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May 7, 2024

Legalist eyes ‘vastly higher yield’ with novel alt-credit gov’t receivables fund

San Francisco-based technology-driven hedge fund and alternative asset manager Legalist is circling U.S. government receivables with a novel alt-credit strategy that utilizes proprietary algorithms to mine data and unearth investment opportunities.

The strategy, which has so far raised around $200 million from university endowments, foundations, and family offices, sees Legalist invest in short-duration credit assets secured against invoice payments from federal and state government to contractor companies.

“Our AI algorithms scour through dense government databases to identify needles in the haystack: small government contractors at a stage who have recently been awarded disproportionately large qualifying contracts that render them both suitable for, and in need of, financing,” Eva Shang, co-founder, general partner and CEO, told Alternatives Watch.

“In terms of underwriting, the primary source of repayment for our loan is the government contract itself. We underwrite for the terms of payment, timing of payment, and specificity of performance requirements. Duration and liquidity are of paramount importance to our fund given its capacity for quarterly redemptions. We underwrite for an average disbursement outstanding of around 90 days, and that’s historically what we’ve achieved,” she said.

Co-founded in 2016 by Shang and Christian Haigh, Legalist uses proprietary algorithms and event driven origination to invest in uncorrelated credit assets spanning litigation finance, government receivables and bankruptcy lending.

The tech component

The firm, which was incubated by tech start-up accelerator and venture capital outfit Y Combinator Management, now has about $1 billion in assets under management, with a 35-person team comprising engineers, investment professionals and attorneys.

Shang said: “Our proprietary AI, called the ‘Truffle Sniffer’ was developed at Y Combinator and powers our investments across litigation finance, government receivables, and bankruptcy lending.”

Legalist’s government receivables strategy == which is now the firm’s second largest fund after litigation finance, having raised more than $100 million in Q1 this year == targets a net return of between 10-12%.

While the concept of lending against U.S. government receivables is not new, the asset class has historically been constrained by scale, according to Shang. “Specialty finance companies lending to government contractors have historically found it difficult to identify businesses at the exact stage of growth where they’re both in dire need of a larger credit facility and unable to secure one from a bank lender,” she explained.

“Luckily, that’s what Legalist’s signature technology, the Truffle Sniffer, is built for. Instead of looking to traditional relationship-based sourcing, we go direct to the source, and have managed to scale the strategy in under two years beyond what most funders have deployed in 10.”

Growth in investor interest

The firm’s investor base comprises endowments, foundations, family offices, large consultants and insurance companies, including four prominent university endowments.

“Investors are primarily interested in the capacity of government receivables to generate uncorrelated, liquid returns alongside current income. This is a key feature of government receivables in comparison to our other niche credit strategies like litigation finance: government receivables disbursements are outstanding on average for around 90 days,” she added. “As an asset class,it becomes comparable to fixed income or treasury bonds, but with vastly higher yield.”

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March 1, 2024

AI Helps Litigation Funders Mine Court Dockets for Legal Gold

  • Legalist Inc. uses the ‘truffle sniffer’ to find cases
  • Case Miner is the AI search tool for firm Qanlex

Companies that seek profits by funding lawsuits are using AI to help find cases to invest in, even as skepticism lingers about the tool’s usefulness.

Legalist Inc. built an algorithm called “the truffle sniffer” to search for lawsuits by focusing on variables such as the court, judge and case type. The tool was essential for the alternative asset manager’s growth, with $901 million now under management after its 2016 founding.

“The AI is a really crucial part of sourcing,” said Eva Shang, Legalist’s chief executive officer. She co-founded the company with the help of a $100,000 grant from billionaire Peter Thiel’s foundation after dropping out of Harvard.

Whether companies use AI to decide which cases to fund, or simply for research, the tool is becoming increasingly common in the $13.5 billion litigation finance industry, in which investors fund lawsuits and take a portion of any successful awards.

