Above The Law recently published an interesting interview with Lee Drucker from Lake Whillans. Lake Whillans is a litigation finance and distressed venture capital firm providing funding for companies in litigation or arbitration.
We have decided to provide a summary of they key items discussed. The original article can be accessed here.
Lee discussed how they assess and value potential claims. There are four key elements they review when assessing the asset.
1. Likely duration of the litigation process. The shorter the duration, the more valuable the litigation asset.
The key considerations for these element are:
“(i) the stage of the litigation and the time financing is sought; (ii) the case schedule; (iii) the practices of the presiding judge and/or jurisdiction; (iv) the likely outcome and duration of any appeals; and (v) the complexity of the subject matter.”
2. Damages VS Investment amount required. Of course the larger the potential returns and the smaller the investment required the greater the asset. That said often litigations are embedded with other claims. This means the risk will have to be balanced with the rest of the portfolio.
3. Probability of success for case.
“We…believe that the probability of success for any individual claim ranges from 20% to 80%. While handicapping the precise probability of success can be difficult, we invest only in claims to which we assign a probability of success of 60% or greater.”
4. Other variables. Collection risk is crucial which means ensuring the defendant is solvent and domiciled in a favourable jurisdiction.
Lee Ducker feels the industry presents many opportunities. The most immediate being to build firms that are integrated and valued by the legal community. Trust and transparency will be of paramount importance in achieving this.
The key challenges are mentioned by Michael McDonald. Those are benchmarks for investors looking at the industry. Lee points out there are none currently. Additionally metrics for financially modelling the assets are difficult because each asset is entirely unique. Every claim must be individually assessed before and investment can be made.
It will be interesting to see how the industry evolved. Can it be standardised and become more mainstream? Time till tell.