Susan B. (0:00:05) – Hello, everyone. Welcome to another episode of the Leverage Report. Really excited to have Ryan Steven with Pine Valley Capital Partners here with me today, especially since the Litfin conference was this week. Ryan. And so I’m interested. Maybe just give a quick background about yourself and about Pine Valley Capital Partners, and then we’ll dive into questions about the Litfin conference.
Ryan S (0:00:27) – Awesome. Well, thank you, Susan, for having me on. Yeah. So, Pine Valley, we are a litigation funder. We are a credit focused approach to litigation funding. We don’t do any defense side work. We do anything in the law firm lending space exclusively to the plaintiffs bar. We do some other legal asset work as well in terms of non lawyers who hold claims but not consumers. So that’s generally what we do. It’s a credit focus approach. So we tend to be on the later stage of mass action litigation, whether mass torts, class actions, mass environmental, tend to lend to leadership firms in the mass action space. And, yeah, I mean, really, at the end of the day, we are focused on legal assets being the base of what we lend to, and we’re oftentimes kind of the senior lender for large law firms, and that’s what we do. We’re based here in Austin, Texas.
Susan B. (0:01:14) – Awesome.
Ryan S (0:01:15) – I was going to say. Yeah, I was going to lead into Litfincon, so I’ll let you do it.
Susan B. (0:01:18) – Yeah. Well, I was going to say, since the Litfin conference was this week, tell us a little bit about what was the buzz, what was the vibe at the conference and what were the things that most people were talking about.
Ryan S (0:01:28) – Sure. So, look, I think the conference was fantastic. The beautiful spot, although you say that about Houston, and a lot of people raise their eyebrows. I’m from Houston. The hotel itself was beautiful. I always think the city’s beautiful, but I think it was well attended. There were a lot of people involved in the space from the funding side there. I think a little bit lighter on the firm side, potentially, but of course, a lot of great panelists from some top law firms and some interesting discussion there. I would say a lot of excitement. There was some stuff, a lot of concitement and a little bit of concern. So excitement as it relates to some of the momentum we’re seeing in various spots, I mean, as may approaches, especially in the mass tort world, there is a lot of deadlines approaching. Think about the Boy Scouts filings that are due. There is class action world. There’s been a lot of momentum in some spots. There’s been quite a few large financings that have occurred over the last twelve months. And I think many of those funders were there. And then there’s also some regulation that’s out there that continues to bounce around in Illinois and Florida, House Oversight committee, plenty of those places. So a lot of. What does this mean? How does this impact? Kind of question kind of tended to be in the air.
Susan B. (0:02:31) – Okay. Well, I know, I’m sure a lot of attorneys approached you at the conference, had questions. What were some of those questions that they were asking around? Kind of the hot topics within the litigation space?
Ryan S (0:02:43) – I think primarily the discussions I had to that end were around some of these regulation questions. And so we’ll get to the panel I was on, I’m sure, here in a minute. But one of the pieces that we had discussed is about disclosure requirements and kind of what is a common sense approach to that? What would I be for or against? And one of the things that I mentioned in that is that on the law firm side, control from a lender perspective is if you’re sensing that you are dealing with someone that ultimately wants some degree of control over your settlement time frames, your settlement values, your interactions with your client, that that is kind of a sacred rights issue that really, from my perspective, no lender should really be involved. And so the questions really tend to center around that, which, how does this look in various forms? It’s a tough question to answer because, of course, when you’re lending to a value, there’s some set amount that now needs to be cleared. And that’s kind of the argument to the other side is, well, you set a value. I mean, that’s kind of some implicit control. I think the points that we were asked about were more around how do you interact with firms, how are you able to maintain that kind of sacred attorney client privilege and making sure we’re still able to do what’s best for the clients as opposed to being somebody who is influential to the overall litigation. And when a settlement start, a mediation starts or there is some settlement conference, all of a sudden you’re the new guy sitting in the room and everybody’s eyebrows are raised. And that’s just not what we do. I think that most of the groups that we know that do this well in the space also are not involved in that capacity. But the political messaging certainly reflects otherwise. So I’m trying to sell some of that fear.
Susan B. (0:04:15) – Yeah. You mentioned the panel that you were on. Could you talk a little bit about, from a high level, the general takeaways from your discussion?
Ryan S (0:04:23) – Yeah. So we were on this, the great debate panel. It was a few of us on there. One very lively candidate in Lucian got sick, and so he was not able to be on the panel, which I was bummed about. But we had a rep from intel who is on their kind of IP defense side. And then another lawyer was up on the stage from kind of a large boutique firm that’s both on the plaintiff side doing contingent fee work. They do some defense work, they do some litigation finance underwriting as. So, you know, a mix of views. But really, the whole panel discussion was the pros and cons of litigation finance.
