Litigation Funder Cuts Staff as Backer Slashes Future Commitment

Validity Capital plans to lay off half its staff after its financial backer decided to cut investments in the litigation finance firm.

The New York firm has so far laid off six of its roughly 20 employees and plans to maintain between seven and 10 workers going forward, Ralph Sutton, the chief executive officer, said in an interview. Validity plans to continue operating a slimmed-down business investing only in patent cases.

Private equity firm TowerBrook Capital, which anchored a $250 million investment to launch Validity in 2018, decided not to continue financing a business that wasn’t creating enterprise value apart from case returns, according to a TowerBrook executive who was not authorized to publicly comment on the decision.

Litigation finance has soared in popularity to a nearly $14 billion asset class, as law firms and their clients seek outside cash to pay the cost of lawsuits. But TowerBrook’s move shows not all investors are getting the value they seek by reaping returns if the litigation they finance is successful.

TowerBrook will continue to invest in the roughly 60 cases it has already committed to fund, Sutton said. TowerBrook chose to harvest returns from the cases after concluding the litigation funding business could not be sold, he said.

“The question to the marketplace is whether these companies are worth anything beyond their assets, no matter how well they’re run, how much they return,” Sutton said. “If you’re an investor, can you get anything in return other than your case returns? And TowerBrook has concluded in the next two, three years it will be difficult to monetize this enterprise, so they’re moving to a harvest option.”

Case Returns

Validity to date has invested a total of more than $400 million in nearly 75 cases, Sutton said. The whole portfolio has fully resolved 13 cases, having returned more than its principal in 12 of them, he said.

The TowerBrook executive said the Validity investment had generated good, and maybe great, returns so far—depending on what the remaining cases generate. Validity has so far achieved a 34% internal rate of return, according to Sutton.

TowerBrook did not want to sell Validity’s cases, viewing it as an unnecessary haircut on deals it expects to generate significant returns, Sutton said. The period in which Validity runs off the remaining cases TowerBrook has committed to could last anywhere from two to five years, he said.

Sutton said going forward he plans to invest only in patent cases because they outperformed the group’s broader returns, with the firm so far having so far “won” all of its eight completed patent investments.

Raising Funds

Sutton is seeking to raise around $100 million for the patent cases. He said he’s received early “significant” capital commitments of nearly $50 million that have yet to close.

The smaller Validity team could be funded by management fees from its new cases as well as those concluding during the run-off period, the TowerBrook executive said. TowerBrook is likely to be a minority investor, the executive said.

A public share offering was also an unlikely exit plan for TowerBrook considering how few publicly traded litigation finance companies exist, including Burford and Omni Bridgeway. Since Validity launched in mid-2018, Burford shares have fallen by roughly a third while Omni Bridgeway shares are essentially flat.

There have been few sales of litigation funding companies. The most prominent example was a 2016 sale of Gerchen Keller Capital to Burford Capital for $160 million. The founders of that business departed Burford shortly after the sale.

A secondary market for litigation finance deals has begun to emerge, most notably with the entry of Gerchen Capital Partners, which raised $750 million to purchase existing claims.

— With reporting by Emily Siegel