Photo of Travis Lenkner, Ashley Keller and Adam R. Gerchen by Michelle Nolan.
Three years ago, a trio of brilliant lawyers with impeccable credentials decided to change the economics of litigation. Sound far-fetched? Think again.
Gerchen Keller Capital has raised more than $1.4 billion in funding and committed more than $900 million in 80 investments, ranging from accelerating law firm receivables at year-end, to $55 million for Quinn Emanuel’s $25 billion Mastercard claim in the UK, to $26 million for a bankruptcy estate. That rare air makes the firm the world’s largest litigation funder – and they’re just getting started.
The need for litigation funding is undeniable – plaintiffs’ lawyers have funded their own cases for years, and as the cases have gotten bigger, the most successful plaintiffs’ lawyers have funded the smaller ones. On the defense side, the scale of litigation has become an arms race.
Yet with a handful of exceptions, the industry has remained at the edges of most attorneys’ awareness and acceptance.
Led by Adam Gerchen, a Harvard Law School graduate and former Goldman Sachs banker and Alyeska portfolio manager; Ashley Keller, a former Bartlit Beck partner; and Travis Lenkner, who brought in-house experience from Boeing as well as time with Gibson Dunn, the Gerchen Keller team seems unbeatable. Keller and Lenkner met while clerking for U.S. Supreme Court Justice Anthony Kennedy, and Gerchen and Keller met at Alyeska.
We sat down to talk with them in Chicago recently, discussing what Gerchen Keller brings to the litigation funding arena, as well as their rocket trajectory.
LD: Where did you get the idea to start Gerchen Keller?
Adam Gerchen: At Alyeska, I was doing what’s called risk arbitrage, which is looking at announced mergers and acquisitions and investing in the outcomes. By far the largest component of that analysis is legal, looking at antitrust and regulatory approvals. And Ashley was analyzing other investments in public markets that were influenced by legal developments. Together, we saw an opportunity to apply legal analysis in the most efficient possible manner, which is to invest directly, where we know the investment we’re making and the risk associated with that investment.
Ashley Keller: Our goal was to try to thoughtfully institutionalize the litigation finance space by bringing in best practices and expanding the type and quality of counterparty, being helpful in a variety of ways outside. To us, it’s about treating a legal claim as an asset, and all the creative things either on the corporate finance side or the risk-management side that you can do with that asset.
Travis Lenkner: We saw the opportunity to bring finance principles and capital to a profession and an industry that is under-banked and under-served by those principles. Law is one of the last industries that hasn’t had traditional finance applied to it. Given our backgrounds, we thought there was real demand, in a time when the cost of litigation is growing and legal budgets are being cut.
AG: If you think about our team on the law-to-finance spectrum, Travis is on one end having principally practiced law, and I’m on the other, having never practiced law and always been in finance. And Ashley bridges the two.
LD: Your focus on building a team with exquisite backgrounds top to bottom strikes me as a critical edge from attracting the best cases to the best investors.
TL: Our intent from the beginning has been to be viewed as best in class and not just a commoditized source of capital. Frankly, given the sensitivities, a Gibson Dunn attorney is not going to consider working with a litigation finance provider that doesn’t speak the same language, understand the unique client concerns that come in working with a firm of that caliber, and who can’t come in, sit at the table, and be a productive member of that team.
AG: Law firms know they can introduce us to sensitive client relationships and that we will approach all aspects – from the initial intake through potential documentation and then post-investment – in a professional manner that’s reflected in the brand we’ve built in the marketplace.
TL: We do all our underwriting in-house, which has been true from day one. If we consummate an investment, two years later, we’ve been following the case the entire time. We understand it and have productive, strategic conversations throughout with the law firm and the client.
LD: Ashley, you recently wrote an article looking at the impact of changes in patent law on case outcome that was impressive for its depth of understanding of the risk profile of a case, not just in general, but with current litigation trends. Can you speak about the importance of staying current on legal developments to strong risk analysis?
AK: Particularly in the intellectual property arena – although it applies in any commercial case – there’s a lot of complexity. It’s value-added to have a capital provider that can also sit around the strategy table and say, “Here’s how we need to think about the Markman [claim construction] hearing that’s coming up” and how it impacts the value of the case if this claim term gets construed the way the defendant wants instead of the way we want.
LD: How do you market Gerchen Keller to the firms you want to fund?
TL: Roughly three-quarters of our opportunities come from lawyers. Even if our contract is ultimately with the firm’s client, it’s the litigation partner at Firm X who realizes there’s a potential need and picks up the phone and calls us.
Since we launched in the spring of 2013, it’s been a full-court press – initially by the three of us, and now we have a whole team that is charged with nurturing and building relationships with leading law firms and leading lawyers across the country. They are the target audience for the services we’re providing.
