I, Uncorrelated
In Sir Walter Scott’s Guy Mannering (p.75), Mannering the neophyte enquires of Pleydell, the barrister, why his law office is lined with books of history rather than law. Mannering sagely replies: “These are my tools of trade. A lawyer without history or literature is a mechanic, a mere working mason; if he possesses some knowledge of these, he may venture to call himself an architect.”
As a lawyer, I have always invested in myself and been the architect of my financial future
My own history and experience as a lawyer in several countries resonates not only through my practice, but also my personal investing life. As a lawyer, I have always invested in myself and been the architect of my financial future. I carry this approach over to my personal wealth planning strategy: I know nothing of the architecture of the stock markets, relatively speaking, but I do know the architecture of litigation. So that’s where I have always invested. I bet on me.
There is a lesson here for all lawyers, perhaps especially litigators whose portfolios, pension funds and 401(K) plans plummeted in 2008 and 2020. The lesson only emerged on the eve of the Great Recession (around 2007) when litigation finance provided a new lens into the investment qualities and characteristics of the litigation asset class. That form of investing I named “alternative litigation finance,” because it was “alternative” to the traditional ways to finance litigation--through lawyers’ contingent fees and through fees paid by the client.
Litigation assets are proven, prime, high-yield investments
Alternative litigation finance took off. Eventually it began to produce replicable and reliable investment data, empirical and statistical performance indicators and verifiable “track record” of the highly desirable outsized returns to investors that the litigation asset class could yield. Over a decade of history, these assets came to be recognized as “solid” investments based on multiple of invested capital (MoIC) yields and market-beating internal rates of return (IRR). Moreover, they are said—even touted—to be uncorrelated assets, those whose performance is not affected by the vicissitudes of the stock markets. The extent to which this is true may be debated but that does not erode the conclusion that litigation assets are proven, prime, high-yield investments.
They are plenty and ever-replenishing. Every day lawyers harvest them into their litigation departments. Direct co-investments in them by the lawyer-sponsors is not off limits anywhere except the few Commonwealth jurisdictions that have not yet permitted lawyers’ contingent fees (Australia, Cayman Islands, Hong Kong). Indeed, in the United States, lawyers are the “traditional” direct litigation co-investors through contingent fees. (The history of this co-investment market is one of humble beginnings where law had to be reformed from English law in a largely agrarian society. It is no wonder Abraham Lincoln famously and routinely charged contingent fees for his legal work.)
Why would any litigator worth his salt not want to invest in his own litigation assets?
Plentiful investment opportunities over which lawyers have a right-of-first-refusal (until recently, exclusivity as to outside investors in the assets); why would any litigator worth his salt not want to invest at least some measure of his wealth in his own litigation assets rather than exclusively take high hourly fees, only to turn his surplus earnings into listed securities that are routinely battered by market malfeasance and pandemics. Logically, contingent fee investments should form a part of the investment portfolio managed by every litigator and litigation law firm. That sub-portfolio can be managed, balanced, and calibrated just like the firm’s retirement plan. Face it, a lawyer with a co-investment in a claim is the expert in the underlying asset; she selects it, grooms it, manages it and (within ethics boundaries) controls its development and value. She then enjoys the outsized returns when it is liquidated. Make sense?
This paradigm is not as odd as it may seem. Finance, rather than law, teaches us that a portfolio of litigation investments resembles a cross between hedge fund (typical life of 4 years) and private equity fund (typical life of 6 years). But unlike private equity investments, litigation investments have a definite exit not tied to an acquisition or an initial public offering or wider market behavior: in the litigation investment “market”, if the defendant does not buy the claim against him (through settlement), a judge will always order the sale with his gavel (through judgment). There is a unique certainty one cannot find in other asset classes, even the alternatives or real estate.
Me, I invest in litigation assets. My own history and the history of my profession confirms repeatedly that my strategy is sound. Moreover, I like my investments in litigation assets. I understand them and I take solace, particularly these days, in the fact they largely sit outside of unpredictable and cross-correlated markets that seem destined to disappoint me time and again.
