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.”
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.
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.
“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.
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.”
On Wednesday, November 10th, Litigation Finance Journal hosted a special digital conference titled Innovations in Litigation Funding. The event featured a panel discussion on disruptive technologies within Litigation Finance, including blockchain, AI and crowdfunding platforms. Panelists included Curtis Smolar (CS), General Counsel of Legalist, David Kay (DK), Executive Chairman and Chief Investment Officer of Liti Capital, Cormac Leech (CL), CEO of AxiaFunder, and Noah Axler (NA) Co-founder and CEO of LawCoin. The panel was moderated by Stephen Embry (SE), founder of Legal Tech blog TechLaw Crossroads.
Below are some key takeaways from the panel discussion:
SE: All of you seem to have an interest in taking litigation funding out of the back rooms and making it more mainstream so that anyone can invest. I want to ask each of you to briefly explain your specific approaches in trying to accomplish this goal.
CS: Basically, what Legalist does, is we use artificial intelligence and machine learning to reduce the potential for adverse selection and hazards that may exist in the Litigation Finance field. By reaching out to those who have valuable claims, we’re able to select the cases we want, versus simply having cases presented to us and sold to us. This has been extremely valuable to us, as we get to really pick the best cases based on criteria that we are selecting.
DK: I think we’re getting pretty close to it already being in the mainstream. I think adoption has grown a lot over the last ten years. In terms of moving it forward, our view on it at Liti Capital is that we are trying to democratize the availability of Litigation Finance both from the people who finance it and the people who have access to it.
CL: What I really see AxiaFunder doing is connecting investors with a new asset class, and at the same time, providing claimants with a new source of flexible funding. AxiaFunder in a nutshell is a funding platform that connects investors with carefully vetted litigation investment opportunities on a case by case basis. The capital is put to work immediately, and then when the case (hopefully) resolves positively, we return the capital with a return. So there’s little or no cash drag. We see it as an obvious win-win.
NA: What we’re seeking to do is open Litigation Finance, like some of the other folks on the panel, beyond the institutional space into individual accredited investors and also to retail investors. The additional value add we have, is that we fractionalize the investments as digital assets, or what are sometimes called tokens, using the Ethereum blockchain. We think ultimately that by doing that, we can bring liquidity to the Litigation Finance space and beyond Litigation Finance as well. We’re not the only ones securing this in the private security space.
SE: One of the questions we often see with cryptocurrency, whether it’s right or wrong, is that it’s used to hide who is paying what to whom. How does that concept square with the growing concern of many investors (and to some extent, the judiciary) about transparency in terms of funding agreements and the identity of funders?
DK: I think the key here is consistency, which is to say ‘who is the funder?’ and I think that’s an important distinction that gets a short shrift from a lot of these discussions. To put it another way, if Liti Capital is the funder, then it’s obviously very important to know who Liti Capital is, and who are any majority or control holders within Liti Capital. And we, like other companies on the blockchain, are still required to do KYC and other rules with our investors to ensure that we’re compliant with domestic and international law. So I think that piece is much ado about nothing. But what I will add, is that I do think litigation funders should be held to the same standard as companies, and whether or not an arbitrator has an investment in our company is important to know, or a decision maker has an investment in our company is important to know. And disclosures in the same way that’s required in US Federal Court makes perfect sense. This is not a new issue. I think where we fall prey to the people that are against litigation funding…we’re falling prey to this argument that somehow everything and everyone must be known—or it’s evil. Access to justice is not evil. Being able to compete with people with large amounts of capital is not evil.
NA: I second a lot of the things David said. At LawCoin, we’re selling securities. We’re very upfront about that. That’s a hot button issue in crypto, whether or not a particular token is a security. We have a separate white list that exists off of the blockchain, which might in some cryptocurrency circles lead to criticism that we’re not a decentralized operation in the way that a lot of cryptocurrency evangelists argue that cryptocurrency is most suited for. We embrace the obligations that go with issuing securities, so as a result…there’s no issue with respect to our platform with having anonymous investors that haven’t gone through a KYCAML process.
SE: Given the volatility of cryptocurrencies that we’ve all seen…how do you mitigate against a severe price drop or price increase, and what do you tell investors in that regard?
DK: How does Blackstone or Apollo mitigate against market crashes or change in the underlying value of their equity? Volatility and movement in price just exist—in terms of value of the corporation. In terms of funding the cases, we’re not funding cases in Bitcoin or Ethereum. We’re not a cryptocurrency, we’re a company that’s listed on the blockchain. Our token trades on the blockchain, but our token represents the underlying equity of the company. The money that we raise, 90% of it is dollars, some small percent is in Ethereum, but…our expenses are paid in dollars, we raise money in dollars, our revenue comes in dollars. There is some currency risk in anything we would keep in Ethereum, but we manage it. … You really just have to be aware and manage the fact that you’re operating in two currencies.
SE: Given the way litigation sometimes drags on, especially in the US, given the unexpected twists and turns—what happens when you have to go back to your investor pool and say, ‘we need some more money?’ How do you manage that and how are the terms structured?