AG: Also, the more we hear about problems they or their clients are facing, the more innovation we can bring to bear in coming up with new products. We think about the entire temporal spectrum of litigation as our investible universe, and the capital needs and the risk profile differ depending on what stage you are in. The more we develop those relationships and the trust that goes along with them, the more creative we can be in coming up with solutions.
LD: Is there such a thing as your ideal client or case to invest in?
TL: Our goal from inception was to expand the market for litigation finance, and to explain to law firms serving larger companies that there are many situations where the fact that you could pay for something doesn’t mean that you should, or necessarily that you want to.
AG: Think of it this way: At Boeing, when you’re building a new manufacturing plant, you have cash on your balance sheet but you still choose to use external financing in a variety of forms because that’s just a more efficient use, as general corporate finance theory would tell you, of someone else’s balance sheet.
AK: Unlike Boeing – which has a wide range of options for how it’s going to utilize other people’s balance sheet to optimally put its own dollars to work – law firms operate under constraints that don’t apply to any other businesses. Law firm partnerships have a very healthy and natural risk aversion to taking or sharing risk with their clients because it’s always the partners’ money on the line.
They have to put up their houses, cars, and other assets as collateral to finance the firm. You’re not going to take the same approach to risk when the only balance sheet that you can look to is your own.
As specialists who focus only on evaluating legal and regulatory risk, we can expand the risk appetite and try and help them solve the problem that they’ve been talking about for decades.
LD: The economics of law practice and cases has gotten so huge it’s beyond most lawyers and firms to financially sustain these cases for the number of years that’s required. And it does thwart justice if a litigant or an advocate can’t continue a case because a party with bigger pockets has worn out their resources.
TL: There’s a lot of litigation finance already being practiced by white-shoe law firms whose names and brands everyone knows, and it’s called the contingent fee. Part of the service we’ve provided to those firms has been to help them think in a more focused way about the risk-reward calculus of their contingent-fee engagements, and whether financing some of the costs that they bear in connection with those engagements is a smarter play over time.
AG: Or maybe we are expanding their capacity to take on even more matters on a contingent-fee basis.
TL: Sometimes we provide funding relatively early in a case to help pay for fees or out-of-pocket costs. Sometimes near the end of fiscal years, we help accelerate hourly receivables for firms because they’re on cash accounting. Drawing on their lines of credit does not help them boost their numbers and distributions for the partnership.
LD: Is it risky to finance law firm receivables?
AK: That’s one of the least risky investments for us. These are receivables that are due and owing from blue-chip clients. This is really a cash-management tool for firms which are a cash accounting system as opposed to the accrual method. That’s a very important distinction between law firms and basically every other business in the country. There are particular reasons that they need the cash to come in the door December 31 or sooner, so that it doesn’t trail off into the next fiscal year, so that distributions can be made and the new partners can have their equity allocation based on the revenues that they’ve brought in.
AG: Most of the time we’re dealing with AmLaw 100 firms that have large lines of credit, but the form of our capital has certain benefits to it, from revenue recognition to acceleration, and the things that they can do with those cash flows versus drawing on a line of credit.
AK: The distinction actually between financing receivables versus an early-stage case – where we’re providing capital non-recourse based on the outcome of the litigation – is that it is at the very end of the process, so it comes with the least amount of risk. We’re truly just taking time risk. Does the blue-chip client pay net 30 or net 60 this cycle? It’s a very different risk calculus.
LD: Can you talk a little about some of your early investments and how they were instructive in building the business? Any course corrections you made or opportunities you saw and implemented?
TL: If you look at our first dozen investments, about half were with or on behalf of Fortune 500 companies. Some were early stage, the complaint had just been filed, and we were paying fees and costs associated with litigation. Some were much more developed.
For example, one involved a company that had a federal court judgment in hand, had survived the court of appeals, but was waiting because the defendant had said it would file a cert petition in the U.S. Supreme Court. In the meantime, our counterparty, the plaintiff, had an acquisition opportunity and wanted to use the proceeds of this judgment, about which there was still some uncertainty, to pay some of the acquisition cost. Even in the best-case scenario, the judgment wasn’t going to be paid for six months, until the Supreme Court process ran its course. At closing, we provided $5 million. It had nothing to do with the attorneys’ fees, nothing to do with the cost of litigation. The plaintiff company used that $5 million as part of a package of money they put together to make a purchase.
We’re now at more than 80 investments consummated across all our funds and more than $900 million of commitments to litigation investments, inception to date.
LD: The growth’s extraordinary. You must be really proud of that.
AG: We’ve remained nimble and flexible and, in terms of getting here growth-wise, we’ve been open to the needs of our counterparties; if we don’t have a pool of capital or don’t have a product that specifically addresses what they’re trying to solve for, we can create that product.