Litigation funder Qanlex created software called Case Miner to screen, rank and compare cases in Latin America and Europe. Case Miner then automatically reaches out to potential clients deemed most attractive.

Born out of funding from the Harvard Innovation Lab in 2020, Qanlex is “more of a technology company than investment fund,” said co-founder Fernando Folgueiro.

During the pandemic, the founders realized that international courts were increasingly putting dockets online, creating an opportunity to fund cases in untapped markets. The company invests from $100,000 to $3 million per case, and it tends to favor breach of contract cases.

Case Miner has been so successful that company leaders at times have had to halt using the tool because they could not handle the amount of leads it created for them, said co-founder Yago Zavalia Gahan, who is also an engineer and programmer.

AI Limitations

Using artificial intelligence to predict the value and length of a case is tricky because of a dearth of publicly available data. While many court dockets are online, settlement amounts are often confidential, leaving the most vital data point for funders out of reach.

Instead, algorithms are trained to look at other factors such as jurisdiction and judges to assess whether a case would be financially viable.

Legalist exclusively relies on its technology to find cases to fund. It then sends automated outreach to potential clients, which are typically the law firms representing plaintiffs but at times are the claimants themselves.

But the functionality of the AI reaches its limit once it’s time to determine the value and merit of a case.

“It does not do things that an underwriter would normally do,” said the CEO, Shang. “There’s still a very important human component.”

At Qanlex, both Gahan and Folgueiro stress that once they’ve made contact with a lead, their human team uses the company’s technology and conducts diligence and underwriting before deploying any capital.

“It is a relationship-based business,” Gahan said. “We just use technology to be extremely efficient and let’s say leapfrog a few stages.”

UK-based Apex Litigation Finance advertises the use of AI on its website and the ability to predict case outcomes, timelines, and settlement amounts. But in reality, Apex CEO Maurice Power said, the data available is quite poor and the ability to predict is limited.

“For any AI predictive analytics model to be really effective, it’s only as good as the data that it has available to it,” he said.

Apex, which funds small to midsize commercial claims in the UK, began to explore AI four years ago with a company called CourtQuant. The model was to gather information on every recorded judgment in the high courts in the UK and through predictive analytics forecast the likely outcome of a case.

CourtQuant eventually shut down, so Apex employed people to build a similar model.

Right now, Power said, it’s more of a negative assessment tool that helps identify cases they don’t want to invest in. Apex doesn’t make funding offers or commit capital on what the AI tells them without running it through the company’s internal assessment team.

AI for Research

Burford Capital, one of two publicly traded legal finance firms, experiments with AI on its closed cases to see if the technology could accurately predict how a case turned out.

“No one’s got a tool where you could push a button and say, wow, this is an order of magnitude better—you still have to read the case,” said David Perla, co-chief operating officer at Burford.

Burford also uses AI to identify lawyers that handle the types of cases they typically get involved in, but the firm can’t envision using it to send out automated emails, Perla said. “It just won’t work for a company like Burford,” he said.

Litigation funder Parabellum Capital is skeptical of the role AI could currently play and instead said it relies on relationships to obtain clients and invest in cases. “We’re not in the business of cold outreaches, so people will approach us,” said Angela Ni, managing director at Parabellum.

But the funder has found other ways to use AI. Ni said Parabellum created a proprietary tool that automates the case management process. Parabellum often invests in portfolios—bundles of hundreds of cases typically handled by one law firm as a way to hedge risk—so there’s often a lot of tracking involved.

“We use rules, algorithms, and code so that we can see all this information,” Ni said. “And it helps us with decision-making moving forward.”

The software improves efficiency. Parabellum would likely hire two full time employees to do the job if not for the software, she said.

Burford’s Perla said it is likely AI will improve and will have more uses in the future.

“I’m optimistic a year from now, maybe less, we’ll get on the phone and I’ll say to you, ‘Yeah, it’s much, much faster, we’re now seeing stuff and we’re seeing things we didn’t see before,” he said.

