By James Langford | February 14, 2023 | Legal Consultant Limelights
Chip Hodgkins held a job many would consider a career pinnacle, Chief Financial Officer of a business he helped build from a niche player into a billion-dollar publicly traded company, when he realized he wanted something different.
Something more entrepreneurial.
It was that insight that led him to leave his C-suite role and team with Andy Woltman, then a commercial litigator, to form Statera Capital, a litigation finance firm focused on middle-market funding.
The two had realized that the still-nascent industry was an elegant solution to a pervasive problem in American legal practice, namely that many law firms are ill-equipped to consider alternative fee arrangements even in extremely high-merit cases.
“It struck me just how much more growth remained ahead,” Hodgkins says. “This was private equity in the ’80s – a unique moment to create and innovate and build value.”
The more that Hodgkins and Woltman evaluated the opportunity, he says, “the more convinced we were that the timing was right and we had the complementary skill sets to raise a fund and build a dynamic platform.”
If the timing seemed auspicious in 2019, with a white-hot economy at their backs, it would quickly grow complicated. The two were told that raising capital would take a while, particularly for a new team with a first-time fund, and it did: about a year.
The result was that the closing of Statera’s first fund was slated for mid-March 2020, which turned out to be the week that the world shut down with the Covid-19 pandemic, Hodgkins recalls, “the same week that Tom Hanks caught Covid, the NCAA canceled March Madness, and the S&P 500 closed down 35 percent from its peak a month prior.”
But their investors remained committed, “and we came out as a nearly $80M fund with a great origin story.”
Lawdragon: How has Statera’s arrival changed the legal affairs industry?
Chip Hodgkins: Statera greatly expands the availability of financing to a broader range of counterparties and law firms, for whom such financing was previously inaccessible. Conventionally, commercial litigation finance has only been within reach for cases with at least $4M budgets for legal fees and costs. That is a relatively small pool of cases that are typically prosecuted by a short list of only the largest law firms. By contrast, there are four times as many commercial litigation matters in the “middle market” segment. Furthermore, this financing size is also applicable to larger cases in which Statera may fund costs only, enter at a later procedural stage, or even fund working capital for the company – e.g., when litigation fees may already be provided for by the law firm (on contingency) or even by another funder.
We work with leading law firms and their institutional clients to provide non-recourse financing for a wide breadth of commercial litigation matters. These include breach-of-contract disputes, fraud claims, business torts, intellectual property campaigns, insolvency actions, antitrust matters and others. Statera’s solution allows companies to pursue justice and damages, shift risk and expense onto a third party, and focus resources on core objectives. Statera enables attorneys to innovate and transcend the billable hour.
Statera was purpose-built to execute a larger number of relatively smaller investments efficiently, ethically and responsibly. Hallmarks of our business are responsiveness, transparency and client service. The firm invests from discretionary funds and its principal decision-makers engage at all stages of the investment process to avoid approval bureaucracy and streamline the closing process with certainty.
LD: How did you first become interested in providing this type of professional service?
CH: Prior to launching Statera, I was involved in building business services company InnerWorkings from a niche player to the billion-dollar market leader though a mix of mergers and acquisitions and organic growth. While I enjoyed the responsibilities and challenges of being a public company CFO, I wanted to return to a more entrepreneurial venture that leveraged my transactional and principal investing capabilities.
Commercial litigation finance presented a tremendous opportunity in a burgeoning asset class and a financial solution that had only recently gained prominence and acceptance in the U.S., and it struck me how much more growth remained ahead. Andy Woltman and I quickly honed in on the “middle market” as an underserved but vast market segment where we could differentiate ourselves.
Our counterparties typically have suffered substantial harm and, without Statera, are unable to hire the right legal representation for their needs.
LD: Why did you decide to go out on your own instead of joining another company?
CH: Because we could! Together with my co-founder, Andy Woltman, we believed that we had the complementary skill sets to raise capital; source, underwrite and structure compelling opportunities; and execute a varied set of investments across a diversified portfolio. We’ve done just that. Getting started involved great risks and great opportunity costs, given where we were in our respective careers, but the journey has been worth it. And we’re creating tremendous value for all of our stakeholders.