TL: For example, when we launched, we didn’t have a dedicated pool of capital that could make later-stage, lower-risk investments, because our investors then were looking for the higher-risk, higher-reward, earlier-stage litigation investments. We realized that people were looking for a specialized capital provider and not finding one. And so we announced in 2014 that we had raised a $500 million fund dedicated to those kinds of opportunities.
LD: What portion of your portfolio is IP related?
AK: About a quarter, including soft IP.
LD: Is IP a strong area for investment, or less so because of the changes in the law?
AK: The demand for our products in the IP space is dramatically higher than it was a couple of years ago because the need for a risk partner is so acute in this environment.
TL: The more risk involved in a particular area – or frankly, the more risk people perceive in a particular area – the more they will seek to offload or to share that risk with specialists who are interesting in warehousing it. Of our many competitive advantages as compared to other firms, we are the only firm that has built such an experienced team to look specifically at IP opportunities.
If you look at the background of Gerchen Keller’s IP team, we are the leading finance group in the world, and certainly in the U.S., for IP litigation investing, full stop, bar none.
LD: Should a law firm chair or head of litigation be calling you and saying, “I think I should come in and talk to you about our cases?”
AK: Yes. We’ll come to you.
TL: We are presenting to litigation groups, going to law firm retreats, and sitting down with executive committees, practice group leaders and a range of partners and non-lawyer COOs, CFOs, Executive Directors and pricing directors – all the new professionals who are critical to the operation of a large law firm who do not come from a legal background.
Anyone who hasn’t had that conversation with us should absolutely call to say, “What is the menu of offerings? How does it work? How do I educate my team and my firm so that when we see an opportunity we’re not trying to establish a relationship and figure out how it works for the first time?”
LD: You’ve done some international investing, and it’s been reported that you’re financing a $25B claim with Quinn Emanuel in the UK. Do you see much more international work in your future?
AK: We’ve done a few international cases and we’re open to more. Our predominant focus is on the U.S. It’s such a big market, with a very small percentage of litigation partners who are aware that this is out there as a tool. Educating that base is priority Number 1, but when international opportunities come across our desk, we certainly consider them.
LD: Can you talk a bit about the potential litigation finance has to change the economics of litigation for law firms?
TL: Just think about alternative fees and contingent-fee work. In many large firms, leverage only means “how many bodies can we put on this litigation. Let’s strap 100 associates to this thing and ride it as long as we possibly can.” And firms are skeptical about taking a completely contingent, risky position and making an investment in a case that might or might not pan out.
We can calibrate that. It is possible to provide contingent economics, so the client receives what it wants, but we, for example, monetize 50 percent of fees every month for the firm. In that example, the firm is dramatically reducing the risk of a contingent fee. The firm is able to market itself more aggressively – not completely shift away from the billable-hour model, but also use the labor force that it has to create this contingent uplift instead of just the normal premium that a firm would negotiate.
They can use the same number of bodies they already have to think about the fee picture differently and more aggressively, and frankly to be part of the chorus that is proposing contingent fees to their corporate clients more frequently. Those economics are very attractive to large and small companies alike.
LD: What’s most gratifying about what you’ve achieved thus far? Is it changing the economics of litigation? Is it building an interesting and smart team?
AK: For me, part of the allure was the marriage of the best parts of finance and law. I loved clerking. One of the greatest experiences of my life was thinking deeply about legal questions. Transitioning into the day-to-day practice of law, I got about 10 or 20 percent of that satisfaction and 90 or 80 percent of discovery work, which is necessary and important and keeps the machinery of litigation running, but was not fulfilling.
I’ve always had an appreciation for finance. I’m a very Chicago School type person and believe in efficient markets, that capital should go into its highest and best use, that industry should adapt modern finance principles. That has largely held true for everybody except for the legal profession, which seems to be stuck in the ‘70s from a corporate finance perspective.
The opportunity to use the legal brain, think deeply about legal questions, to add value, while simultaneously thinking about finance and how we’re, as you said, transforming an industry and bringing the tools of modern corporate finance to them, is really attractive.
AG: For me, there’s obviously excitement to building a business. It is gratifying to be partnered with these two guys and for the rest of the team we’ve built and the value-add that they’ve given us, scaling the business the way we’ve scaled it.
It’s rare that you can be disruptive to an industry, but in a positive way. It just seems like there’s so much low-hanging fruit for us to be helpful to companies and law firms that is exciting and powerful.
TL: In particular, I enjoy the marriage of the substantive and strategic legal analysis that was the fun part of practicing law. The other fun part for me of practicing law was being interested in the business of law and of the law firm.
We are at the table for high-level, strategic discussions with leaders in our field about how they manage their global firms and the direction of this profession from a finance perspective. That is exciting and satisfying for someone who was as much or more interested in how the law firm worked than in doing the work of the law firm.