When Chicago investment firm Gerchen Keller Capital launched in 2013, it carved out an unusual and controversial niche — bankrolling multimillion-dollar commercial lawsuits in return for a share of any judgment or settlement.
It was a gamble that paid off big for Gerchen Keller, now a major player in the growing field of litigation finance, and its three 30-something principals.
Gerchen Keller was acquired last month by its rival, London-based Burford Capital, for $160 million, forming a litigation finance behemoth with a combined $1.2 billion invested in active commercial lawsuits.
“In hindsight, our timing was perfect,” said Travis Lenkner, 37, a Gerchen Keller managing director who will hold the same position at Burford. “That was a little less obvious at the time.”
Nearly nonexistent in the U.S. a decade ago, litigation finance has turned contingency fees — once the exclusive province of personal injury lawyers — into an institutional investment platform. Funders develop portfolios of cases based on their likelihood of success, and pay off investors with a percentage of any proceeds. Law firms and businesses reduce the risk of costly litigation by taking on a financial partner.
The deal may signify a coming of age for the litigation financing industry, according to Maya Steinitz, a professor at the University of Iowa College of Law and a litigation finance expert. “It shows growth and normalization of an industry that was very controversial a few years ago and has really become mainstream,” Steinitz said.
Among its current cases, Gerchen Keller committed nearly $50 million for a U.K. class-action suit filed in September against MasterCard over high fees charged consumers. The suit seeks more than $17 billion in what is being billed as the largest damages claim in British history.
Gerchen Keller manages litigation funds for institutional investors such as state public pensions, university endowments and private foundations.
“We looked like a private equity fund in the sense of raising capital from third parties and then managing that capital as an investment adviser,” Lenkner said.
The firm launched nearly four years ago with $100 million in capital commitments, and expertise that bridged the gap between finance and law, according to Lenkner, a former U.S. Supreme Court law clerk who previously served as a senior counsel with Chicago-based Boeing.
It has grown into a 20-person Chicago office comprised mostly of lawyers and finance professionals, who vet the risk and reward of prospective cases. The firm has invested in more than 90 cases since its inception, a “very small, single-digit percentage of the number of opportunities we’ve considered,” Lenkner said.
Adam Gerchen, a former hedge fund manager at Chicago-based Alyeska Investment Group, and Ashley Keller, a former partner at Chicago law firm Bartlit Beck, co-founded Gerchen Keller with Lenkner. All three will continue in Chicago-based executive roles post-merger.
Gerchen Keller was projected to generate an estimated $15.4 million in income and an operating profit of $9.1 million in 2016.
Burford, publicly traded on London’s AIM exchange, reported $103 million in income and a $77.2 million operating profit in 2015, according to financial statements.
While litigation finance operated “in the shadows” for decades, Steinitz traces the “global big bang” of the industry back to 2000, when Australia changed its laws to enable third-party financing of class-action suits, followed by the U.K. in 2006.
In the U.S., third-party litigation financing is legal in some states but not in others, Steinitz said. In addition, the practice has raised ethical concerns within the legal profession.
“It places lawyers in a conflict of interest, because they have their client, who they’re supposed to take direction from, but there’s this other third party that’s actually paying their bills,” Steinitz said.
The industry was imported to the U.S. in the wake of the Great Recession, as law firms and clients sought alternative litigation financing options, Steinitz said.
Critics remain, however, such as Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, who said in a recent article in British magazine Financier Worldwide that third-party litigation funding may lead to the filing of speculative lawsuits, prolong cases and frustrate settlements.
It is an argument Lenkner rejects. “Our underwriting function ultimately reduces the volume of litigation out there, because we certainly are not in the business of funding frivolous litigation or litigation we don’t think will be successful,” he said.
Despite the firm’s acumen and profitable track record, Lenkner said Gerchen Keller has bet on its share of losing cases.
“We’ve lost,” he said. “If we never lost, we wouldn’t be taking enough risk.”
Twitter @RobertChannick
