Litigation Finance with Joe Siprut | CEO Kerberos

Joe Siprut

CEO Kerberos Capital Management

Susan Barfield (00:06):
Hello everyone. Thank you for joining another Case Works stream. We are joined today by Joe Siprut who is the CEO of Kerberos Capital Management to talk all things litigation finance. Joe, I’m super excited to have you on our stream today.

Joe Siprut (00:21):
Thank you very much. Glad to be here.

Susan Barfield (00:23):
Yeah. The more I’ve gotten to know you, read about you, listen to podcasts that you’ve been on, the more I’ve really grown to admire you. And just listening to some of the podcasts and hearing more about your background, the journey of your becoming an entrepreneur and your approach of being in a courtroom as a lawyer, and even back when you talked about in middle school being a wrestler. And the life lessons that you’ve learned and the things that stood out to me where you discussed just being authentic, honest, being an advocate, and really just simply having the confidence to be yourself. And those are some of the tenants that have been a catalyst to your success.

Joe Siprut (01:18):
Thank you. Yeah, no, I really appreciate the kind words and yeah, I think there’s a theme there. The wrestling background is a great background, I think, for anyone who is interested in really testing themselves and kind of forging character through fire, if you will. And it helped a lot of times in the office late at night as a younger associate attorney, the physical stamina actually required to keep going at three o’clock in the morning is really a real thing. And I like to think that the wrestling background prepared me for that. I was able to endure somehow, so it worked out.

Susan Barfield (01:59):
Yeah. Well, tell us a little bit prior to founding Kerberos, you were a nationally recognized litigating attorney. How did this experience lead you to Kerberos management?

Joe Siprut (02:10):
Yeah, there’s definitely connection. I mean, during my time as a plaintiff side attorney, actually prior to being a plaintiff side attorney, I was a corporate litigator. And then I started the law firm after about eight or nine years of practicing law, which focused on plaintiff side stuff. And during the years that I ran the firm as the founder and managing partner and then as a practicing attorney at the firm, it was all in on the plaintiff side bar. And the kinds of cases that we brought exposed me to a lot of interesting entrepreneurial areas, gave me the chance to work with a lot of great lawyers, and really work on some interesting, cutting edge cases. It also gave me firsthand familiarity of the challenges that I think a lot of plaintiff side lawyers face with scaling their platforms, given the fact that when you work on contingency by and large, and you have huge inventories of cases that have very lumpy, unpredictable and episodic cashflow. Managing that is one of the hardest parts of the game and a limitation on people’s ability to scale their platforms.

Joe Siprut (03:15):
So the ability of lawyers to now access capital in ways that are more efficient and workable is a great thing, because ultimately, it means that more cases can be brought and more access to justice is basically created in that way. So all of that is simply to say that as a plaintiff side lawyer with exposure to those types of situations, there were many, many opportunities where I saw a void that litigation financing could have filled, or perhaps I experienced firsthand some litigation financing transactions. I saw things I liked, saw some things I didn’t like, and so I began to develop a vision for how to build a mousetrap that I thought could be pretty effective and that could be really filling a niche in the marketplace.

Joe Siprut (04:04):
And that’s really how Kerberos started. When I started the company, I was still a practicing lawyer and the plan wasn’t necessarily to leave the practice of law, but Kerberos very, very quickly sort of took off. And we grew significantly, we put a ton of capital out, we raised significant capital, then did another round of fundraising recently. And so, we’ve just been too busy to think about anything else, and I’ve largely left the practice of law as a result.

Susan Barfield (04:33):
And you touched on this, but so when you were a practicing attorney, did you leverage litigation financing groups?

Joe Siprut (04:41):
Yeah. Over the years, I did all sorts of different transactions with different groups, many of which don’t even exist anymore, because the market has changed a lot in the last 10 years. But I tried all sorts of different things at various points, sometimes in partnership with other firms or sometimes not, sometimes on specific cases, sometimes not. So it gave me a broad sort of flavor for what the sensitivities were and how the marketplace was beginning to function at that time. Although that was years ago, and as people in the litigation finance base know, the market has evolved tremendously in a very short time. Even in the last four years since Kerberos has really been operating, the amount of evolution and progression that has occurred in the litigation finance asset class is really quite fascinating. It’s amazing to see it evolve and mature into a real asset class, which it was not five years ago.