In Sir Walter Scott’s Guy Mannering (p.75), Mannering the neophyte enquires of Pleydell, the barrister, why his law office is lined with books of history rather than law. Mannering sagely replies: “These are my tools of trade. A lawyer without history or literature is a mechanic, a mere working mason; if he possesses some knowledge of these, he may venture to call himself an architect.”My own history and experience as a lawyer in several countries resonates not only through my practice, but also my personal investing life. As a lawyer, I have always invested in myself and been the architect of my financial future. I carry this approach over to my personal wealth planning strategy: I know nothing of the architecture of the stock markets, relatively speaking, but I do know the architecture of litigation. So that’s where I have always invested. I bet on me.There is a lesson here for all lawyers, perhaps especially litigators whose portfolios, pension funds and 401(K) plans plummeted in 2008 and 2020. The lesson only emerged on the eve of the Great Recession (around 2007) when litigation finance provided a new lens into the investment qualities and characteristics of the litigation asset class. That form of investing I named “alternative litigation finance,” because it was “alternative” to the traditional ways to finance litigation--through lawyers’ contingent fees and through fees paid by the client.Alternative litigation finance took off. Eventually it began to produce replicable and reliable investment data, empirical and statistical performance indicators and verifiable “track record” of the highly desirable outsized returns to investors that the litigation asset class could yield. Over a decade of history, these assets came to be recognized as “solid” investments based on multiple of invested capital (MoIC) yields and market-beating internal rates of return (IRR). Moreover, they are said—even touted—to be uncorrelated assets, those whose performance is not affected by the vicissitudes of the stock markets. The extent to which this is true may be debated but that does not erode the conclusion that litigation assets are proven, prime, high-yield investments.They are plenty and ever-replenishing. Every day lawyers harvest them into their litigation departments. Direct co-investments in them by the lawyer-sponsors is not off limits anywhere except the few Commonwealth jurisdictions that have not yet permitted lawyers’ contingent fees (Australia, Cayman Islands, Hong Kong). Indeed, in the United States, lawyers are the “traditional” direct litigation co-investors through contingent fees. (The history of this co-investment market is one of humble beginnings where law had to be reformed from English law in a largely agrarian society. It is no wonder Abraham Lincoln famously and routinely charged contingent fees for his legal work.)Plentiful investment opportunities over which lawyers have a right-of-first-refusal (until recently, exclusivity as to outside investors in the assets); why would any litigator worth his salt not want to invest at least some measure of his wealth in his own litigation assets rather than exclusively take high hourly fees, only to turn his surplus earnings into listed securities that are routinely battered by market malfeasance and pandemics. Logically, contingent fee investments should form a part of the investment portfolio managed by every litigator and litigation law firm. That sub-portfolio can be managed, balanced, and calibrated just like the firm’s retirement plan. Face it, a lawyer with a co-investment in a claim is the expert in the underlying asset; she selects it, grooms it, manages it and (within ethics boundaries) controls its development and value. She then enjoys the outsized returns when it is liquidated. Make sense?This paradigm is not as odd as it may seem. Finance, rather than law, teaches us that a portfolio of litigation investments resembles a cross between hedge fund (typical life of 4 years) and private equity fund (typical life of 6 years). But unlike private equity investments, litigation investments have a definite exit not tied to an acquisition or an initial public offering or wider market behavior: in the litigation investment “market”, if the defendant does not buy the claim against him (through settlement), a judge will always order the sale with his gavel (through judgment). There is a unique certainty one cannot find in other asset classes, even the alternatives or real estate.Me, I invest in litigation assets. My own history and the history of my profession confirms repeatedly that my strategy is sound. Moreover, I like my investments in litigation assets. I understand them and I take solace, particularly these days, in the fact they largely sit outside of unpredictable and cross-correlated markets that seem destined to disappoint me time and again.