On The Case

Burford, Gerchen Keller to merge: turning point for litigation funding?

(Reuters) - 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, for example, 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 notes.

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 industry.

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.

The combination will also diversify the two funds’ investment portfolios. 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 boutiques. 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 competitive advantage.

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.