One of the fastest growing alternative investment sectors is litigation funding. Originally established by attorneys to help their clients pay for basic living expenses while awaiting settlement of their personal injury claim, the industry has expanded rapidly as institutional investors realize the high returns and negative correlation to the stock market. One of the newest and largest litigation funding companies is Baker Street Funding, with offices in New York and soon to be Florida. Daniel Digiaimo, the CEO of the firm, whose background includes stints at Morgan Stanley, Merrill Lynch and Oppenheimer & Co, answers questions about litigation funding and the recent glut of investor money that has flooded the space.
Third-party litigation funding is a relatively new phenomenon in the United States but has quickly become an important part of the legal landscape. Why has this industry taken off so quickly and why is it so important to plaintiffs and their attorneys?
Well you’re right there has been a large amount of recent interest in the industry, especially from some larger asset managers like Stifel Nicolaus. The simple reason is that this industry is able to produce great returns, relatively low risk and a negative correlation to the economy. Our plaintiff funding business, where we provide personal injury plaintiffs with liquidity, in order for principal and a set rate of return to be paid upon successful settlement of their claim, has grown enormously in the past two years. We only work with a fraction of personal injury plaintiffs nationwide and if the economy takes a turn for the worse, there will be more plaintiffs in need of immediate capital. Investors see that as a great compliment to a portfolio of domestic equities and fixed income. As far as the importance to plaintiffs and counsel, quite simply the liquidity that we provide allows the plaintiff to continue to fight for a settlement that they deserve. It is a well known tactic of insurers to drag out cases as long as possible in order to force the plaintiff into taking a smaller settlement. We help even the playing field.
There has been a change recently and many firms are moving away from funding individual cases and looking to invest in portfolios of cases instead. Is that something your firm is doing? If so why the change?
We provide a full suite of services at Baker Street Funding. This means everything from investing into single large corporate cases, individual personal injury or malpractice cases to financing large portfolios of cases. The reason that many firms are taking the portfolio investing route, is to diversify risk. When you underwrite a single case there is inherently more risk involved than when you invest into a portfolio. We look at all of our holdings as part of a single portfolio and think that whether you are investing in a single case or a portfolio of cases it comes down to good underwriting and good risk analysis. With those two things it doesn’t matter the type of case we invest in because we trust our due diligence process.
There have been some harsh critics of litigation funding since its inception. What do you say to those people?
While I understand that from the outside looking in, some people may have an emotional reaction to our business, but at the end of the day what we do is rational and gives plaintiffs the option to utilize leverage in a way they would not be able to if our industry did not exist. We believe that our contracts are priced appropriately for risk and that our clients always have the option to look for other avenues of financing. You have to remember that most of our transactions are non-recourse and solely based on the merits of the litigation. We do not have the luxury of personal guarantees or any other type of recourse when it comes to repayment. I don’t believe the critics of the litigation funding space properly understand the risk involved in what we do.
Beyond criticism, there have also been calls for regulation in the litigation funding space. What do you think about the recent calls for regulation and is it something your firm is actively involved in?
I think regulation can be a welcome thing in our industry but it must be done correctly and with an intense understanding of how our business works. Unfortunately most politicians take the stance of “regulate now, understand later” and can create restrictions that ultimately hurt our clients. While I don’t believe we should be subject to the same amount of regulation as a normal financial institution, I have no problem with regulating certain contract language and industry standards. Just like any industry in its infancy, the litigation funding space has had it share of bad actors. Baker Street Funding prides itself on being ahead of the curve and at the forefront of the space. We feel that our current service model could be a perfect example on how companies should be required to interact with consumers.
What types of cases do you fund?
We are pretty much case agnostic at this point. If a case comes in that doesn’t fit within our investment parameters we help place it with one of our partner firms. We fund everything from personal injury claims to patent infringement cases, wrongful imprisonment cases and everything in-between. If we feel like there is a strong chance of recovery in favor of the plaintiff and the defendant has the ability to pay the judgement, we will invest in the case.
Where do you see the litigation funding industry heading in the next five years?
I see a consolidation coming in the space. There have been a lot of small firms that have popped up recently and are just not able to provide a level of service that is being provided by the larger firms in the industry. I think with the influx of more and more institutional money there will eventually only be a few firms that can consistently provide the level of service and pricing that attorneys and plaintiffs require. We hope to be the largest firm in the litigation funding space within the next five years so we can provide our clients with a suite of services for any type of litigation funding that they require. We aim to be a one stop shop for everything from personal injury finance to surgery funding and large scale commercial litigation funding.