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.