Susan Barfield (05:36):
Yeah, no. It’s certainly evolved even, I started Case Works in 2015 and there wasn’t as many litigation finance groups as there are now, but how does Kerberos really support law firms?

Joe Siprut (05:52):
Yeah. So our sort of bread and butter is providing capital solutions to the law firms themselves. So generally in litigation finance, there are a couple of different broad models or strategies. One is case specific equity financing, providing X dollars of equity capital for a particular case tied to the outcome of that case. That’s generally not what Kerberos does. What we prefer to do is work with law firms, and we will basically provide capital solutions to the law firms. Generally, that involves collateralizing their portfolio and giving them the best cost of capital that we can based on the fact that our risk is less if we’re crossed across the whole portfolio, as opposed to just betting on a specific case outcome. So that’s basically our sweet spot is firms that have very large, diverse pools of collateral that we can underwrite and sort of hedge our bets against. And that allows us to be more aggressive on the pricing.

Joe Siprut (06:51):
And that also allows us to be pretty creative. One of the gratifying parts of the job is working with firms who have been frustrated because they can’t quite find the solution they need because they need additional capital to acquire more collateral. They may need some sort of liquidity runway. They may need to bring in a lateral book of business or whatever it may be. There might be some various liens out there that are causing problems and they can’t quite put the pieces together. So for us to come in and basically look at it and say, “Okay, here’s how we need to approach this to find a path to yes.” I think we’re really good at that. And that’s the most fun part of the job for us is being creative and structuring things that solve problems for people. And that’s, I think, the brand that we’ve established and why we get a lot of our business is because rather than being deterred by that stuff, we like it. And it allows us to do what we do best, so that’s where I think we can really be of value to law firms.

Susan Barfield (07:50):
Yeah, absolutely. So let’s say I was an attorney sitting here listening to the stream and I’m like, “I wonder if I’m a good fit for Kerberos.” My portfolio of cases. So how would you describe an ideal client and a good partnership with the firm?

Joe Siprut (08:06):
Yeah, so I think we, generally speaking, mass torts work really well for what we do, because if you are a firm that traffics and mass torts, that probably means that you don’t have literally one individual case file. It probably means you have a thousand and you may have 10,000. And so that already is starting to sound like a very good Kerberos type transaction, because there’s a lot of collateral, it’s diverse, it’s voluminous, et cetera. So mass torts work really well. The other reason why mass torts work well is because the information is out there in terms of what’s happening on any given day of the week in the world of whatever. Roundup, Hernia Mesh, IBC, whatever it is, we have a tremendous amount of visibility on that stuff, which helps us with the underwriting and minimizes our information risk. To a lesser extent, but also to a significant extent, personal injury cases work really well.

Joe Siprut (09:01):
But what would be ideal is a docket of many, many personal injury cases, as opposed to a very small firm that has 10, because at that level, it starts to be a little bit more binary. And you’re taking equity risk and there are other shops out there that are probably better choices for that kind of transaction. And they will charge you equity cost of capital, but they will be seeking equity returns. Where we specialize is in the stuff where it’s probably lower risk and it’ll cost the borrower or the law firm much less. So that’s perhaps a long answer to your question. In general, I would just say mass torts, class actions, PI, lots of collateral, lots of diversity, et cetera. That works really well versus the very, very small handful of cases where there’s binary risk.

Susan Barfield (09:52):
Yeah, yeah. That makes a lot of sense. What about your philosophy and thought on torts that… Let’s say a firm comes to you and says, “I want to go invest in CPAP.” It’s a newer tort. How do you approach that?

Joe Siprut (10:05):
Yeah. So part of the answer depends on what else they may have. So for example, if it’s a firm, and this is not uncommon by the way, that a firm may have… Let’s just make up numbers and say 5,000 individual files spread across, let’s say, 10 mass torts that we know and love. And then the 11th, if you will, is this new, more speculative, less developed mass tort where it hasn’t even been MDLed yet, let alone daubert hearings and so on and so forth. And so it may well be that the firm says, “By the way, we also have this,” and then our ability to value that could be somewhat limited and we may value it at zero, theoretically. Or to put it a different way, it may be that we could value it at zero and still do the transaction the law firm wants to do just based on the strength and the valuations from the other pieces of collateral.