LD: What aspects of this work do you find professionally satisfying?
CH: I most enjoy the financial/investment aspects of what we do, particularly designing transactions to align and optimize the incentives of all involved – from our fund to the clients to their counsel – across the full range of possible litigation outcomes. Statera can punch above its weight in evaluating and structuring investments to meet unique needs of our counterparties, and I’m an important part of that.
The attorneys I work with are incredible. It gives me great enjoyment to engage every day with such brilliant minds, both within Statera and with the great firms who seek us out.
Finally, the societal impact of our services is also amazing. Our counterparties typically have suffered substantial harm and, without Statera, are unable to hire the right legal representation for their needs. When they ultimately achieve justice, and we’ve played a meaningful role in accessing that result, it is intensely rewarding and gives me great pride.
LD: What would you say is the most interesting matter you’ve worked on for a client?
CH: We recently helped an entrepreneur with a defense-side funding in a bankruptcy context. The company was building a unique and valuable asset, but the uncertainty of a litigation dispute had clouded its financing prospects and presented an obstacle to further growth and development. Statera stepped in, was able to quantify the risk, and created a solution that limited the company’s financial exposure and enabled it to resume its business plan. Within a year, the client had settled its litigation and was emerging from bankruptcy with its fortunes transformed. That company was a terrific counterparty and a huge proponent of Statera. And it was exciting to provide such a compelling and highly technical solution.
LD: What trends have you seen in the types of matters on which clients seek your help?
CH: First, we are seeing more specialization in the legal finance market. As the industry continues to grow and mature, funders are becoming more specialized. This trend enables funders to better serve the needs of the companies and law firms seeking to utilize litigation finance. It also allows funders to focus on those industries or segments of the market where they have a comparative advantage. For instance, Statera’s focus on mid-sized investment needs – disputes requiring approximately $500,000 to $4M in financing – meets a growing need in the market. It also leverages Statera’s flat decision-making structure that makes Statera more transparent in its diligence and decision-making process and able to close investments within 30-45 days, a timeframe often touted yet rarely achieved in the litigation finance market.
Second, litigation finance is becoming a mainstream solution. The number of companies and law firms accessing litigation finance continues to grow. From Fortune 100 companies to start-ups, from AmLaw 100 firms to boutiques, litigation finance is becoming a more common and sought-after solution in the marketplace. Judicial decisions and bar association working groups are also accelerating this trend. More and more courts continue to affirm the ethics of commercial litigation finance and protect the confidentiality of information shared with funders. And more bar associations are issuing white papers that address best practices in litigation finance and that endorse litigation finance for the benefit that it brings to the civil justice system.
Third, there’s more innovation taking place. Whether it is new financing structures in a bankruptcy context or regulatory changes regarding law firm ownership, the legal finance industry specifically and the legal services industry generally are finding new ways to effectively and efficiently serve clients. Law firms are also partnering with funders early in the lifecycle of a case, looking to the funder’s commitment as a key element of effectively litigating complex disputes.
LD: Tell us about the career path that led you to Statera.
CH: After graduating from Duke University, I started my career on Wall Street, working as an investment banker executing public and private equity offerings and providing strategic advice to emerging companies. There, I built strong financial analysis skills that I still use today. I worked for several years in venture capital and private equity, where I learned to apply those skills critically in making principal investment decisions. Then, after earning my MBA at the University of Chicago, I joined a newly public company, InnerWorkings, as head of mergers and acquisitions, where I was directly responsible for more than 40 acquisitions globally, representing over $500M in revenue and $350M in deal value. In addition to the value in honing my business development and legal transactions expertise, this experience was directly applicable to our strategy at Statera, vis-à-vis executing a high volume of middle market investments efficiently. Ultimately, I served as CFO of InnerWorkings from 2017 into 2019, before leaving to launch Statera Capital.
LD: Did any experience from your undergraduate work push you towards this type of career?
