Litigation finance firm Parabellum Capital has raised a new fund with commitments exceeding $450 million ahead of a potential torrent of coronavirus-related lawsuits, new proof that betting on court battles remains popular with investors despite the current crisis.
The nearly 15-year-old business of investing in lawsuits in exchange for a portion of their rewards has seen dramatic growth in the past few years, drawing billions in investment and luring dozens of former Big Law attorneys into the relatively nascent industry.
Many in litigation funding expect a surge of investments in the coming months to help companies access courts as they struggle to recover from the business interruptions caused by the Covid-19 pandemic. That includes legal disputes over insurance coverage, unfulfilled contracts, and claims arising from bankruptcies.
“There will be a slew of litigation that will derive from this experience,” Parabellum CEO Howard Shams said in an interview. “There will be significant claims, many of them meritorious, that will be litigated in the future and which would be entirely appropriate for litigation finance support.”
Those opportunities will play out in a cash-rich finance industry. A survey of more than 40 funders released in November said there was nearly $10 billion in capital committed to financing U.S. commercial litigation, noting the amount of capital made the market favorable for those seeking financing. Funders spent $2.3 billion on cases from mid-2018 to mid-2019, the survey found.
Commoditization in the litigation finance space “was always a risk,” Shams said. But he said his firm has found ways to fend it off, including by closing deals quicker than other funds and by bringing opportunities to law firms rather than the other way around.
The risk of a capital over-supply, which critics warn could result in funders clogging courts with bad cases, has been dulled by the impact of the coronavirus pandemic, Shams said. Hedge funds that specialize in distressed assets had been targeting litigation during the recent bull market, but those big-money players now have an abundance of troubled assets to keep their attention, he said.
“The biggest commoditization I feared was the hedge funds coming in to do things they weren’t designed to do,” Shams said in an interview. “Because of Covid, a lot of people sniffing around in litigation finance left to go back to the things they were built for.”
In a filing with the U.S. Securities and Exchange Commission, Parabellum said it has so far raised more than $433 million with 88 investors. The firm expects a final number in the coming weeks will be greater than $450 million.
Shams and Parabellum chief investment officer Aaron Katz are pioneers in the U.S. commercial litigation finance industry, having helped launch a legal risk strategies unit at Credit Suisse in the mid-2000s.
Litigation finance is still generally dogged by criticisms lobbed by the U.S. Chamber of Commerce, which has advocated for reforms that it says would limit funders from exerting control over settlement decisions. Most of those reform efforts have stalled, and funders say they don’t make litigation decisions in their cases.
Parabellum was launched in 2012, around a time when other private funds like Gerchen Keller Capital and Longford Capital were raising vast sums to enter the space.
GKC was eventually acquired by Burford Capital, a publicly traded litigation funder that routinely commits more than $1 billion annually to invest in lawsuits or to finance advance payments based on legal judgments.
Burford last summer came under scrutiny from short-seller Muddy Waters, which said the company was “egregiously misrepresenting” its investment returns. Burford has denied those claims, but the controversy sent its share price tumbling. That played out while Parabellum was raising capital from investors, leading Shams to fear the industry could be “tainted” in investors’ eyes.
But Shams said investors ultimately understood the critiques of Burford, the veracity of which he declined to comment on, were only applicable to a publicly traded company.
“We believe the best way to invest in this space is through private equity models that we and others present,” Shams said. “We think you have to be cautious about how your investment manager is handling valuations, and it will differ. We are proud of our conservative approach.”