Joe Siprut (10:58):
So we would try to basically anchor our underwriting with the stuff that is more seasoned and more late stage which, again, is also the way to get them the best cost of capital. Now, on the other hand, let’s imagine it was a firm that had only the sort of speculative early stage mass tort. And so basically, the firm’s business model was being a pioneer and there’s nothing wrong with that, by the way. That’s a good way to make a lot of money. There’s also more risk attached to that. And so from a funder perspective, I think you probably have to view that as being almost tantamount to equity risk, and then you’re probably going to need to price it accordingly to get proper risk adjusted returns. That isn’t necessarily our specialty, but it’s something that is also doable. It’s just not historically what we’ve done the most of, but we are looking at a couple transactions like that right now. And the name of the game is just getting as smart as we can on the tort at issue, and then making sure that it’s priced accordingly.

Susan Barfield (11:57):
Right. Do you find that attorneys typically work directly with Kerberos or do they have a broker involved? And what are the pros and cons of either of those?

Joe Siprut (12:09):
Yeah. The short answer is both. We’ve been around now for about four years, and as we’ve done more and more transactions and been more active, the word gets out. And so every day, there’s more phone calls and more inbound emails unsolicited from attorneys looking to talk, which is great. Historically, a lot of our business has come through broker partners, which we really like. And we really, really value broker relationships or consultant relationships. We think that there’s significant value added by consultants and brokers in the space for a lot of different reasons, but those relationships are very important to us. And we look at it as a really important part of our origination platform. If you want, I can give you my view of the sort of benefits to a firm.

Susan Barfield (13:04):

Joe Siprut (13:05):
Or the pros and cons, perhaps, of both sides. So the obvious con, if you’re a law firm, I suppose, is that people don’t work for free. And so if you introduce an intermediary into the mix, that could potentially increase your cost of capital. But it’s similar to, I think, using a real estate broker when you’re selling a house. Sure, you could sell the house by yourself if you wanted to, but why would you want to? Why would you not want to pay a broker who specializes in this stuff to do it the right way? And very few people that I know of who have ever sold a house and hired a broker have ever said, “Darn, I should have just done it myself and done all those showings myself in the last six months.” Whatever.

Joe Siprut (13:47):
So I think that it’s probably a fair analogy for this stuff. The role of the brokers can be very significant. Now, I will say there’s a lot of people out there who sense that there’s money to be made in this space. And they have some landing page on the internet trying to get cases. They’re not necessarily adding a lot of value, those types, and they’re out there. I’m talking about the people who are really in the space who are really trusted partners to both law firms and to funders like Kerberos and who can really add value. So the specific ways in which I think that people add value are number one, helping the firm organize and present all of the material that the brokers know a funder is going to need to see.

Joe Siprut (14:32):
And most law firms would hear that and say, “Oh, obviously I know that. We keep all of our records in perfect working order and we’ll just send them our cases.” Well, they think that, but they’re probably wrong. The amount of stuff that we need to see and the type of information we need to see and the way in which we need to see it is not necessarily something that most law firms can just press a button and do. And probably, they’re busy practicing law and trying cases before juries understandably. So they don’t necessarily have tons of extra time to fiddle around with Excel spreadsheets or whatever it is. So it’s understandable that information doesn’t exist in the vacuum, but it’s very, very important that we get the master spreadsheet that has the inventory, the cases, the fee splits, the percentages, the sell side valuations, the damages model, et cetera.

Joe Siprut (15:24):
If we have that, it inspires a lot of confidence and it makes our job a lot easier. And similarly, if we’re getting into the operating picture of the firm, understanding expenses and things like that is important, depending on what the nature of the transaction is. And if the firms don’t have the ability to produce that information, either initially or upon request, not only is it not helpful, but it also causes some concern that they don’t have the back office functionality to actually do this stuff. And so then we start thinking, “Oh geez, this loan’s going to be a hassle,” because every time we need something, we’re going to have to chase after it. So a broker who can instill some discipline if it’s lacking and really tighten up things before we even get started and then everything is ready to go, that’s really, really helpful for us. And I think it really adds tremendous value for the law firms.

