Go Fund My Dispute: Litigation Finance Takes Center Stage in a Crisis

Christopher DeLise, founder and CEO of Delta Capital Partners, discusses what sets Delta apart from other litigation finance firms, including its work on algorithms for a predictive litigation engine.

Tell me a little bit about your background and how you came to found Delta.

Christopher DeLise: I grew up in Concord, Massachusetts, and went to business school at Boston University. I was a financial analyst before going to law school in Chicago. I practiced law for 15 years, representing private investment funds and their managers and investors at some of the world’s largest law firms. In 2011, I left the law to found Delta’s predecessor. It was just me, a pool of capital, and my outside counsel at Skadden Arps and Nixon Peabody. My first five cases were all against hedge fund managers who had defrauded some of my European institutional investor clients. They were not interested in spending $1,000 an hour for me to chase fund managers and possibly come away with nothing because the money was gone. I knew about litigation finance through my international work and met with some funders in London. Ultimately, I secured funding and pursued these five claims for 18 months and got back about 65% of their capital. At that time, the funding industry really had not begun to any large extent in the United States. Instead, ad hoc groups of investors and hedge funds were betting on one-off cases.

I recall that there was a great deal of skepticism back then.

Yes, while there was a lot of interest from law firms, large corporations and potential investors, there was also much concern over whether commercial litigation finance was a viable asset class/business. I was convinced it was and formed the current iteration of Delta. Moreover, the then-existing model used by UK funders was rather old-school and very conservative. They were run almost exclusively by former litigators who wanted to only do funding in the London/UK market. They were not very aggressive in marketing or risk-taking. I used my marketing savvy and experience as a financial analyst and then as a lawyer and applied them to this industry in the U.S. I felt it was a significantly improved model.

Is that basically Delta’s differentiator?

In part. We have developed what we call the “Delta difference” – 10 things that set us apart from our competitors. It starts with speed - we are faster than our competitors in originating, vetting, diligencing and closing deals. We have almost 30 personnel, including nine litigators and transactional attorneys. We also have developed proprietary technology, including an artificial intelligence engine to help us vet and diligence investment opportunities. And we are now operating across the world: we are based in Chicago, but we source as many deals outside of the United States as we do within. Actually, some of our first deals were in China and the Middle East. Other funders thought I was nuts funding cases in those regions until they learned of our success. Now several funders operate in those regions. In my opinion, there is no material difference doing deals in any advanced region: you need to analyze the local courts, the local judges and attorneys, and the applicable rules of law, and most importantly you need to properly and comprehensively assess the risk and price it accordingly.

Inquiries from law firms looking for credit facilities and other liquidity solutions to help them meet operating expenses during these unprecedented times are skyrocketing.

Do you work mostly with law firms, in-house law departments, or both?

We mine work from many different organizations, claimants and channels. Our latest numbers show that about 60%- 65% of our deals come from law firms. The next biggest source is investigators and intelligence firms (about 15%), and then corporations (10%). We work with Fortune 500 and mid-sized and smaller companies as well. Media and PR firms account for about 5% of our cases. The balance comes from intermediaries and blind inquiries over the website, phone or via email.

Litigation funders would seem to be well-positioned to benefit from the current crisis by, for example, supporting insurance coverage litigation that takes time to resolve.

That's correct. Inquiries from law firms looking for credit facilities and other liquidity solutions to help them meet operating expenses have sky-rocketed over the last six weeks. We also have a product, litigation-collateralized loan, which allows a claimant to borrow against unresolved claims or litigation where that is the only collateral. That has been a big thing for us since we launched it last fall. Covid-19 and the global economic downturn resulting therefrom will result in massive insurance coverage litigation. This will be the full employment act for lawyers for the next 10 years.

Tell us about Delta Liquidity Solutions.

DLS is a catchy name for a set of credit-like products we have developed to meet the liquidity needs of law firms, businesses and individual claimants by leveraging our expertise in underwriting litigation for purposes of making equity investments. Basically, we can provide credit facilities, loans and other credit-oriented products. Law firms can use their contingency cases or a portfolio of matters as the only collateral. It is typically an off-balance-sheet arrangement that does not adversely affect existing lending arrangements. It usually does not require partner guarantees. Law firms have not yet jumped all over it because the money is more expensive than a bank’s money, but conditions have changed, and banks are being much tighter in renewing and granting new loans and facilities. And now firms are worried about making payroll and laying people off, so they have become quite interested in the last several weeks and I expect that interest to continue to grow in the coming months.

As I previously mentioned, we started offering litigation collateralized loans last fall in Europe. The construction and transportation industries have a lot of regularly occurring litigation against governments for failure to timely pay the full amounts owed under infrastructure and construction contracts. This type of litigation usually settles over time but these firms need liquidity sooner and banks will not lend against such collateral. We analyze this type of litigation, put a value on it, and let the companies borrow against it on terms more expensive than a regular bank loan but without the same requirements of banks – the loan is repaid only if they win the case. If the cases go under, the borrower pays Delta nothing. That is why the money is more expensive. We've had this product since last fall but once things started to slow down at the beginning of this year in Asia and then rolled West, interest in these loans significantly picked up. There are a lot of companies that have litigation that they ordinarily would not consider an asset and now they realize that they can borrow against it. It is found money to them.