Susan B. (0:04:58) – Right.
Ryan S (0:04:58) – And it was supposed to be a bit of a debate as it relates to disclosures that were needed. Obviously, Ashok from Intel, who was on the panel, his general view is on an IP side. Right. And so a lot of the points that were brought are the same points that we continue to hear again and again on the messaging against litigation finance, which tend to come down to issues of control and how we’re approaching a resolution for a client with a financial intermediary potentially involved. And what degree of control does that financial intermediary have? As well as does litigation finance drive meritorious claims or not? Like, is there evidence to support that dollars, institutional dollars flowing into this space, increase the risk of frivolous litigation, clogged the court system, these types of things. I’ve obviously got a very clear stance on this, and this was not necessarily all panel consensus, as you might imagine, but the points that were raised around meritorious claims were pretty specific, in my opinion, where there is in the IP world, one specific piece of litigation, where national security being another piece of this, right? Is there frivolity, or are we taking some sort of controlling group’s influence on a way that either affects our national security or really emboldens some outside interest using our judicial system? And the points that were raised were really kind of one specific time when this might have happened, as opposed to the broad array of things. Now, one interesting thing I did here is that an IP, I think that 60% of the active litigation per ashoke in the US, as it relates to IP litigation, are basically shell companies that hold these patents. So they are set up to go litigate. And I do think that is an interesting take. I don’t know structurally why else you might need those things, right? Like if they’re shell companies for those holdings, so that there is other things involved or it’s just not my world. What I do know is the messaging I gave was litigation finance in the mass tort world is extremely necessary. And I think that one, as you think about meritorious claims. There is no logical reason why an investor whose responsibility is to make money would get involved in something that did not have a very high chance of success, at least from their standpoint. If the judicial system itself is designed to decide, you have two people who believe their claim is meritorious at the other person’s expense. Right. That’s why we go to court. There’s a gating item in sophisticated investors prior to that. Now, do we have the same views always that the law firm is going to have? Are we actually that sophisticated? Those are all questions that are up for debate. But there is a screening process and a deep diligence process and a lot of gates to get through as it relates to litigation finance. And I think that’s a decent first line of defense. I think the takeaway is, and I heard this also from the trends and mass torts panel, the takeaway is that the political messaging battle is being lost by litigation funders. If you think about what a plaintiff’s firm has in terms of resources to capitalize a five to eight year mass tort cycle, basically who’s being represented and who’s on the defense side, you’ve got myriad clients who could not pay a white shoe firm an hourly rate to go toe to toe with the defense firms hired by J. J. Or Bard or whoever. The US government. The individual by themselves cannot do that, obviously, in scale. A mass tort firm or a mass action firm, especially groups that are leading litigating shops, are having to eat the cost of their overhead, their expert costs, their filing costs, their claim acquisition costs, all the way through to represent these people, to find people to represent, take them all the way through the process and get out the back end. And that’s a long process and it’s miserable for cash flow. So what are their financing options? I mean, anybody listening knows this. The traditional commercial banking world through Dodd Frank is just not going to be your best option. You can go get some degree of line of credit, but you’re going to pg it. You’re the principal of the firm and you are not going to get near the value that another US business would get for something similar. And the reason is your cash flows are very bad. That’s going to put you in a bad regulatory bucket for the bank. And so concentration is going to make it where you can’t do anything there. Then you move through the capital structure and you have private credit, which is what you do have access to within private credit. The inflows to the space are limited because insurers who are a big limited partner of other private credit funds or other alternative investment strategies are also the defense in a lot of these cases and are not going to invest in this type of private credit world. Right. So it’s already a narrower field than others have. And then you get over into equity, public equity, private equity, whatever it looks like, the alternative business structure, you can’t take those dollars either. So very limited in what’s available and therefore also expensive. And you have a David and Goliath story where the David has to go to one small pot of capital to have a chance to go fight Goliath, who has access to every piece of that capital structure. Johnson. Johnson is one of the few AA credits left with all the commercial debt they could ask for, all the high yield, the cheapest public debt that there is, AA credit, they have access to it all the way through common equity. And so my point was, litigation funding is a little bit fungible. I mean, there are those of us who do it specifically in this very narrow credit structure. And then there is the common stockholders of Johnson and Johnson, who you can classify that however you want to. Like if I hold it in some vanguard account. Well, those dollars are ultimately funding those pharmaceutical R D products. They’re funding the distribution of those products. And so to the extent something is wrong there, they’re funding those errors or omissions. However it is all the way through. If you start walking through frivolity and meritorious, we go look at Texas two step and then maybe a third attempt to do so there. Those legal dollars are being financed by this system that is funding what’s ultimately, I think, been deemed now as wise to be frivolous. Right. I think the main takeaway was the messaging itself is off, and everybody, self included, has an obligation to try to right size that messaging, because at the moment, where lobby dollars are being spent are all on the big firm or the big defense side saying this is a problem and we need to know who’s involved here carrying some red herrings around national security, which we’ve seen zero evidence of. I’ve got my own questions as to that. We can talk more about that. But if there’s going to be disclosure I made on the panel, and I’ve heard in a couple of other different panels, was much like was said in Florida, you better be sure that this cuts both ways, because if you’re only looking on the plaintiff’s side, if you’re worried about the sovereign wealth fund of whoever involved, let’s go look at the capital structure throughout this defense firm. If you’re worried about outside influence, none of my LPs have any influence over my decision making. Who’s your largest common stockholder and what influence do they have? What’s their board position look like and what are their voting structures that we’re not aware of or we are aware of? We just better be ready to cut that both ways if that’s the route we’re going to go. And I think that what’s really happening is lobby dollars flowing in are basically winning the political messaging battle. And we need to do a better job of showing. Here’s how this is actually working.