“Everything in the next few years is gonna be incremental and then in 15 years, litigating is gonna look totally different than it looks today,” Perla said.

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September 1, 2022

How Legalist grew from humble roots

The couch picture is a tradition at asset management firm Legalist, writes Andy Thomson. It’s a reminder of the early days of the firm when it was run out of a garage covered in graffiti in one of San Francisco’s less glamorous districts. As the garage “was about to be torn down”, says the firm’s co-founder and chief executive officer Eva Shang, the couch was being moved across the road to a new office. That is when the team decided to pose for a picture – a picture which included cars coming to a sudden halt behind it.

The concept of the office is now in Legalist’s past – still technically based in San Francisco, Shang says that everyone in the firm works remotely. But the team will occasionally come together, including every July for the couch shot.

The word ‘unconventional’ is easily applied to Legalist, and to Shang herself. The firm was launched in 2016 when Shang dropped out of Harvard University as a 20-year-old to develop a business with the help of Y Combinator, a Silicon Valley technology accelerator.

The firm that emerged was based on proprietary technology that trawls public government databases to search for investment opportunities that meet certain pre-specified criteria. Today, it has around $700 million in AUM across three strategies – debtor-in-possession financing, litigation finance and government receivables lending – all run by portfolio managers but based on the technology.

Shang says the firm’s approach is based on being ‘top-down’ rather than ‘bottom-up’. The latter is where firms are typically brought opportunities by the likes of brokers and bankers and will choose their deals from what comes across their desks. Legalist has what Shang calls “a very intentional approach. One of our investors calls it ‘portfolio by design’. We decide in advance what the ideal opportunity looks like and then we go out there and source it”.

She adds: “That’s the reason why our strategies centre around government proceedings. Anything that touches the government in some way creates a public record, which then gives us a bird’s eye view of the entire world of credit opportunities in that space.”

Further differentiation is provided by a focus on niche areas, or what Shang describes as “hyper-specific buckets”. While debtor-in-possession (DIP) financing is often a part of the toolkit for distressed investors, Shang says that most LPs she speaks with have never come across a DIP financing-specific fund. Legalist is currently in the market with its second such vehicle. Shang says the strategy is favoured because it’s high up in the capital stack and the firm dodges competition by avoiding the larger deals that the mega-sized distressed funds tend to chase – focusing instead on tickets of around $10 million-$20 million.

PE-like returns

When it comes to litigation finance, Legalist – as with DIP financing – uses its database to identify target cases that best fit its criteria. It backs single cases and targets private equity-like returns of 20 percent or more. The newest strategy, government receivables lending, involves providing financing to government contractors that may need extra finance to support the costs of a contract during the period before the government pays them. “It’s like factoring but we’re not buying the receivable – just lending working capital against approved government payments,” says Shang.

Reflecting on the early days of the firm, Shang says she and co-founder Christian Haigh (now the chief investment officer) had little idea of the future shape of the business. The early motivation, says Shang, was Haigh’s obsession with data. Beyond that, not a great deal was clear, and she compares the business plan with one formulated by the cartoon South Park: one, collect underpants; two, question mark; three, profit. The Legalist plan was near identical, she jokes, with the only difference being that step one was to collect data.

She says a coherent plan started to come together with the help of an adviser at Y Combinator, who pointed out that with an overview of a sufficient amount of data it was possible to search in real time for things you wanted to invest in and create your own market. This was the inspiration behind the litigation finance strategy, for which Legalist scraped together a $10 million first fund in 2017 before managing to close a much more substantial $100 million fund a couple of years later.

Shang stresses that plenty of blood, sweat and tears separated the first and second funds. Amazed by the ability of some brand-name spinouts to raise $1 billion “right off the bat”, she reflects: “At 20, I spent a year doing the first fundraise. If I went back in time and told myself how difficult it would be to raise that first $10 million, I would probably have packed up and gone home. That’s why so few firms are built from the ground up.”

