Who doesn’t want an investment that’s insulated from external events, while also offering them a high probable return on their investment? LexShares, according to CEO and co-founder Jay Greenberg, does that and in a pretty counterintuitive way. Well, if you have an appetite for throwing money into a marketplace that lends money to plaintiffs in exchange for the promise that they’ll not only have their day in court but win.
The easy part is attracting plaintiffs with a beef and a target defendant. The hard part is getting investors to pony up. Greenberg walked us through how the online litigation funding startup works, how it makes money and what the potential investor needs to know.
The LexShares Financing Model
Private equity financing of lawsuits in corporate cases is nothing new. There are plenty of companies that raise funds for legal campaigns for a return on investment, but LexShares, Greenberg says, is the first online litigation financing entity.
So, how does the process work? The online litigation financing group makes money in a similar fashion to other commercial litigation funders. A percentage is taken upfront, typically from the plaintiff, and LexShares then receives an amount of carried interest on the back end for each case that it funds. According to Greenberg, “the difference between investing in cases through LexShares versus investing in a traditional litigation finance fund is we do not charge our investors any upfront fees or management fees. So, for every dollar that the investor invests, there is a chance to get a return on that dollar.”
Investors only pay a fee if the investment is profitable, and if so, the investor pays a carried interest fee. Here’s an example. LexShares funds a case for $100,000 and receives a commission upfront from the plaintiff. If LexShares receives $5,000 for facilitating the transaction, $95,000 would be remitted to the plaintiff, but the investors are still receiving their return on the full $100,000. If recovery occurs and the investors are paid back $200,000 on their $100,000 investment, there is a profit of $100,000. LexShares takes 20 percent of the profit, which is $20,000 of the $100,000 profit, and $180,000 would be remitted to the investors on their $100,000 investment. So, LexShares makes money from commissions upfront, as well as carried interest on the back end.
Kinda similar to the online lending model that has seen better days.
Why Do We Need A LexShares?
Greenberg, prior to founding LexShares, was an investment banker at Deutsche Bank involved in M&A and debt and equity underwriting for technology companies in the software space. Greenberg “stumbled across” the niche market of litigation financing when a friend asked him to invest in a lawsuit.
After better understanding the ins and outs — or, rather, the risks of litigation financing — Greenberg was intrigued by “these completely uncorrelated, zero-beta assets that are not influenced by broader economic factors. So, it doesn’t matter what the stock market does — commodity prices, interest rates, none of that is having a direct impact on investment in litigation, which is really operating inside a courtroom vacuum.”
When Greenberg dug deeper into the industry, he found other hedge funds that were very successful and engaging in commercial litigation finance transactions. However, only large limited partners had access to these funds, which were also limited in number. Greenberg wanted to find a way to provide broader access to this asset class, which was the genesis of the LexShares platform.
LexShares Financing Provides Access To Justice
Greenberg sees two key functions of LexShares. On the investor side, the company is opening up access to a brand new asset class. Previously, individual investors could not invest in commercial legal claims unless they were a limited partner in a large hedge fund. On the flip side, LexShares is giving plaintiffs access to justice by providing financing in highly meritorious cases. Greenberg concedes, “We have one of the greatest legal systems in the world here in the U.S., but the truth is that it takes an abundant amount of capital to use the system efficiently.”
But what sounds like a win-win for everyone comes with its fair share of risk. Lawsuits can take years to conclude, tying up investor dollars, and funders lose everything if a suit isn’t successful.
Greenberg, however, is unfazed, confident that the biggest risk is that investors might not fully understand the value proposition. “A big part of LexShares is having this online, forward-facing platform where we can educate all of the parties involved — the investor, the plaintiff and the attorney — on what litigation finance is, and I think only once we’ve breached that education gap will people be comfortable engaging in these transactions.”
What’s Next For LexShares?
Greenberg is focused on educating potential stakeholders and providing a greater number of high-quality investment opportunities. He wants investors to understand the key idea that, “instead of just investing in one legal claim, LexShares allows investors to take that piece of their portfolio that they dedicate to litigation finance and to diversify within that piece itself by investing in a number of cases.”
To date, LexShares has put approximately $5.5 million to work through the platform. The Wall Street Journal reported that, of LexShares’ 15 cases so far, three have settled favorably, and one saw investors with a 93 percent annualized return from a $28.5 million settlement. That, of course, means that there are 13 still hanging out there that could go any which way.
Investments For 8.9.2016
August introduces the dog days of summer and also introduces a typically languid period for investors, both public and private. You’ve heard of the Hamptons, and no doubt, that’s where many of them have gone. The pace set in recent weeks for the Investment Tracker has been one where a few multi-billion dollar deals have been replaced by a sub-billion dollar level of fund flow, and that still is a decent pace. The week that ended Aug. 5 showed a level along the same lines, with a $921 million total investment tally. Yet, this time around, B2B grabbed some more traction and transactions, coming in to represent roughly 83 percent of the total.
Logistics held sway over the week within B2B, and within logistics (let’s include transport here), a few triple-digit deals grabbed the spotlight. Go-Jek, Indonesia’s answer to Uber via on-demand motorbike taxis, was the recipient of $550 million in funding through a round led by KKR and Warburg. Warburg had some continuity with a $125 million investment in Stellar Value Chain Solutions, a third-party logistics company that operates in India. Quite a bit down the line, we can see that FINO PayTech brings up the rear, so to speak, with $37.5 million invested, tantamount to a 21 percent stake bought by an energy marketing company.
The weighting assigned to the top three deals coming from the Eastern regions give that geography the lion’s share of investments in the latest week at 83 percent of holdings.