CL: There are two aspects to it. First of all, before we actually issue a claim, there’s no adverse cost risk for the claimants or our investors. But once you issue the claim, you potentially have adverse costs risk for the claimants. If the claimants can’t pay, our investors could potentially be liable for the adverse costs risk, which we’re obviously not comfortable with. Before we will fund a case where the claim is going to be issued, we basically get a cost budget through trial, and make sure we have enough money to see the case through to the end of trial. Having said that, the cost-budget is always an estimate. So sometimes you need to come back and get more capital from investors.
Jaemin Chang, who had been a litigator and transactional lawyer at Fox Rothschild LLP since 2013, and Anand Upadhye, vice president for business development at legal research software company Casetext, were both hired at Legalist, the firm announced last week.
Chang and Upadhye follow an impressive group of past litigators who have all joined the technology-based finance firm since its founding in 2016, including Legalist's general counsel Curtis Smolar who was also a former partner at Fox Rothschild.
"As Legalist expands our mission to help small businesses pay for expensive legal proceedings, we continue to add talented individuals to help us grow," Legalist CEO and co-founder Eva Shang said in a statement. "Both Jaemin and Anand are attorneys who bring significant experience as talented litigators, and we are excited to have them as part of the team."
The startup, which uses proprietary machine learning algorithms to assess investment opportunities and help small businesses pay for lawsuits, has been making waves since its founding. In March, Legalist announced it raised $50 million for its first bankruptcy fund, called Legalist DIP Fund I. The firm also tapped Nathan Jones, former chief investment strategist for United States Debt Recovery LLC, to head its new bankruptcy team.
At Casetext, Upadhye helped the company market its legal research AI-powered tool and closed some of the company's earliest deals and partnerships. He has now stepped into a new role at Legalist as the director of investment.
Upadhye said his new role involves working with attorneys and plaintiffs to discuss and negotiate what investments in particular litigation could look like and how it might be structured. He said he was really drawn to Legalist's mission, and also its startup feel.
"The legalist mission of evaluating meritorious claims, and funding those claims is societally important," he said. "Also important is the fact that they are a hyper growth start.up, and that is the environment that I'm coming from with Casetax. I fit very well in that environment, and I'm really looking forward to contributing to the rapid growth of an already fast expanding company."
At the start of his career, Upadhye was an assistant district attorney for the San Francisco District Attorney's office. He also worked as an associate at Schnader Harrison Segal
& Lewis LLP and Berding & Weil LLP, practicing mostly commercial and real estate litigation.
He graduated from the University of San Diego School of Law in 2009 and gained his undergraduate degree from UC Berkeley in 2003.
Chang said that after having been with Fox & Rothschild for over eight years, it was a difficult choice to leave, especially leaving behind several mentors and "champions" at the firm who helped her "climb the corporate ladder," she said. However, working at Legalist gave Chang the chance to meld the business acumen she gained earning her MBA at the University of San Francisco with her experience with litigation.
"This opportunity came about and I jumped at it because it was a chance to apply all of the things I have learned over time, working for different clients across different industries, including finance," she said. "And it was an opportunity to really use my MBA as well as my JD."
In part, Chang said, she was familiar with Legalist's work through the clients she was representing. She also has known Legalist's general counsel Smolar since she graduated from law school, she said.
Chang gained her law degree from the University of San Francisco School of Law.
--Additional reporting by Steven Lerner. Editing by Amy Rowe.
San Francisco-based Legalist has 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, the litigation finance startup said in a statement.
"We are building out our senior leadership team because our business is expanding," Eva Shang, Legalist co-founder and CEO, said in an email Friday. "We've seen a lot of demand from both investors and attorneys for our target market -- midsized commercial cases," she said.
Harvard dropouts Shang and co-founder Christian Haigh launched Legalist in 2016. The company differentiates its approach from other funders by using technology to scrape data from court records to source and underwrite investments. Legalist says it has funded over 200 investments.
In addition to financing commercial cases, the company in March raised $50 million for a bankruptcy fund, expanding into the bankruptcy sector for the first time with a similar focus on small and middle-market businesses.
Since its founding, Legalist has expanded its investment team with former litigators from several firms, including Duane Morris and Dinsmore & Shohl. Legalist's general counsel Curtis Smolar is a long-time trial lawyer who joined the funder in 2017.
Chang, the recruit from Fox Rothschild, practiced at the firm for more than eight years, representing corporate and individual clients in various types of business disputes, Legalist said. Chang, in a statement, said she is "thrilled to join Legalist at this pivotal moment in litigation funding."
Upadhye, Casetext's business development lead, was previously a litigation associate at law firms Schnader Harrison Segal & Lewis and Berding & Weil. He called the company's vision "inspiring."
Representatives for Fox Rothschild and Casetext didn't immediately respond to requests for comment on their departures.
An increasing number of players have moved into third-party commercial litigation finance as the industry matures. While funders tout inroads in the U.S. legal market with more companies and firms turning to legal finance, efforts continue by some, including the U.S. Chamber of Commerce, for more transparency in the litigation finance industry.