Since lawsuits emerged as an asset class around 20 years ago, litigation finance has blossomed into an industry with about $16B in assets under management. The lion’s share of this third-party funding has gone toward the costs of pursuing a lawsuit, with the funder receiving a share of the recovery in return. But in Austin, Texas, a relative newcomer to the field has carved out something of a niche for itself.
Pine Valley Capital Partners specializes in post-settlement capital, a type of funding that aims to address what can be the extended time gap between the reaching of a settlement agreement and the payment of the proceeds. For cash-strapped law firms working on a contingency fee basis, the funder provides an advance on a legal settlement that has already been reached but not yet paid out. The advance, plus interest, is repaid from the proceeds of the settlement.
“For contingent fee law firms, cash flow is always an issue,” notes Pine Valley Managing Partner and Co-Founder Ryan Stephen. “In our view, the most sustainable way to finance a contingent fee law firm is with post-settlement capital, especially for mass tort [litigation] when you have some degree of [settlement] receivables that are tied up in basically a distribution process for one, two, five years.”
The financing goes toward the law firm’s operating expenses, covering everything from payroll to vendor bills. “What we do is unlock trapped assets for law firms and allow them to use that working capital to keep growing their firm and operating their firm,” Stephen says.
The post-settlement space has attracted other firms including Burford Capital, Balanced Bridge Funding and Amicus Capital Group. But Pine Valley believes it offers a clear alternative to its competitors.
“What we've told law firms is, ‘We might not be your absolute cheapest term sheet you get in the door. But we are going to be your most transparent and most trusted partner,’” Stephen explains. “We want to work with the best law firms in this space again and again and again, as opposed to working with somebody and getting a great return, but they never want to work with us again and they go to work with somebody else.”
And their model works: They’ve amassed an impressive track record, providing some of the top law firms in the space with working capital at the crucial end juncture of a case.
Bringing Finance Expertise into the Legal Field
Both Stephen and Sam Vinson, Pine Valley’s other managing partner and co-founder, have finance backgrounds. Early in his career, Stephen worked for Guggenheim Partners where he originated, structured and managed private credit investments in the energy sector. Prior to joining Pine Valley, he spent five years as chief financial officer of Trinity Environmental Services, an Austin-based oilfield waste disposal company.
This distinct background gives Stephan a nuanced understanding of the opportunities in the still-maturing field of litigation finance. In private credit, “you’re lending against assets that are a bit different than what you're used to lending against, but also have ascertainable value to them,” Stephen says. Similarly, in post-settlement financing, “you’re lending against ascertainable value.”
What we do is unlock trapped assets for law firms and allow them to use that working capital to keep growing their firm and operating their firm.
For his part, Vinson, who is based in Abilene, Texas, has more than 15 years of experience structuring and managing specialty finance and private credit transactions. He started a specialty finance platform that focused on equipment leasing, lease-to-own and receivables factoring. In a factoring business, “you're lending against receivables, awaiting payment of invoices,” he says. “That puts it in the post-settlement type pocket.”
Stephen and Vinson crossed paths in the finance world, and each had an eye for unique financial structures and instruments. “We'd been looking at asset-backed private credit transactions in weird, kind of under-served spots, for years together,” Stephen says. At some point, Vinson picked up the phone and pitched Stephen on a post-settlement deal.
Stephen was initially skeptical. “We're not litigious people,” he told Vinson at the time. But that fresh perspective into the legal space, combined with their deep backgrounds and interest in cutting-edge financial products, drove them forward.
“When we dug into the space and saw this opportunity,” says Vinson. “Where a settlement was already in hand, we could put our foot down on the valuation of the underlying collateral, and then we could run our typical specialty finance or private credit tools around being able to secure that collateral.
“Knowing how that cash was going to be distributed, it became even more and more interesting to us.”
They got smart about the nascent industry and stepped into the space in the boom years, which can generally be traced to between 2018 and 2021. “You saw this massive adoption rate by law firms at that time,” Stephen says. A 2021 Bloomberg survey of the space noted billions of dollars at play, with 23 percent of lawyers saying their firms are more likely to seeking funding compared to one year earlier, and 69 percent were more likely than five years earlier.
Pine Valley Capital Partners was incorporated in Texas in October 2020. But rather than jump in as another player in the busy arena, they got smart about their options when they saw an underserved niche. “When you looked at the litigation finance space and you saw this mass adoption occurring, it was predominantly done on pre-settlement financing,” Vinson says. “You had guys taking bets on outcomes of litigation. We saw a gap and an opportunity in the post-settlement space.”
It was a prescient decision. The post-settlement funding space has grown rapidly, with Pine Valley as the vanguard, leading the charge and setting the standard in what is now a key area of litigation funding.
Spreading the Word
The Pine Valley team now includes Ryan Schultz, who joined as Head of Business Development in September 2023 after practicing law for 12 years at Robins Kaplan and then working for UK- based litigation funder Woodsford.
Robins Kaplan was one of the early adopters of litigation funding, and part of Schultz’s role there was working with the funders. “With a pretty heavy plaintiff contingent practice, our cash flows were very lumpy and we looked to litigation finance to help smooth that out,” says Schultz. A practicing lawyer who saw the value early on of funding, he became the go-to contact for financing, with other partners at the firm consulting him when they thought funding might work for a case.