She says the capital mostly came from high-net-worth individuals and concedes that she hadn’t quite thought through the fund economics, which meant that the $10 million raised translated to just $250,000 in management fees for a firm developing its own proprietary technology and seeking to build a team. It wasn’t until the $100 million fund was raised two years later that the firm made its “real start as an asset manager”.

Since then the fundraising has accelerated. Six months ago, AUM was around $200 million. This has since risen to $700 million and is expected to reach $1 billion once the firm reaches a final close of its second DIP fund, which is aiming for $300 million. The third litigation fund is also pegged at $300 million, while the first government receivables fund, launched earlier this year, has a $100 million target.

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May 10, 2022

How a Machine-Learning Algorithm Finds Private Credit Deals

For litigation finance firms, finding the right lawsuits to invest in requires quite a bit of time, effort, and capital.  

Like other nascent investment strategies, high returns are the result of highly knowledgeable investors, of which there are few and far between.  

But Eva Shang, co-founder of Legalist, is trying to change that. Her firm uses quantitative techniques and machine learning applications to find easy-to-manage deals in litigation finance, bankruptcy, and government receivables.  

Founded in 2016, the firm now manages more than $650 million and is on track to hit $1 billion in assets under management by the year’s end. So far this year, the firm has built a board with ex-Nuveen and Canyon Capital executives and garnered investments from endowments, foundations, and insurers.

And the strategy is all about the technology. “Even though each of our strategies is hyper-targeted, our core thesis is that our technology allows us to scale across asset classes,” Shang said. She added that the strategy generates alpha by sourcing deals quickly across the databases it scours.  

Sitting outside of a Midtown, Manhattan coffee shop, Shang pulled a laptop out of her backpack to demonstrate the firm’s proprietary technology. She dove deep into Legalist’s tech, peppering in anecdotes and even threw in a few memes during the conversation.  

Legalist’s application crawls government databases, including Pacer, as well as more than 200 databases representing state courts and government contractors.  

The program — which Shang’s team calls a “truffle sniffer” — looks for static variables like defendants or lawyers, as well as time series variables, which include the events associated with cases. The technology is looking for key litigation dates, such as “creditor motions” in a bankruptcy.

Then, machine learning comes in. The app classifies the data by the type of case, individual, and event, among other variables, creating a decision tree that ultimately leads to a decision on whether the firm will finance the case.  

Once Legalist has identified the cases it finds attractive, the firm sends an automated and customized email to the parties in the case the firm wants to finance. These emails explain what litigation financing is and introduce the firm to potential loan recipients.  

If those loan recipients are interested — and about 20 percent of those emailed are — Legalist’s underwriters get in contact with the lendees, and soon have a term sheet on the table.  

“If we have data origination right, it’s much easier to send term sheets in a few weeks,” Shang said. “The deals we target are less hairy than our peers.”

There are, of course, still errors. Shang said the litigation fund has about an 80 percent success rate. But her team tries to limit potential losses with its standardized process.  

Shang, as a recent Wall Street Journal profile pointed out, is different from many in the finance industry. She and her co-founder Christian Haigh launched the firm in 2016 as 20-year-old Harvard dropouts after completing Y Combinator, a startup accelerator program. Shang eschews “cutthroat” finance culture, saying she wants to “grow the pie,” not push others out for a slice of her own.  

The Legalist co-founder is inspired by Rishi Ganti, the founder of Orthogon Partners, whose M.O. is discovering un-traded assets, then investing in them. But Ganti’s guiding philosophy goes well beyond niche assets.

“He basically says the way to get alpha in any kind of asset is to be there early where there’s no competition,” Shang said. “It’s like going to a little league game where you scout players. There’s no market yet.”

After launching Legalist, Shang set off on her first fundraise — bringing in $10 million from potential investors. “I don’t think I understood the challenge of raising a $10 million fund as a 20-year-old without investment experience,” Shang said. “It took me a full year to do it.”