CH: At Duke, I completed dual majors in economics and in political science, which incidentally are the most relevant coursework to finance and law that Duke offered.
LD: Is this the type of job you imagined yourself having as a younger person or student? If not, what did you expect to be doing by this point of your career?
CH: Over my career, I have most enjoyed roles in principal investing and in executing financial transactions. I have also found working in entrepreneurial environments and with start-up companies to be the most rewarding, and I always knew I wanted to start my own business.
I was not actually aware of even the concept of litigation finance until four years ago. Launching a fund in this strategy certainly “scratched the itch” of everything that most excited me earlier in my career and what I was seeking in the next phase of my life.
LD: Was there a course, professor or experience that was particularly memorable or important in how your career turned out?
CH: Economist Connel Fullenkamp taught an engaging course at Duke, “Corporate Finance and Investments,” that opened up my eyes to the world of finance and inspired me to seek a career there.
Famed venture capitalist Scott Meadow taught a capstone business school course at the University of Chicago, “Commercial Innovation,” about entrepreneurship through a financial lens that was equally motivating and stimulating.
Invest in your network and always help others when you can. Do the little things like returning phone calls and emails. These investments will pay off in spades throughout your life.
LD: What advice do you have now for current students or young professionals who wish to have a similar type of career?
CH: Work hard and build solid fundamental skills early. They will serve you well throughout your career. Know your strengths and, as important, your weaknesses – not only to improve but also so you can surround yourself with partners who complement you. Finally, invest in your network and always help others when you can. Do the little things like returning phone calls and emails. These investments will pay off in spades throughout your life.
LD: What changes have you observed in the litigation finance industry?
CH: While our firm is a relatively recent entrant to litigation finance, it does seem that the growth of the industry, together with the proliferation and specialization of funds into different strategies, means that different professional backgrounds can disrupt the industry with novel investment strategies and structures. Whereas funds traditionally have been almost exclusively populated by J.D.s – and certainly that background still dominates – it is more possible today for finance professionals to contribute to and excel in this industry. While there is certainly much more work ahead for Statera in growing our business and executing for our investors, I couldn’t be prouder of what we’ve done already in raising a fund, assembling a world-class team, and building a stellar Chambers-rated brand in a short period.
LD: How would you describe your style or philosophy as a professional service provider? What characteristics does it take to thrive in litigation finance?
CH: At Statera, we maintain the same client service mentality in our investment fund that we had prioritized in our prior careers in law and business services. It made us successful before, so there’s no reason to abandon that now. We bring this clients-first approach to all of our stakeholder relationships, including with counterparties, their counsel, and our own investors.
Our industry is often criticized for slow execution, opaque decision-making processes and lack of accountability. We deliberately designed Statera to be extremely transparent and responsive, even while scaling a deep and diverse portfolio of varied sizes of investments. Our full investment team is involved in all investment considerations from their earliest stages to assure buy-in and avoid surprises down the road. We also keep our underwriting in-house to prevent delays. We can get to “yes” quickly, but we are also very selective about where we spend our time and can decisively move to “no” as well out of respect for our counterparties’ time and our own. Our term sheets and transactional documents are thoughtful, pragmatic, fair, and we honor our commitments. In our business as in life, we treat others how we’d like to be treated.
LD: What advice would you give potential clients in terms of how to most productively work with an outside advisor?
CH: Outside advisors add great value in litigation finance transactions, because the market of buyers/investors is fragmented and opaque, with investment interests and criteria varying widely across firms. Underwriting an opportunity’s legal and investment merits, even preliminarily, can be quite time intensive. Those seeking legal funding are well served to engage a reputable advisor who has a long track record with the various funders and can navigate that process with a much higher probability of success. There are several reputable firms we can recommend. Involving a third party also helps avoid any potential or perceived conflicts of interest in negotiating the terms of funding, which may benefit both a client and its counsel.
LD: What innovations are you trying to achieve that will most help your clients?
