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AIR Asset Management on the Nuances of Legal Financing: What Investors Should Know

In a time when excess volatility plagues the stock market and uncertainty looms large, more investors are looking for alternative investment avenues. One of these is litigation finance, a process where an investor or investment firm offers upfront funding to a law firm or lawsuit in exchange for a portion of the proceeds from any verdict or settlement. One of the firms providing this opportunity is AIR Asset Management.

During his tenure, CEO Richard Beleutz has gained valuable insight into the process. Many investors are drawn toward legal financing and other non-correlated (meaning not affected by stock market fluctuations) assets because they offer high returns, considering how low their risks are.

Firms like AIR are increasingly focusing on these “alternative” assets to meet demand. “We have branched out into esoteric asset classes like law firm financing,” Beleutz says. “So when investors are interested in investments with an asymmetric risk-return profile, they know to think of AIR.”

AIR’s Unique Strategy: Law Firm Lending

Unlike traditional litigation financing, which involves funding individual cases, AIR Asset Management takes an innovative approach by providing loans to entire law firms. This method, as explained by Joe Siprut, CEO and CIO of Kerberos Capital Management, AIR’s sub-advisor on legal lending, involves offering capital solutions to law firms that operate on a contingency fee model.

“The law firms we partner with take large amounts of cases on contingency, leading to episodic and lumpy cash flow without a strong base of recurring revenues,” Siprut explains. “We specialize in providing capital solutions to these firms, managing their cash flow, and enabling them to scale their platforms. By doing so, we get a complexity premium that is disproportionate to the actual risk being taken because you have to be a specialist to underwrite that type of collateral.”

This approach sets AIR apart from traditional litigation finance strategies. Instead of financing a single piece of litigation, AIR provides credit products to law firms, cross-collateralizing on the firm’s entire portfolio of cases. This diversification across potentially hundreds of cases reduces the risk associated with any single case and provides a more stable and predictable return profile.

Performance and Risk Management

Legal financing might sound fairly straightforward. However, if investors want to maximize their chances of securing a return, a thorough due diligence process is essential. “We work very hard to be able to deliver attractive risk-adjusted returns,” says Beleutz.

Since its inception, AIR’s strategy has delivered double-digit annualized net returns. According to Beleutz, success can be attributed to underwriting discipline and maintaining a strong position in the marketplace to secure the best deals. “Good deal flow, disciplined underwriting, and effective loan servicing are key to our success,” he reports.

By focusing on law firm lending as the core of our strategy, AIR can offer investors a strategy that is not only uncorrelated but potentially inversely correlated to traditional equities. When the macroeconomic environment is adverse, litigation tends to increase, driving demand for litigation finance and enhancing the performance of these investments.

Future Outlook

Looking ahead, AIR Asset Management believes the future for law firm lending and litigation finance is bright. The caliber of counterparties continues to improve, with new law firms increasingly integrating litigation finance into their business models. This development opens up new structural opportunities and allows AIR to pursue even better risk-adjusted returns.

AIR Asset Management’s innovative approach to legal financing, through law firm lending, offers investors a unique opportunity to diversify their portfolios with a strategy that provides risk-adjusted returns and low correlation to traditional markets. By leveraging their expertise and maintaining ethical standards, AIR continues to enhance value for their investors.

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