Susan Barfield (16:22):
Yeah. One of the things I was going to ask you is what are the steps that a law firm takes when approaching the funding conversation? And I think you touched on a little bit of that is you’ve got to get all your ducks in a row. You’ve got to get all the documents organized and be able to present the data to the funder that indicates and highlights each case, so that you can put some kind of value onto it. And then organizing the documents so that someone can come in and substantiate what they’re indicating to you that they have and what their true portfolio is.

Joe Siprut (16:56):
Yes, that’s entirely correct. It’s really important. There’s no way that we can complete the underwriting without engaging in that exercise, but if we can have it done, at least facially done, before we even jump in, that does make our job a lot easier and it inspires confidence. Sometimes, firms will have case lists, but they won’t necessarily have all of the information plotted out with the fee splits and the sell side valuations. From my experience, I would say that each and every time a firm has been forced to kind of go through the paces because they didn’t have that stuff, what any of those firms would say after the fact is, “Boy, I’m glad that I had an excuse to do that, because I’ve always sort of vaguely known that I probably should do that for our own purposes. And I never really had the motivation because if you don’t have a deadline, something else always gets in the way.”

Susan Barfield (17:49):

Joe Siprut (17:51):
Something else always comes forward. And so, having now been forced to do it for our process, they think, “Gee, this is great, and I can run my business more effectively.” That’s one of the ways, incidentally, in which I think we do add some value is that we encourage the firms to think about their business a little bit differently and a little bit more as an entrepreneur and business owner. You might say that there’s a little bit of a private equity type mentality there, and not that we want to be interfering in the ways that you might think of a private equity company as doing. I just mean on a very general level, and I was as guilty of this as anyone when I practiced, lawyers do spend so much time keeping up with the demands of the cases, taking depositions, writing letters threatening sanctions, or responding to letters threatening sanctions, plaintiff’s bar, that’s on a daily basis, arguing cases before juries.

Joe Siprut (18:44):
You probably are not carving out enough time to really think about your business model and think about, “Okay, am I going like this? Or am I going like this? And if so, how do I tweak a few things to kind of correct that?” When you scale that over time, it makes a huge difference. So one of the benefits of working with a funder whose job is to think about these issues is that we will sort of force you to have that dialogue with us. And then having had it, the firm ends up being much better off and will benefit for years. And so that’s all part of the process, both at the time of underwriting and then going forward.

Susan Barfield (19:24):
Yeah. It’s kind of like you’re forcing the firms or encouraging the firms to track and measure the metrics from an operational standpoint and just their business, and that which gets tracked and measured improves. Like you said, I’m sure after the pain of going through and getting everything organized, it’s a great exercise to do for sure. What do you think can be done to minimize rejection for firms that reach out to you? Or what are the top reasons why you do have to reject firms?

Joe Siprut (20:01):
Yeah, so I would say one of the things that can sometimes be problematic is when we have completely inflated sell side valuations. Now, on the one hand, we do our own work and we come to our own buy side valuations independently, but we do ask for the sell side valuations, because we want to understand how the borrower or the applicant thinks. And we want to understand if there’s going to be a disconnect between their view on the cases and our view on the cases. So the valuations, like I said, we do our own workup, but the fact that we might be in different galaxies on certain stuff could be a concern, because it means there’s going to be constant disconnects when we are living with the loan as well so we do like to kind of feel that out a little bit. But also in fairness to the law firm, if we’re understanding a case wrong, we want to know that someone thinks that we’re wrong and we want to have a conversation, help us understand what we’re getting wrong about our valuation on this case.

Joe Siprut (21:05):
What do you know that we don’t know? Maybe we’re wrong. So that’s one of the reasons why we like to know the sell side. With the finances, again, law firms don’t always do the best having the back office functionality, but I think that the investment in the back office is really important, because it makes your life so much easier as the law firm principle if you can figure out a way to build the machine. And it does inspire a lot of confidence with a funder that they have functionality and they have the ability to provide reporting. And you know that the numbers are hopefully real and not just made up in a Word document by a lawyer one minute before it was supposed to be sent to you. So I think all of that stuff inspires confidence, but ultimately what really matters is just whether there’s coverage for the loan and whether the business thesis is valid.

