Jun 27, 2018
The billionaire George Soros has found a new way to make money from personal-injury lawsuits.
Soros Fund Management is pushing into a branch of litigation finance that few hedge funds have entered. His family office is bankrolling a company that’s creating investment portfolios out of lawsuits, according to a May regulatory filing.
The development is the latest twist on the litigation funding market, which has drawn criticism for monetizing and encouraging the lawsuit culture in the U.S. The firm Soros is backing, Mighty Group, bundles cash advances that small shops extend to plaintiffs in personal injury suits in return for a cut of future settlements. Mighty Group’s approach opens the door to another potential development: securitizing individual lawsuit bets for sale to other investors.
“There are all the ingredients there to securitize these things,” said Adrian Chopin, a managing director at legal finance firm Bench Walk Advisors. “A diversified, granular pool with predictable outcomes. The problem is, you can’t yet get these things rated” by credit agencies.
Wall Street has been betting for a while on commercial litigation, which provides financing of big corporate suits with millions or even billions of dollars at stake. Soros is focused on the consumer side, where plaintiffs receive advances of $2,000 on average for legal claims typically tied to auto and construction accidents. The advances are used to cover personal expenses, such as medical bills and rent.
Soros along with Apollo Capital Management are among the first money managers to jump into this niche of the lawsuit-funding market. It offers steady and predictable returns, which historically have averaged about 20 percent a year at relatively low risk, said Chopin of Bench Walk.
“Everybody is looking for yield, and people are also looking for assets that are not correlated with the major equity and debt markets,” said Christopher Gillock, a managing director at Colonnade Advisors, an investment bank that specializes in financial services. “Litigation funding falls into that category.”
Joshua Schwadron, a co-founder of Mighty, declined to comment on the firm’s investors. Michael Vachon, a spokesman for Soros Fund Management, the billionaire’s New York-based family office, declined to comment.
The investments come with risk from both sides of the political spectrum. The U.S. Chamber of Commerce and the insurance industry criticize litigation financing for clogging the courts with frivolous lawsuits and driving up the costs of settlements. Regulators, on the other hand, have taken the side of consumers, moving to rein in the advances, casting them as loans subject to usury laws.
Industry proponents say the funding helps people win appropriate payouts instead of settling for pennies on the dollar under the pressure of medical bills or missed income from work. In addition, plaintiffs don’t have to pay back the advances if they lose their cases.
“These funding companies are allowing the folks who are injured through some accident to be able to stick around long enough to get paid,” said Joel Magerman, chief executive officer of Bryant Park Capital, an investment bank.
The funding companies don’t always get fully paid since other claims on settlements, such as attorney fees, have priority. This risk of underpayment makes advances difficult to bundle into securities, said Eric Schuller, president of the Alliance for Responsible Consumer Legal Funding, an industry trade group. In contrast to advances, most securitizations are backed by tangible items like a home or car.
“If the case goes south, there is nothing there to go after,” Schuller said. “It’s just a piece of paper.”
Mighty, originally a software provider, announced in March it had raised more than $100 million from major institutional investors to help litigation finance firms access capital. The May filing shows that a Soros affiliate agreed to provide Mighty with financing, which can also be used to back lawyers’ contingency fees and medical bills slated to be paid when cases settle.
Soros’s move into consumer legal funding is somewhat akin to another investment his family office made last year. It participated in a joint deal to buy as much as $5 billion of loans from Prosper Marketplace, a pioneer in peer-to-peer lending.
Although this form of litigation financing dates back to the mid-1990s, hedge funds had mostly steered clear because the advances and firms that issued them are so small. Only the largest players have been able to obtain financing from big investment firms. For example Leon Black’s Apollo Capital, through its MidCap Financial affiliate, backs Golden Pear Funding of New York, one of the biggest providers of advances.
Magerman anticipates that more investors will jump in the market. “It’s a small niche asset class,” he said. “There is a lot of additional money that can come in.”
Everybody is looking for yield, and people are also looking for assets that are not correlated with the major equity and debt markets.
Christopher Gillock, a managing director at Colonnade Advisors