Schultz vetted funders, connected his colleagues with them and helped negotiate contracts, organically morphing into the role of the litigation finance contact at the firm. Then Covid hit. “I had some time on my hands sitting at home and just kind of thought – I’ve done some interesting litigation, done trial work, really enjoyed it, but now I’m looking for something different.”
For contingent fee law firms, cash flow is always an issue. In our view, the most sustainable way to finance a contingent fee law firm is with post-settlement capital, especially for mass tort.
That’s when a litigation funder at Woodsford reached out to Schultz. The funder said that, with Schultz’s legal experience, he had the ability to relate to the lawyers who might need or be interested in litigation finance, but were unsure of what it looked like or if it would be a good fit for them. Schultz was already informally at that role within his firm, as educator and connector, so it was a natural transition. He focused at Woodsford on finding new opportunities for the funder, targeting law firms and lawyers who needed the traditional pre-suit litigation, particularly in the commercial and IP space.
Now Schultz is performing a similar function at Pine Valley, focused on educating law firms and lawyers. While everyone is aware of litigation funding at this point, skepticism remains in many pockets of the landscape.
“Some lawyers come from a space where debt is a four-letter word,” says Schultz. “They see it as a sign of weakness, that there's trouble at the firm.” He spends his time talking with those skeptics, showing them that debt is a viable, well-known and well-used financing tool.
Firm leaders will also often rely on a growth plan that’s contingent on waiting for all their funds and fees to come in. The problem is, those fees too often tend to flow in on a more steady basis and just get eaten up with monthly expenses. “I tell them, ‘You have cash that's trapped, you need to have access to it so you can grow,’ and” Schultz says, “post-settlement capital is a way for you to do it in a cost-effective way.”
Another leg of education comes with firms who have tried funding with another firm, and are leery about doing another deal because their expectations didn’t match their experience. Either the deal was more expensive than they thought, because while they knew about the interest rate, they didn’t understand about the make-whole call provisions, where they could pay a penalty for early debt repayment.
Sometimes, firms also didn’t know what they were getting into from an operational perspective. They didn’t fully grasp the boundaries around how this cash was going to flow – and that the funder might be on the phone with them every week, asking for progress reports.
At the same time, some funders grew similar scar tissue from their experiences in the initial boom years. They realized they were not going to get all the money back that they expected, and watched as their interest ticked past the point of their collateral coverage. Some of them didn’t have a real deep understanding of who they were underwriting to. “Those types of disjointed interactions led to a lot of disenchantment on the law firm side and a peeling away on the capital side,” says Stephen. “We showed up somewhere in the middle of that and thought, ‘There's got to be a better way to do this.’"
So, as nearly any industry that goes through a rapid expansion, the litigation funding industry experienced some correction, with some players dropping out, and is in a maturation stage now. The players still standing have a more nuanced understanding of what types of products will properly work in the legal industry, which has its own set of cultural norms and institutional needs.
Pine Valley is working closely with clients in this new phase of the industry, bringing their collective backgrounds in financial products and the needs of law firms to help educate lawyers who may still be trepidatious about funding. “We help them understand their cash requirements,” says Stephen. “We make sure they're not choking out while they're in a debt facility, and that they're actually using leverage and growing and accomplishing the goals they're trying to use the capital for.”
We really look at ourselves as partners with the law firms and work hard to find ways to help them grow.
The team at Pine Valley is always deliberate with upfront conversations, so that the firms understand how the facility will work and how they will interact with them across the lifespan of the loan. And, in the event that things don’t go as expected, with timing delays or other deviations, they have already laid out how they will work together to make it a successful interaction for all involved.
“We're very cognizant of keeping the firm alive and doing well,” Schultz says. “We've seen a lot of deals where the facility is structured in such a way that the funder is going to do really well, but it's going to gouge the law firm. That’s just not sustainable.”
At Pine Valley, he adds, “We really look at ourselves as partners with the law firms and work hard to find ways to help them grow.”
Funding Justice for the Long Haul
At the end of last year, Pine Valley Capital had $535M of assets under management, with $286.3M managed on a discretionary basis and $248.6M on a non-discretionary basis. Pine Valley's most recent capital commitment puts the firm approaching $1B in assets under management. According to Stephen, the firm lends to law firms “representing clients that have been harmed by anything from corporate greed to sexual abuse, including many clients who have no way to get justice without contingent fee law firms.”
“Plaintiff firms would probably be better off billing by the hour like these white shoe firms do,” he continues. “That's the better model from a financial perspective. But that doesn't exist, because that’s not what is realistically going to work for their clients.” Hence, their focus on post-settlement funding, which enables plaintiff firms to capitalize on funding in a sustainable way, so they can continue fighting for the good fight for their clients. “That's why we like what we do,” he says.
Schultz also emphasizes that Pine Valley plays a key role in the ability of its borrowers to get access to justice for their clients. “We allow them to provide best-in-class legal services for their clients to get the best result that they possibly can for them,” he says. “We’re lending against collateral to help support a business that is out seeking justice for those who otherwise wouldn't have access to it.”
With a sustainable model built on smart choices and a deep understanding of this unique financial product and the industry it serves, Pine Valley is emerging as a long-standing player in the litigation funding space. They have built out the niche of post-settlement funding as a “capital backstop for access to justice,” as Stephen puts it. And one thing is clear: They are in it for the long haul.
