume, workers’ compensation, personal injury, social security disability, commercial litigation, and international arbitration. Furthermore, loans are secured by underlying collateral representing various revenue streams, such as contingent fees owed to law firms, proceeds entitled to claimants upon the successful resolution of legal disputes, etc.
What is the market opportunity? Why is this strategy attractive?
Legal finance is an uncorrelated, inefficient, and growing asset class. The total annual global legal fees are approximately valued at $825.0 billion1, and the estimated annual U.S. legal spend is approximately $445.0 billion2. Law firms are looking for ways to lay off this legal spend and legal risk; however, the demand for legal funding continues to outpace the supply of capital. VPC anticipates this market to grow as the demand for legal finance continues to increase. “Legal finance is a burgeoning asset class that is generally uncorrelated with the broader capital markets and macro-economic backdrop” says Chad Clamage, VPC Principal. He says, “Restrictions around non-lawyer ownership of law firms and a relative lack of traditional debt financing solutions have created and sustained capital markets-related inefficiencies.”
What are VPC’s legal finance capabilities and experience in the space?
VPC has been investing in the legal finance space since 2018 and has a proven track record of providing investors with attractive risk-adjusted returns. VPC has deployed more than $800.0 million into legal finance since 2018 across over 50 transactions. “We benefit from pattern recognition as a result of our investments in best-in-class legal platforms and credit exposure to over 100+ law firms. These long-term relationships allow us to identify attractive and proprietary investment opportunities on behalf of our limited partners. We are excited about partnering with new platforms and law firms and offering them innovative financial tools to execute on their business models” says Richard Levy, VPC Founder, CEO & Chief Investment Officer. VPC pursues a hub-and-spoke strategy, in which it partners with best-in-class platforms across the asset class. “By providing these platforms with strategic investments, VPC secures proprietary sourcing channels with the companies that interact most frequently with the law firms and plaintiffs that are litigating cases” says Ahmed Eltamami, VPC Vice President.
How is VPC’s approach to legal finance differentiated from competitors?
The legal finance strategy at VPC leverages the institutional infrastructure of the firm, along with all operational support. In terms of deal structuring, VPC’s investments are viewed through a credit lens and feature structural protections, such as cross-collateralization and investment discretion, which limits VPC’s downside risk while providing VPC with material upside potential and strong investment rights.
Notably, VPC’s portfolio offers shorter-duration investments, with additional liquidity not currently available with traditional litigation funders. “Approximately 10% of our portfolio has turned over quarterly versus invested capital on average since 2018, which differs from traditional litigation funders where you may not see any realization activity for 3-5 years. In terms of risk, traditional litigation funding is more aligned with taking binary risk” says Luke.
How is VPC’s approach to legal finance similar to its approach to other private credit deals?
VPC is an established private credit manager founded in 2007, with an extensive track record and institutional infrastructure. Legal finance is just one of several strategies for VPC, and the legal finance team adheres to the firmwide investment philosophy focused on proactive and ongoing risk management and constructing its portfolio with an emphasis on yield generation and capital preservation. “We are a trusted credit provider and have a long history of credit expertise. When it comes to our legal finance strategy, we view the legal finance asset class through a structured lens, primarily leading with a debt or debt-like instrument, placing an emphasis on downside protection and current income streams, which result in an attractive risk-adjusted return profile” says Luke.
Portfolio Company Spotlight:
Plaintiffs law firm (the “Company”)
The Company is a respected and trusted plaintiffs’ law firm headquartered in Washington DC. Since its founding in 1953, the Company has grown to become one of the most prominent injury firms in the country, with 50+ employees practicing throughout Washington DC, Virginia, and Maryland. Despite their growth, one thing has remained the same over the last 65 years: the Company’s commitment to helping individuals who have been injured or wronged.
Sourcing Advantage: The Company was sourced directly via an existing VPC platform relationship, an alternative non-bank lender to plaintiff firms.
Investment: VPC committed $20 million to a four-year term loan in September 2021, with favorable underwriting and key provisions such as account and cash controls, perfected first lien on collateral, customary negative covenants, and events of default. VPC intends to grow the relationship and portfolio size over time.
VPC Investment Thesis:
The Company has strong brand recognition and a multi-pronged marketing approach, which will allow the company to continue increasing the size of its practice. Additionally, aligning with VPC’s diversification goals, the Company is underpinned by highly-diversified legal exposure across 7,000+ personal injury and mass tort claims.
At VPC, we are excited about the future with the Company and our continued partnership. With a strong management team and expanding ecosystem, the company is poised to be a leading, long-term player in the large and growing legal finance ecosystem.