CH: Statera extends access to litigation finance to a broader cross-section of corporations and law firms, enabling them to seek justice for the harms that have been suffered. With our help, clients can offload the risk and expense of affirmative recovery programs, turning corporate cost centers into profit centers. We unlock the value of litigation as an asset, not a liability, and enable companies to see and obtain the value of these assets, even in advance of the litigation resolving.
Statera is uniquely organized and structured to best serve clients in the commercial litigation middle market. Our innovations to benefit clients include a flexible investment size. As mentioned, most of the existing large players in the commercial litigation finance market focus on financing cases that require at least $4M budgets for legal fees and costs. Statera structured its capital stack and team to serve cases below this threshold (with the flexibility to finance cases above that amount, too). This provides a much broader pool of clients and law firms access to litigation finance and creates greater access to justice.
We also have streamlined approval. Statera is a nimble, flat organization. Clients and law firms engage directly with the investment committee from the initial screening through closing. The investment committee has complete authority and discretion to execute financing. There are no convoluted approval processes or opaque hierarchies to navigate.
Speed to execution is another innovation. Statera’s focus on middle market commercial cases requires us to employ an efficient diligence process to close transactions quickly, reliably and cost-effectively. We are closing two deals per month, so we make our process as user-friendly as possible to expedite the consideration and diligence of opportunities. This serves our clients by getting them decisions quickly, providing them fair, easy-to-understand documents, and putting money in their hands as soon as possible.
We offer innovative deal structures, as well. Our team’s experience structuring deals in and outside of the litigation finance industry and our flexibility on investment size gives Statera an unparalleled ability to structure transactions in innovative ways that best meet a client’s needs.
For example, Statera has financed several deals involving counterparties acting as a trustee for a company in receivership, bankruptcy, or similar circumstance. We have created bespoke financial structures in these cases that respond to the particular duties and obligations of the trustee and put the trustee in the best position to maximize the trust’s assets.
Additionally, in several cases, Statera has provided financing side-by-side with another funder where a counterparty needed complementary financing to meet its business needs. Because of Statera’s flexible investment minimums, we could meet the client’s needs where other funders could not.
We can get to “yes” quickly, but we are also very selective about where we spend our time and can decisively move to “no” as well out of respect for our counterparties’ time.
LD: Based on your experience so far, what changes do you see for the industry going forward?
CH: Commercial litigation finance will continue to grow. The asset class has earned attractive risk-adjusted returns relative to other debt or equity investments, and capital abhors a vacuum, so funds should continue to flow into the space, and the excess returns will get competed away, eventually. I say “eventually” because the increased supply in capital is happening simultaneously with increased demand for capital – i.e., we see rising awareness about litigation finance, and law firms of all sizes are embracing this novel solution more and more.
LD: Can you share some strategic plans for your firm in the coming months or years?
CH: We want to be the dominant firm and the go-to-source for funding “middle market” commercial litigation cases at scale. Commercial litigation finance is still in early innings, and most corporate litigators have not been involved in funded cases. Adoption is rapidly accelerating, however, and our market segment is poised for growth, even faster than the overall industry. We have a lot of work yet to scale our team and processes while staying true to the same investment strategy and client service that have made us successful to date, but we’re not cutting any corners and so far it’s working.
LD: How have management challenges changed since the start of your career?
CH: It’s all about the people. Our team is our greatest asset and the greatest opportunity to continue the momentum we’ve created to this point. Covid certainly created significant challenges in growing and motivating our team, particularly in a remote work environment. It also created new obstacles with engaging with other stakeholders, from investors to counterparties to vendors. But Zoom and other tools have made this more manageable, and we’ve navigated the last few years like the rest of the world.
LD: What do you do for fun when you’re outside the office?
CH: With four young children at home, it sure doesn’t seem like there’s much time outside of work and family life, though I do enjoy music – both attending live shows and playing myself. I’ve played guitar for a long time, and during the pandemic I also taught myself the banjo.
LD: Do you have a favorite book or movie about the law?
CH: I love "A Few Good Men."
LD: If you weren’t in your current job, what would you be doing now?
CH: Building another emerging business, probably through an acquisition strategy.