Brandon Baer
Hedge funds are eagerly examining cryptocurrency's bankruptcy filings to buy and sell customer claims, amid the collapse of companies including Genesis, FTX, BlockFi, Voyager Digital and Celsius.
In the case of the FTX, "it is unclear how the creditors will be treated," said Brandon Baer, founder and CIO of New York-based Contingency Capital and a former attorney.
The $700 million asset management business focused on credit-oriented legal assets is examining the market in FTX and other crypto claims, such as BlockFi, Voyager and Celsius, but is not yet a buyer.
As a customer depositing cash in an FTX account, "will you be treated the same as someone who deposited a cryptocurrency? The bankruptcy court has not yet ruled," Mr. Baer said.
The rash of bankruptcies in crypto is sparking renewed institutional investor interest in litigation, class-action and other types of lawsuit financing.
Litigation financing entails raising money for and then funding U.S. law firms with million- and billion-dollar suits against companies such as talcum powder producer Johnson & Johnson; opiate maker Purdue and distributors CVS and Walgreens; Roundup pesticide manufacturer Monsanto; and Boy Scouts of America for abuse claims.
In theory, litigation funds aren't correlated to the stock and bond markets, and so pension funds, endowments and foundations, and family offices are attracted to the asset class amid falling stock and bond markets.
"There is increased demand from the institutional market to participate in litigation finance," said Mr. Baer. The firm invests in pools of claims, largely 25,000 or more at a time.
"It's a credit-oriented approach, as we're lending against legal assets."
Asset allocators "view this as an interesting diversifying strategy," Mr. Baer said.
Contingency Capital launched in November 2020. Its types of investors include university endowments, pension funds, family offices and consultants.
Contingency Capital is minority-owned by TFG Asset Management. Mr. Baer formerly worked at Fortress Investment Group. Fortress and Contingency Capital also inked a co-investment arrangement under which Fortress may invest up to $500 million.
Other players in the bankruptcy lawsuit and litigation financing space include hedge funds such as Armadillo Litigation Funding, CenterBridge Partners, D.E. Shaw, Pravati Capital, Rocade Capital and Virage Capital. Burford Capital and IMF Bentham/Omni Bridgeway are the most prominent third-party litigation funders.
Many of their loans to law firms fetch very high interest rates.
"These are high-premium loans. One of the deals we recently closed was at a rate of (Secured Overnight Financing Rate) plus 16.25%," said Mr. Baer. SOFR's latest quote was 4.3%.
Why must attorneys and their firms borrow at those rates? It's often difficult to get capital. Private equity and venture capital firms are prohibited from owning U.S. law firms, and non-lawyers cannot share in the profits from law firms either, based on restrictions in every state except Arizona.