Joe Siprut (21:59):
And so sometimes what happens is that we like the firm a lot and we like their business model, but there might be some debt in the capital structure already. And there’s just not enough coverage for us to both take out the debt and then provide them with the runway that they need. And so what maybe sometimes happens is that over time, they can grow their inventory a little bit more organically, and then we can take another run at it. Or who knows what? There’s always reasons why we might get to no, but sometimes a no becomes a yes with the passage of time and with developments having occurred. The other thing I will say is that from Kerberos’ perspective, when we get a new deal, one of the things that’s very important to us is that we try to get to a no as soon as possible.

Joe Siprut (22:45):
I’d rather always be getting to a yes, but in the situations when it’s going to be a no, I think the worst thing you can do is string the firm along for 40 days or whatever or more. And then you’re like, “Nah, I just don’t think that we’re going to get there.” So what we do is right away when something new comes in, we immediately dive in and we try to look at the case portfolio to understand facially, on a surface level at least, what does the coverage appear to be? That’s why the point about having that stuff kind of already ready to go is important, because it helps us respond immediately. So if we can look at what the borrower’s spreadsheet appears to be and conclude that, yeah, if the valuations pan out and if the diligence pans out, this appears to be right within our buy box.

Joe Siprut (23:31):
So, this is a green light. We will communicate that message as soon as possible and hopefully get to a term sheet as soon as possible so that all parties are on the same planet commercially before we waste more time. Conversely, if we can just tell that there’s no way, even if we accept everything he’s telling us at face value, it still doesn’t fit the buy box, or there’s not enough coverage. You can hear that message from us in 24 or 48 hours. We’re not going to make you wait four months to hear that. And I think that’s really important, because the worst thing that funders do to people is drag things out. And then, half the time they don’t respond to emails or whatever, and you don’t even know if the guy even works there anymore. And then after three months, you get an email saying, “Sorry, we’re not going to be able to get there.” We never want to be doing that because it puts them in a bad spot.

Susan Barfield (24:23):
Sure. What is the turnaround time from, let’s say you have a good indication that you are going to fund a law firm, from when they submit all the documentation to going through the diligence, looking at the collateral to actually getting funded? What is your average turnaround time?

Joe Siprut (24:41):
Yeah. So I would say that the goal for us is from the time that we get the first communication about the transaction, leading up to the time that we are wiring money to the law firm, it should be 30 days.

Susan Barfield (24:56):
Wow. That’s awesome.

Joe Siprut (24:57):
The only caveat there is that timeline assumes that we have all the information in order from the firm. So if I have to ask for something and then wait 10 days to get a response, well, then 30 becomes 40. But in a perfect world where everything is ready to go and we have time to just do our work, do the term sheet, go through diligence, get it approved at the IC level, work on the transaction docs, and then call capital and fund, et cetera, that process ought to be 30 days. We’ve even done it in less. I will say it’s not easily accomplished. That is a commitment of will to move that quickly, particularly because we are thorough. We’re not cutting corners. We’re doing the work, and it is a significant task, but that’s what we do. That’s what we view our brand as being is we’re the people who are willing to do that and who will commit to that. And that’s what we hold ourselves to.

Susan Barfield (25:54):
Yeah, no, that’s awesome. 30 days is great. I know that Kerberos started out focused on law firms and you mentioned mass tort and personal injury, and I believe you said some commercial cases, and what other types of businesses, if any, do you guys work with?

Joe Siprut (26:10):
Yeah. So we’re expanding into a multi-strategy type firm. Litigation finances, the flagship strategy, but we’ve built out a private credit asset management platform, which can service different types of strategies that are complimentary or incremental step outs from litigation finance. So a lot of what we’re doing is creative structuring, special situations type stuff, direct lending, all of which is stuff that people do in contexts other than just litigation finance. So there are other asset classes or industries that we’re working on taking our platform to and doing what we do now, except with other people as well. We’re also working on some transactions with sovereign entities, states, municipalities, tribes, and so on and so forth, which is sort of the exception to the general rule about only transacting directly with law firms.