By 2018, the firm had already started identifying attractive deals but had little capital to put to work. It partnered with a large, publicly-traded firm (not Burford Capital, Shang clarified), to make three co-investments and get the business off the ground.  

The firm first focused solely on litigation finance and has since expanded into bankruptcy financing — particularly lower middle market debtor-in-possession loans — and government contracts.  

“For any manager that starts off, the core question is can you scale,” Shang said. “There are a lot of very successful niche managers that never crack the institutional world, no matter how great their returns are.”

Expanding into new strategies has kept the firm growing without having to compete with litigation finance behemoths like Burford or Parabellum Capital.  

Legalist now is raising its second bankruptcy fund and has filled the founders’ share class. The firm has raised capital from endowments, foundations, and insurers, among other investors.  

The litigation financing fund is targeting a return of 20 percent net of fees, with a five-year lock-up period. Bankruptcy investments, meanwhile, target high-yield-like returns, with capital held for between four and five years. The firm’s government receivables fund is evergreen, but redemptions are available to investors, as the time horizon on those loans is quite short, Shang said.  

Despite the recent downturn in the markets, Shang is optimistic.

“Litigation finance is definitely uncorrelated and counter-cyclical,” Shang said. “I know our IR team has been heartened by rising interest rates.”

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April 28, 2022

Legalist Fuels Tech Startup Buzz with Private Credit Potential

There have been times when market ideas, boldness and technology have come together at the right time and the right place. Think D.E. Shaw or Renaissance Technologies.

If Legalist CEO and Founder Eva Shang’s first few years in business are any indication, lightning may have struck again in the arena of private credit in San Francisco.

She may only be 26 years old, as a recent Wall Street Journal headline informed the world, but Shang and her team have already analyzed tens of millions of legal cases and received tens of thousands of funding applications all the while raising a cool $400 million in the last six months. Her advisory board includes William Von Mueffling, founder of Cantillon Capital Management; Margo Cook, former president of Nuveen Advisory Services and independent director on the operating board of directors for Bridgewater Associates; Andrew Gundlach, co-CEO of Bleichroeder and director at First Eagle; Michael Fisch, founder and CEO of American Securities; and Dominique Mielle, former partner at Canyon Capital.

In an exclusive interview with Alternatives Watch, Shang observed that many of the successful asset management companies of our day were all founded around the same time. Many of them, like her today, leaned heavily on the emerging technology of their era whether it was for derivatives trading or for macroeconomic analysis.

At Legalist, she has been thinking a lot about the future of asset management. And for Legalist, that future differs — not only because the company has a female is at that helm, but also because Shang and CIO and Co-Founder Christian Haigh are Harvard University dropouts, giving Legalist the vibe of an edgy tech startup rather than a traditional money management firm.

“What we always wanted to do was to utilize the full potential of our technology,” said Shang, who readily admits she didn’t start out — at the ripe age of 20 — with an eye on asset management back in 2016, when Legalist won backing from Y Combinator. The idea was to build a powerful technology platform that had its roots in crunching of data from the Massachusetts’ state court website. That same year, the pair received a $100,000 grant from Peter Thiel, who himself financed litigation against Gawker Media.

The seed had been planted, and Legalist was encouraged to consider litigation financing as an asset strategy.  And with no previous work experience in asset management, she and Haigh, who met in an entrepreneurial group at Harvard, busily began hired staffers with experience in underwriting and law and computing. Together they are shaping a unique vision for what asset management looks like. Firstly, there is no office or headquarters. In fact, the firm’s 30-plus team of engineers, credit analysts, lawyers and investment professionals all work remotely, and did so even prior to the pandemic.

As the firm soars past $665 million in assets under management, Shang is optimistic that Legalist has hit on a segment in the lending sphere where an influx of powerful data analysis could yield results. Legalist uses proprietary algorithms to find patterns within pools of unstructured, publicly available data at an unprecedented volume.

