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What is Litigation Finance and Why is It Potentially Important for Your Business?

Written by Patrick Henry

Litigation Finance

Show Notes from Episode 8 of the Real Deal…What Matters Live

Discussion with Alex Chucri, CEO and Charlie Brown, Director of Business Development, at Pravati Capital, the Litigation Funding Firm

Patrick: Hi, everyone. This is Patrick Henry, the CEO of QuestFusion, with The Real Deal…What Matters Live. Today I’m here with the CEO and the Director of Business Development for Pravati Capital, the litigation funding firm. Charlie Brown is the Head of Business Development and Alex Chucri is the CEO. These guys have been around since 2013. Alex has been in this industry since 2003. He’s a serial entrepreneur and so is Charlie. We’re happy to have them on the show today. Welcome.

Charlie: Thank you.

Patrick: What is litigation finance?

Litigation Finance

Alex: Litigation finance is a situation where people who find themselves in a law suit can come to us for capital. We’re able to help finance their case. Typically, what transpires in law suits is the David and Goliath story. You may have a situation where you have a person or company with a suit going up against deep pockets or a more sophisticated lawyer group. We finance them to give them a fighting chance.

Patrick: Do you have any areas of specialization around patent litigation or corporate litigation?

Alex: I’ve been in this space since 2003. A lot of us in the United States started with consumer cases. A consumer gets into a car accident lawsuit. We help that time frame of settlement. You might have someone in a property situation where there are millions of dollars at stake. We help finance that entrepreneur or corporation to hire the right firm. We even provide a little bit of working capital for the firm to stabilize. Then they’re able to pursue. A lot of what we do is with mass torts. These are bad pharmaceutical situations. We finance those as well.

Patrick: You help corporations and individuals.

Alex: Yes. Right now, we have 70 law firms that we’re financing. We have 6,000 cases and a couple hundred million AUM assets under management). We’re growing dramatically on the income side.

Patrick: Do you handle anything related to criminal law or it is more so litigation?

Alex: It’s mostly civil litigation.

Patrick: How would you define litigation finance?

Alex: It’s a bridge loan in some ways. It’s an expensive non-recourse bridge loan. If the case loses, we lose our capital. It’s not inexpensive capital. It’s venture capital with a debt wrapper. That’s how to look at it?

Patrick: Is it typically interest rates?

Alex: It’s interest rate milestone driven. If the case is lost, we lose.

Patrick: You have to do a lot of investigation up front to have your handicapping process looking pretty good to stay in business. How do you go about that with the breadth of different things that you’re involved in?

Vetting Candidates for Litigation Finance

Alex: We are five to ten lawyers full time. We have very critical underwriting parameters. We tend to get into cases a little later. We tend to do more portfolios. If a firm comes to us and says, “I want you to do this one case,” we usually convince them that they have to give us the entire portfolio. Cost capital goes down for us. It creates more of a win-win situation. We use a lot of portfolio strategies. We use a lot of collection strategies. We have a really good track record on investment analysis.

Patrick: What’s your track record of success in the deals that you get involved in?

Alex: As we’ve matured over a period of time, we have a really good understanding of the legal world. It’s really structured finance. You want to be last money in, first money out. We try to structure it from that perspective. When you’re applying finance to the legal world, it’s very delicate. You have ethics. There are a lot of rules in the legal world. You can’t apply it like you would to corporate finance. We tailor-make our strategies to fit those types of situations.

Patrick: Can you share your percentage wins?

Alex: We’re in the 90th percentile.

Patrick: Your investors are getting an equity return based on the debt financing strategy.

Alex: We say “no” a lot. Out of 30 portfolio and case reviews, we usually choose one.

Patrick: You have to screen and say “no” a lot. For our audience or entrepreneurs and startup CEOs, can you give an example of an earlier stage company that you’ve done something with?