Joe Siprut (27:10):
So we will do some trades with those large sovereign type counterparties. And there’s a lot of fascinating opportunities out there to be nimble and creative. We’ll see how it continues to evolve in the next five years, but our flagship, for sure, is transacting directly with law firms. It’s very gratifying. Every now and then, we’ll have a transaction where someone might be in a tight spot or there might be some timing pressure where someone really needs to get a deal done. A law firm, I mean. And we’re able to do what they need done in a timeframe that they thought might have been impossible, but it’s what they asked for. And we got it done, and every now and then, someone will say something like, “I just want to thank you and you guys really saved me,” or “I’m really grateful.” And it’s nice to hear. I know we’re not curing cancer or anything like that, but it is really nice to hear when we can provide help to someone and they’re grateful for it. And so, we like doing that.

Susan Barfield (28:16):
Yeah. You talked about transactions. Any that really stood out to you that you have fond memories of?

Joe Siprut (28:22):
Well, it’s like being asked to choose your favorite child. They’re all your favorites. So I don’t mean to deflect, but I would just say that the ones that are most memorable are the ones where there was some crisis we were solving or some problem we were solving and or that allowed us a chance to really be creative and put a lot of complicated pieces of the puzzle together in a way that people thought, “Wow, I didn’t think that would be possible, but yeah, that works.” And we got it done.

Susan Barfield (28:51):
Yeah. Case Work sent out an email this week about the top funding groups and it’s not that Joe, we really like you, it’s that we’ve been able to work together, and so partnerships that Case Works and some of these groups have had and really stood out to us. What do you think is really unique about Kerberos as compared to some other groups that are in the industry?

Joe Siprut (29:15):
Yeah, I probably touched on some of the points. I think that it’s number one, the willingness to be commercial in the ways that matter most to people. So having been on the other side of these things, meaning as a lawyer running a law firm who’s trying to manage docketed cases and deal with his people and so forth, I understand all too well the pressure and the sensitivities there. And so that’s really how our brand evolved and our philosophy evolved is that we want to be the firm that you can call in a situation like that. And we get it and we’ll try to do everything we can.

Joe Siprut (29:49):
We can’t do the impossible, and we can’t underwrite every loan that we see as much as we’d like to, but we will certainly try. And like I said, if it’s going to be a no, we won’t tell you that four months later. We’ll tell you that two days later, because we know that if we can’t do it, you’re going to need to call someone else right away. And there’s no time to waste. So I do think that it’s the timing issue and the willingness to be commercial and creative to find solutions to things and to try to find a path to yes. I’d like to think that’s what people regard us as.

Susan Barfield (30:23):
Yeah. Yeah, absolutely. And I’ve certainly heard that as well from clients that we’ve worked with. We have a lot of attorneys that we’re working with and that listen to the streams. Who is the best person at your group to reach out to? Should someone be listening, and say, “Man, I need some help. Seems like I might be an ideal client for Kerberos.” How can they get ahold of your team?

Joe Siprut (30:48):
Sure. Yeah. They can email me directly, and then I’ll forward the inbound to the rest of our team. And then we’ll immediately reach out to the person and talk about what needs to be done.

Susan Barfield (30:58):
Awesome. Well, I will include your email so people can email you directly. Joe, it’s been such a pleasure to connect with you today, learn a little bit more about Kerberos, your philosophy as it relates to litigation finance, and I’ve really enjoyed working with you. And like I said, getting to know you better. So thanks so much for taking time to connect with Case Works and all our viewers and talk a little bit about litigation finance.

Joe Siprut (31:23):
Thanks. I really appreciate the chance to come out here and chat and thank you again for your good work. We really think that Case Works provides a valuable service and resource to these firms, so it’s a very good pairing. So thank you.

Susan Barfield (31:34):
Yep. It takes a team for sure to get all these cases worked up.

Joe Siprut (31:37):

Susan Barfield (31:38):
Okay. Thank you, Joe.

Joe Siprut (31:39):
Thank you.