Susan B. (0:12:00) – You mentioned earlier regulation of mass tort funding. And so I’m wondering what your thoughts are. What is the overall impact of the increased regulation? How will this affect the law firms who are looking to secure the capital?
Ryan S (0:12:14) – It’s hard to say, and I’m not an expert on this. I think the most likely kind of common sense approach, if we can have people who have reasonable voices that are being heard as part of these regulatory discussions, I think the most likely outcome is that we do have some degree of growing disclosure requirements. With that, I think control is going to be the biggest question. So general market, and this message tends to include every piece of litigation funding as if it’s all the same thing, when in reality, in the investment world anyways, it’s an asset class. And within this asset class, there are all manner of ways to play it on the commercial side, on the plaintiff side, on the consumer side, just wherever, as well as a wide array of risk and return which drive pricing, and then ultimately the type of structure. And sometimes that also drives the type of influence that a funder might be able to have. And so if you look at other consumer protection that exists in the United States, I think a lot of focus, like as you look at what the noise around litigation funding from three m or the 60 minutes piece from a year or so ago, a lot of that tends to center around consumer level financing. And I think that we have a lot of consumer protection law that is in place in the United States, and it’s in place for a reason. And there are firms that are doing that well that are providing a really good service to planets. There are also places that are taking advantage. And I would assume that’s a place where we have a well trodden path to say, here’s what consumer protection looks like in the United States. Then you get into more like the corporate lending. Right. And the stuff that I do. And I think the question there should be less about, if it’s a common sense approach, should be less about who and how is someone involved, because I think what defense wants is to have access to. This firm is facing a loan maturity. This firm, I was able to access this through discovery, and I can see where they hold this value, and now I have a leverage point. Those things are very bad as it relates to disclosure. It’s the same thing that the IP side is fighting about, saying, if you’re dragging us into litigation and you’re making us show our source code either even under a protective order, that is sacred information to us. It’s the same thing over here. And it’s just the other side of the coin that’s a leverage problem. It comes back to, is there equal access to justice? Which was another big thing. Does litigation funding drive better access to justice? Which, of course, I think the answer is yes. But within this, the disclosure piece really matters for how it’s being used. If there is really national security concerns around something, I think that in my world and in the finance side, we have to do know your customer anti money laundering type, digging into who’s investing with us. I think there can also be express questions asked in disclosures that don’t require the disclosure of things that matter, like terms or values or maturities or things that could be leveraged by a defense firm to say if these are some groups that might have an interest in this type of litigation that could impact us. Do you have a beneficial ownership group in your limited partnership? Do you have litigation financing? Yes or no? If you do have litigation financing, does the beneficial ownership group of the fund that owns this or whatever that needs to look like meet any of the following criteria? This specific thing that we have at risk for this deal and those types of questions, I’ve got no problem with. The issue is there’s been zero evidence that there’s been any true national security concern from any litigation finance, period. I mean, we’ve got all manner of places to have these concerns. I think those discussions are ongoing across various industries, but it hasn’t been here. To my mind right now, it’s a red herring. The best example anyone can give is China through TCL, coming after Samsung, a south korean company in the US courts. And looking at that as what if China did this here and then started to use our source code, our patents or whatever to imitate things that we’re doing in our economy? And I think that is just such a reach of an argument that it just comes back to that same political messaging battle.
Susan B. (0:16:06) – What are the torts that you are seeing the most interest and investment of capital in currently and any that are gaining momentum.