Alex: We’re doing one as we speak. It’s a very interesting situation. This is an app developer with a great strategy. They went out to raise money and had a board of directors that ended up self-dealing on the side. They were not good actors. It turned into a little bit of a legal battle. Their lawyer reached out to us. The nose of the plane starts to dip a bit as far as morale.

Investors are upset because they raised $3 million to $5 million. We stepped in, did the analysis and liked the case. It’s a strong law firm. We are putting a significant amount of money into the litigation. That’s how we plan on getting paid back. Part of the use of proceeds will be provided to the firm to lift the nose of the plane back up and stabilize.

Already it’s made a big change for their company. That’s the type of thing that we do, especially with early stage. This is my ninth startup. I’ve been in this space for 17 years. We see a lot of situations where a corporation will have a good suit, but they don’t necessarily want to do the expenditures, all of the disclosures and have their stock price dip. It’s an off-the-balance-sheet type of transaction. We step in. We finance the case costs.

Then we’re typically non-recourse to the solution or the exit of the case. It really helps corporations because it’s a negative environment to be dealing with a lawsuit all the time. Business owners, whether it’s a large ongoing technology company or a contractor who was hurt in a car accident and they can’t work anymore, they have the same sense of nervousness. It’s a stressful situation. We step in with our knowledge of the legal world and our legal staff,
connecting the victim with a Car Accident Lawyer that we have worked with on many car accidents. We can point out to their legal staff what we think. It really does help.

Patrick: I’ve been in a variety of different things through my career. It’s time consuming. It’s stressful. It’s expensive. It’s distracting. These types of things can be helpful. Let’s say you take on a case that has a large amount of risk. Do you offlay any of that risk to a reinsurance company or are you self-funding?

Alex: Typically, we’re self-funding. Reinsurance is more of a London-based strategy. Our competitors in London have built models for that. It’s after-the-event type insurance. Anything we do abroad, we try to put that in place. It gets expensive. For our cost of capital, typically we’re dealing with portfolios. That’s usually how we offlay risk.

Entrepreneurial Takeaways

Patrick: Both of you have been entrepreneurs for some period of time now. What’s the one big takeaway about your entrepreneurial journey that you’d like to share?

Charlie: Hang on for the ride. Don’t get too excited. Don’t get too depressed. You have to think long-term strategy. It’s all about building the right partnerships. Having the right advisory board really helps. Get good counsel. Don’t get too high or low. Plan for the long term.

Alex: I’ve learned that, in startup and early-stage companies, it’s not a race. It’s more of a marathon. Slow the process down so that less mistakes are being made and you’re making more prudent decisions. It’s not as important to the end game as fast as a lot of guys think. That’s what I have found. For as well as we’ve done, we have not been over capitalized. We run funds.

The manager is typically paid based off how we raise capital from the funds. We have not taken a lot of capital in to keep our dilution low. What has happened is that we’ve made a lot of good decisions through hard work and efforts versus raising extra money to bring on staff that we don’t necessarily need. We’ve been very focused that way. I have a life coach that is a business coach. He’s helped me for years. I brought him into my business. Now I have him work with my team.

They work on a personal basis. It also helps take my objectives for the company and spread it across all of our employees so that they all know where we’re headed. It’s easy to set milestones. Every morning at 10:00 I get vitals from of my team on their objectives. If I see that it’s off, I immediately change it. That way, it keeps everyone on the same page. I tend not to micromanage. They’re able to execute as they see fit. That extra two or three hours on Monday pays off a lot.

Patrick: You’re focusing on the “what” versus the “how.”

Alex: Yes. It’s what they think is important versus what’s really important. It’s a nice way to go about it.

Patrick: How do people get a hold of you?

Alex: They can go to PravatiCapital.com.

Patrick: I’m excited to have you on the show today. Thanks, Alex and Charlie. This is Patrick Henry, the CEO of QuestFusion, with The Real Deal…What Matters Live. Check out Pravati Capital if you have the need for litigation funding. They know what they’re doing.