The firm’s first fund was raised in 2017 at $10 million and focused on litigation financing. A second fund focuses on bankruptcy cases with companies that own real assets and is known as a debtor-in-possession (DIP) loan strategy. A third fund is focused on government receivables lending, which is a form of high yield credit secured loans based on payments owed to labor and service providers by federal and state governments. Legalist’s litigation finance strategy targets private equity style returns of low to mid-twenties, while the DIP strategy targets high yield credit returns in the mid-teens.

The team is in the middle of raising capital for a second DIP fund. All the while, Legalist continues to grow its ranks to further its investment edge. Last year, Legalist added Fox Rothschild partner Jaemin Chang as assistant general counsel and Anand Upadhye, vice president for business development at legal research software company Casetext, as director of investments.

DIP Fund II’s focus may be timely, especially should bankruptcies rise. What makes Legalist’s approach different, according to Shang, is its “targeted origination” that stems from the firm’s “microcap capacity” that has been constructed where Legalist can use its technology as an advantage. For instance, they are not going after high-profile bankruptcy cases such as Toys “R” Us, but the more numerous smaller cases where they have the ability to generate decent returns by relying on proprietary algorithms to invest in Debtor-In-Possession loans to small to mid-sized companies in Chapter 11 bankruptcies.

The aim is to source opportunities conventional lenders, including hedge funds, are unable or unwilling to access for their clients. For now, Shang and her team are focused on expanding the opportunity set for their current and new LPs.

And while the numbers may seem staggering, whether it’s the assets rolling in or the millions of legal cases the team has collected data on, Shang keeps a calm and determined demeanor as she plans to rewrite the code for success in alternative asset management.

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April 16, 2022

The 26-Year-Old Dropout Lapping the Hedge-Fund Field

Photographs by Marissa Leshnov for The Wall Street Journal

Eva Shang is doing the hedge-fund thing her way. That means making money but also making time to blog about dreams, her labradoodle and her fear of becoming a Silicon Valley has-been at age 26.

Legalist Inc., Ms. Shang’s technology-powered investment firm, raised about $400 million in the past six months. Its funds focus on private debt, a hot patch of Wall Street populated mostly by men with pedigrees from top investment banks and private-equity firms.

Ms. Shang and fellow Harvard University dropout Christian Haigh launched Legalist with a splash in 2016 when she was 20, then struggled for years to attract backers.

“I don’t blame them,” Ms. Shang said about the investors who swiped left on Legalist. “If I were an allocator, there would be no reason to take a 20-year-old dropout with a computer seriously.”

Now, Legalist’s flagship strategy of litigation finance—where fund managers back plaintiff lawsuits in exchange for a percentage of court-awarded judgments—has a record of gross annual returns around 25%, people familiar with the matter said.  Insurers and endowments are buying into its funds, which manage $665 million, and the San Francisco-based firm has expanded into corporate bankruptcy loans and lending to government contractors.

Ms. Shang had no formal investment training before starting Legalist, doesn’t own a suit or a car and lives in a shared house with four other startup founders where her wardrobe leans heavily on jeans and Patagonia jackets. Her big splurge last year was on the labradoodle she named General Partner, a legal term often used to describe a hedge-fund founder.  

In her off time, Ms. Shang volunteers with a local Girl Scout troop, helps high-school seniors with college applications and travels to Boston to visit her sister and mother. She also writes a blog, for a subscribership of about 60 friends and colleagues, and science-fiction stories for herself.

In 2013, the year Eva Shang started at Harvard University, she helped her sister petition toy maker American Girl to make a doll representing disabled children, a campaign that turned into a TEDx talk.

“She’s an interesting kind of smart,” said Dominique Mielle, a former hedge-fund manager who sits on the company’s advisory board.  “I get the sense that she reads a lot and  is able to seize on very difficult issues and boil them down to a few simple questions.”

Ms. Shang recruited Ms. Mielle by contacting her on LinkedIn after reading her memoir about navigating the hedge-fund industry’s notorious gender gap.