Ryan S (0:16:13) – So we’re a little weird at Pine Valley. We’re focused on a far more credit focused approach. Right. And so we tend to lend to bigger firms who have a big piece of settled collateral, want access to some cheaper capital, and oftentimes like a larger piece of capital for that. So the stuff that I am seeing right now is stuff that was hot and exciting a year or two ago. In many cases, I will say there was a lot of talk at the conference, in conversations I had. Of course, Roundup continues to be the biggest thing going. I think it’s interesting, the defense verdict that came out this week. I think that could actually be an impetus to getting some of this resolved. I guess my concern with Roundup has been with the absolute waterfall of winds. How does this thing actually get tied up, and where can you start to make settlement recommendations to your clients, and how does bear Montanto actually go resolve this? I think that a defense win here could actually be a good impetus to bring everybody to the table. And so that’s interesting. And I think that that’s a place where a lot of people are really excited. There’s obviously continued Lejeune talk everywhere. I think that people are starting to get a sense that it’s going to be harder and harder to do any further claim acquisition. There a lot of question into bench trial versus jury trial and how that’s going to pan out. Obviously, we already had an initial decision that it’s going to be bench, and so a lot of questions around that, but I see kind of that slowing. Heard a lot of positive around, trying to think what else. I’ve heard several discussions of Bard Powerport as well as Suboxone as well as some of these other kind of more boutique y type, not super mass torts, and then all the way up to where the social media litigation sits and how to play that or where the PFAS personal injury stuff sits or various. So kind of all over the map. But what I found interesting is I think there’s kind of some divisive, not divisive, but some different thought processes on these kind of supermass torts versus the more boutiquey kind of single strike. Because I think that there’s a view that on the supermass tort side, is it getting pushed too far in the direction of too big to settle at some point or too big to actually be able to resolve? And then on the boutique side, obviously, you just don’t have the same degree of scale from a business perspective.
Susan B. (0:18:21) – Ryan, I guess, last question. If someone was listening to this and said, I think that guy knows what he’s talking about, I’d like to work with him, and you mentioned your ideal client. So if a firm is wanting to get into the Powerport cases or the suboxone cases, can they still come to Pine Valley? Can they work with you? What is your ideal?
Ryan S (0:18:41) – Yeah, absolutely. I’ll give you the ideal. And I’ll tell you, we’ve done a wide array of stuff. If there was a single, first of all, if you think I know what I’m talking about, then I’m doing a really good job masking the fact that I think very few people actually know what they’re talking about in this space. But we really specialize in late stage stuff. I think the best way for a firm to capitalize itself is based on stuff that it’s done, but is not yet realized. Right. And so it tends to be the cheapest way to capitalize yourself. It tends to be the lowest risk way. A lot of litigation, finance can really inadvertently, I think, put firms at risk. And so what I mean by that is everything, including structures like ours, involves some sort of cash fleet structure. If you’re not replacing collateral, your collateral is ultimately running down so much like any other loan where things are running off, you have to capture a piece of that collateral to be derisked over time. I think what we do in this space is really focus on how to put sustainable structures in with top tier firms. Oftentimes that does look like a post settlement or a near settlement kind of entry point. So post settlement is a real gray area. So is kind of near settlement. There’s not like a bright line necessarily, that says, this is a place we can play versus not. And we’ve played in all places. We’ve invested in all places in the capital structure. And so we do have a wide group of pockets. What we do best, though, is work with leadership firms who either have taken, know a lot of times we’re taking out more expensive capital as the risk free rate. As the Fed has blown out over the last year and a half, we’ve done a little bit less of that, because some early on facilities are now priced pretty well relative to where debt is generally. But we do a lot of, hey, we have reached a point of derisking here. It’s better for our capital structure to not be paying 22% interest out the door. We have something to lend to. We generally will step in and look to that and say, this is what we could advance against that. This is what the rest of your docket that doesn’t match those requirements looks like. This is what we can advance against that. And then how do we build a sustainable and scalable relationship where you have the liquidity your firm needs to continue to grow? We have the coverage we need, but really, we’re kind of a rifle shot. So I think the best way to finance your new. Whatever you’re getting into or your new spin up of this type of business model within the firm, the best way, in my opinion, to do that is through your late stage stuff. That’s the safest way to do it. And we’re the people that do that well. But really, if it’s a firm that is taking that risk on the litigation side and is representing their clients well, has strong touch points with their clients, strong operations, those are the firms that we work with in this space.
Susan B. (0:21:10) – Awesome. Ryan, thank you so much for spending some time with me early this morning, getting us up to date on what happened in Houston at the Lipfin conference. Grateful for your time and your expertise. Thank you.
Ryan S (0:21:22) – Hey, thank you, Susan. Really appreciate it.