Is there stuff that you won't touch? What do you avoid?

We have a high-risk appetite but stay away from cases in Russia. We do cases all over North America, South America, Europe, Asia, the Middle East and Africa – basically everywhere except Russia. While there is a lot of litigation there and originating there, we cannot get comfortable with it. Even places like Cypress and Panama, where historically there has been a lot of fraud and corruption is not an absolute no. We analyze every case and jurisdiction in the same comprehensive way, whether an opportunity in the US or Asia.

We also avoid funding cases where there is a serial fraudster involved. They are so used to being chased that they become battle-hardened and will not settle. As such, these cases take an enormous amount of time and money. There are so many other attractive cases that we have come to realize that it is not worth pursuing those. That is one of the great things about this industry - even if we triple in size, we will only be scratching the surface in terms of meeting global demand for litigation finance.

Are you involved in international arbitration?

Yes, that is about 20% of our funded cases, we love them. They take more time and money, but they involve all sorts of interesting things like geopolitics and the media. The damages are usually very high, and the practitioners are exceptional.

Delta’s approach is to make sure it is funding the right claims and the right lawyers so it does not have to be a Monday morning quarterback.

How does a typical engagement work? How do you develop business?

We are all about building long-term, mutually beneficial relationships rather than chasing opportunities. I spend at least half my time sourcing business across the globe. I need to be out there sourcing so I can understand what is going on in the market, what needs are being met and what are not so that we can modify our offerings and marketing efforts. I believe in building relationships because when you pursue an opportunity, it is usually too late. Sure, things come our way that are bake-offs or beauty contests among many funders and we participate in those. But we like to educate our channels so that when they have an attractive opportunity, they think of us and call us first.

I tell all Delta personnel that all sourcing is local. People are quick to forget you when you leave their geography. Sourcing is the lifeblood of this firm. As such, we do marketing campaigns, sponsor conferences, join podcasts, etc. but I am a firm believer that marketing must permeate the culture of the organization for it to be successful. I was a businessperson and worked in finance before I was a lawyer, and I learned early on that there is no substitute for building mutually beneficial relationships. We do not love big bake-offs where you put a ton of time in and are usually selected based solely on how low you are willing to price your funding. We do not want to be known as the low-cost funder, we want to be known as the valued funding partner.

Do you have any influence on how cases are handled?

The textbook answer is that funders are purely passive investors and do not control anything about the cases they fund. In reality, many funders exert control over aspects of their cases and I have seen some funders act as if they were the client. Our approach is to spend a lot of time making sure we have backed the right claims and the right lawyers so we do not have to be a Monday morning quarterback. In 80% of our cases, we are just providing money as a purely passive investor and therefore we do not have any control and little influence. Maybe we are asked to make recommendations for expert witnesses or counsel and we will, but we never say, "If you want our money, you have to do this." However, we actively manage about 20% of our cases either because we are buying a claim, judgment or award for our own portfolio, or a claimant or their lawyers have asked us to get involved because, for example, they got an award and are trying to enforce it and do not have the requisite money and/or expertise to do it. In such cases, we are not acting as lawyers or investigators, but we have a good perspective on how things should be run and so we can best instruct counsel and investigators in those cases.

Your use of AI is interesting. Is that something that's common in litigation funding?

Not that I am aware of. Being from Boston, with a father who worked in high technology and with venture capital, I was always one of those kids who loved technology. About seven years ago, I started to fund a side business to build a predictive engine for litigation. I was overconfident that it could get done for a reasonable price and in a reasonable period of time and I was primarily focused on building Delta. After spending a lot of money and time, it did not get accomplished so I shelved it for a few years but last year we dusted it off because recent advancements in machine learning and AI drove the prices way down. I am now optimistic that we will have the first fully integrated AI engine in the industry by the end of this year.

If you ask most litigators, I think they will tell you that there are too many variables for a machine to replicate their thought process. In my opinion, it is more a question of spending the requisite amount of time and money to do it and that's what we eventually did. We took our collective knowledge about underwriting cases, memorialized it and embodied it in a set of algorithms. Now we are on track to finish work by Autumn and then beta test the engine against past cases and data so that we can launch the system in January 2021 and run it in parallel with our existing manual system until we are confident that the two produce similar outcomes.

As there is a lack of talent in this industry, if Delta continues to grow as it has then we will need smart, well-trained undergraduates with the right AI system doing up to 50% of the diligence work currently being done by highly-trained, very expensive lawyers if we want to run the business lean and maintain investment discipline – which of course we do. In my opinion, there is enough information available for certain types of cases that you can use algorithms for a predictive engine and that is what we are trying to accomplish with our platform.

Sounds a little like clients are disaggregating their work, taking some of the lower end work and are finding other ways, like using AI, to do it.

It's more about cost-effective, efficient scaling of our business, consistency of analysis and pricing, and comprehensive data tracking. It will be a tool to help us make better and more consistent decisions. That is what I am always focused on: how to lower our transaction costs and maintain investment discipline. Lawyers, investigators and investment professionals are expensive and our payroll is by far our largest expense. Therefore, I am constantly evaluating ways for Delta to work more cost-effectively and to make better decisions.

Published .