Some question Legalist’s claims of innovation in litigation finance. The firm advertises its proprietary artificial intelligence built to comb through public court databases and identify cases with a stronger chance of winning.

“[There’s no] technology we’ve tested, or that a tech shop has even approached us with, that could help us to price risk in a way that would enable us to make a successful litigation-financing decision,” said David Perla, co-chief operating officer of Burford Capital Ltd. , a large litigation-finance company.

“You can’t invest based just on the tech,” Ms. Shang said. Legalist’s algorithms help it find better deals faster but, like its competitors, the company employs human “underwriters” to ultimately decide whether to invest in a case, she said.

About 80% of the lawsuits Legalist backs end up winning, according to Ms. Shang. The average success rate in litigation finance is 65%-75%, said an industry executive.

“We don’t know whether [their AI] works or not,” said an investment adviser who has recommended Legalist to some clients. “There are positive indicators from their track record that the mousetrap is able to catch the mice.”

Ms. Shang emigrated to the U.S. from China at age 3 and grew up mostly in a Philadelphia suburb where her mother supported the family working as an actuary. Ms. Shang began proofreading her mother’s résumés at age 7, she said, and helped care for her younger sister, Melissa Shang, who has a form of muscular dystrophy and uses a wheelchair.

In 2013, the year she started at Harvard, Ms. Shang helped her sister petition toy maker American Girl to make a doll representing disabled children. Melissa Shang is now a Harvard undergraduate and a disability activist.

The American Girl campaign turned into a TEDx Talk, which connected Ms. Shang to Mr. Haigh, an engineer with a knack for scraping online databases. They became friends and decided to scrape the poorly organized Massachusetts online court system using a jury-rigged network of used Apple computers, hoping to repurpose the data and sell it.

Ms. Shang didn’t fit into Harvard’s culture of exclusive social clubs, she said. She and Mr. Haigh dropped out and moved to San Francisco in 2016, when they raised their first $1.5 million by making it into startup accelerator Y Combinator. An adviser at the accelerator suggested they use their database for litigation finance, an idea the pair spent a year marketing to mostly uninterested investors before raising their first $10 million fund.

Eva Shang, in dark-colored blouse, and Christian Haigh launched Legalist in 2016 with money from startup accelerator Y Combinator.PHOTO: LEGALIST

The duo also received a $100,000 grant in 2016, from Peter Thiel, who that same year financed litigation against Gawker Media. The grant was part of Mr. Thiel’s program to fund startup founders who leave school and gave him no stake in Legalist.

Since then, Legalist has developed a business model of scraping new databases to repeatedly identify niche markets. The firm’s staff of about 50 is fully remote, something that helps it attract talent that wouldn’t normally work for a hedge fund, Ms. Shang said.

Bankrupt companies that Legalist lent to include Maryland-based landscaping company Moon Group Inc. and Buyk Corp., a New York-based grocery-delivery service, according to court documents. The firm is working on a loan this year to a pilot-training company that won a contract from the U.S. Navy, Ms Shang said.

Legalist’s growth plan is to keep using its data to find trades overlooked by hedge funds staffed by more conventional finance professionals, the firm’s adviser Ms. Mielle said. “No one else is going after that market,” she said.

Achievement and identity feature prominently in Ms. Shang’s blog, where she discusses her anxiety that she won’t live up to her early promise. “I’m reminded that the world I inhabited is quickly being replaced by one in which I am no longer a Young Person and instead have to compete in the grown-up’s lane,” she wrote in a post last year.

Her self-reflection is one more thing that sets Ms. Shang apart, said David Lee, a venture-capital investor and one of her earliest backers.

“The ability of founders to write well and to express themselves correlates highly with their ability to lead and manage people,” Mr. Lee said. “There are a lot of great writers that are founders, but not that many are beautiful writers. She is.”

Eva Shang, with her labradoodle, General Partner, a legal term often used to describe a hedge-fund founder.
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