DealBook offers a profile of a new firm, Gerchen Keller Capital, that is now strategically investing in litigation, a field known as litigation finance.
A new firm, Gerchen Keller Capital, has raised $100 million to invest in high-stakes litigation between companies, becoming the latest investment shop to dive into the relatively new sector.
Run by four men with backgrounds in finance and law, Gerchen Keller Capital began this year and closed on its first investment this month. The firm plans to invest exclusively in litigation between institutions, whether on the plaintiff or defendant side.
The prospect of double-digit returns has lured some prominent lawyers to set up litigation finance firms in recent years, bankrolling plaintiffs in exchange for a slice of the potential winnings. Some can invest in defendants as well, by advancing legal fees and then collecting a return if the case is successful. Such deals are not loans; if cases are not successful, the investors lose their capital.
Two of the large firms in the field, Burford, started in 2009, and Juridica Capital Management, started in 2007, have listed their funds in London. Two others run by former lawyers, BlackRobe Capital and Fulbrook Capital Management, began in 2011. In 2012, the litigation finance team at Credit Suisse left to form Parabellum Capital.
Gerchen Keller Capital, based in Chicago, plans to avoid consumer or class-action litigation, aiming instead to appeal to prominent businesses involved in legal disputes.
At AboveTheLaw, David Lat profiles the members of this firm–“resume porn” at its finest.
- Adam Gerchen, the company’s chief executive officer, was portfolio manager at hedge fund Alyeska Investment Group L.P. and an investment banker at Goldman, Sachs & Co. He earned his law degree at Harvard Law School.
- Ashley Keller is chief investment officer who was an analyst at Alyeska and a partner at Bartlit Beck Herman Palenchar & Scott. He clerked for U.S. Supreme Court Anthony Kennedy and graduated from University of Chicago Law School.
- Serving as chief underwriting officer is Travis Lenkner, former senior counsel at The Boeing Co. and former attorney at Gibson, Dunn & Crutcher. Lenkner, who graduated from University of Kansas School of Law, also clerked for Kennedy.
- Terry Carlson, chairman of the investment committee, was general counsel at Synthes Inc. and was a partner at Gibson Dunn, where he established the firm’s Hong Kong office. He graduated from University of Michigan Law School.
Now, how is this firm going to decide what to invest in?
“We won’t be successful if we’re investing in claims that we don’t believe have a very good chance of succeeding,” Mr. Lenkner said.
Lenkner added to David:
ATL: For your fund to succeed, you’ll have to pick the right cases. How do you assess the merits of a case?
Ashley Keller: You look at a case the way a contingency law firm would look at a case when doing due diligence at the threshold. You have a return threshold that is about your cost of capital. Then you draw out a decision tree to figure out what arguments you’ll face from the other side, figure out what the case might be worth, discount back to present value, and see if the amount hits your return threshold.
Depending on the point of time in the litigation, we’ll have more or less information available to us. For example, we’ll have more information if we come into a case after the close of discovery than if we come into a case pre-complaint. There’s no single pricing mechanism; it’s not formulaic.
Big data, and algorithms that can generate the likelihood of different algorithms will be very, very lucrative. Stay tuned.