Anticipating the Puck

Though perhaps overused, we hope the Stanley Cup Finals offer sufficient cover to quote the famous Wayne Gretzky line: “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be."

When we wrote in April 2020, we (perhaps dully) noted evidence of a surge in litigation finance investing. While we have always acknowledged the market’s uniquely attractive attributes – particularly, its lack of correlation with broader markets and the potential for high risk-adjusted returns – in our November 2020 note (“When the Music Stops”), we highlighted signs of cracks in its foundation, particularly for debt investments in contingency fee law firm loans.   

To wit … “and as it relates to law firm loans made to mass tort attorneys, there is a question that seems to quietly echo through investment committees of the most well initiated in the space: how many of these loans will perform without having to be refinanced? Indeed, one may sense an implicitly understood game of musical chairs growing in amplitude with ever-ballooning loan sizes driven by re-financed exits. The music, for now, plays on…”

In fact, Greenpoint’s concern informed a decision to delay capital raising. We anticipated distressed credits as a harbinger suggesting the prudence of re-evaluating prevailing approaches to investing in these assets. Our erudite readers will know this is in fact playing out. Many of you can point to non-performing loans that have traded at deep discounts or have been restructured in the hopes that back-end value will bail out poorly underwritten loans. Likely, few of you can point to large loans that have amortized on schedule. 

From a cyclical perspective, distressed opportunities have been gobbled up (as they always are) by those positioned to pick up broken credits. But more broadly, it seems investors recognize the need for secular change. So the market is evolving (as it always does). 

The equity bar is being raised (multiple puns intended). That is to say, the time for law firm partners to risk (whether well or poorly) creditor capital with fixed maximum returns is on the wane. And as if on cue, incremental state bars are creating avenues for institutional investors to participate as equity partners with law firms. 

We are now seeing a proliferation of equity investments in law firms and torts themselves. The new equity structures are littered with pitfalls and require thoughtful application. That said, Greenpoint believes the tools are now available for a well-designed litigation finance strategy using a blend of credit and equity to offer superior risk-adjusted returns (focused on properly controlled risk) while maintaining limited correlation. 

Over this period of introspection, Greenpoint has focused on three main objectives. 

First, we have developed our own equity portfolio. Second, we have developed requisite expertise as operators, particularly proprietary sourcing mechanisms. And third, we took a controlling interest in what we believe to be the most sophisticated platform in litigation finance – the Tip of the Spear (as it were) underwriting and servicing firm – which boasts 25 years of success. The platform has achieved 18.4% IRR, excluding equity upside, since 2019. Along with the utility of its operating prowess, we now enjoy a co-investment right that allows Greenpoint to participate directly in its transactions. Its superlatives include a long track record of amortizing credits and a best in class equity strategy with investment grade law firms. 

Greenpoint now consistently originates over $150 million in transactions each year. Equipped with newly accessible investment structures and industry leading underwriting and servicing capabilities, we are confident we can realize and scale the long-promised benefits of a diversified litigation finance portfolio.