Legalist, a San Francisco-based litigation finance company that uses technology to scour court dockets and determine the best cases in which to invest, is now expanding into bankruptcy, raising $50 million for a fund to provide debtor-in-possession financing to small businesses in bankruptcy.
DIP financing is used in Chapter 11 bankruptcy cases to enable a company to continue operations while it restructures its business, avoiding liquidation.
Legalist’s new DIP fund will be unlike traditional DIP funders, cofounder and CEO Eva Shang told me, in that Legalist will specialize in financing for small and lower-middle-market debtors, with typical loans in the $1 million to $10 million range.
Legalist uses proprietary algorithms to scrape court records nationwide and identify the best bankruptcy and litigation matters in which to invest. On the litigation side, it raised $100 million in 2019 for a fund that has so far invested in over 200 cases. A 2017 raise of $10.25 million funded 38 cases.
Leading Legalist’s bankruptcy fund is Nathan Jones, who was formerly general counsel and chief investment strategist at United States Debt Recovery.
Legalist says its DIP fund is backed by institutional investors including university endowments, non-profit foundations, and family offices. Shang declined to provide further details about the investors.
She said the fund will invest in DIP opportunities in bankruptcy courts throughout the United States, using Legalist’s software to identify cases in which to invest. Legalist affirmatively reaches out to attorneys in cases it identifies, but debtors can also directly apply for financing through Legalist’s website.
“Small-cap debtors have a strong need for post-petition financing, to help tide them through the bankruptcy process,” Shang said. “Legalist’s expansion from litigation into DIP financing is a natural continuation of our mission to help small businesses pay for expensive legal proceedings.”
Shang said that investments in companies in bankruptcy are repaid at a set rate of return.
Such financing can have a dramatic impact on the outcome of a case, she said. In one case Legalist funded, a North Carolina sawmill faced having to liquidate its $7 million in equipment. But with financing from Legalist, the company was able to continue operating and was sold at auction for $80 million.
Shang and cofounder Christian Haigh formed Legalist in 2016 when they were students at Harvard, with the original concept of scraping court records to build ratings of lawyers. But after dropping out of Harvard, receiving a $100,000 fellowship from the Thiel foundation, and then participating in the Y Combinator accelerator program, they pivoted their company to focus on litigation finance.
Legalist’s move into DIP financing was inspired by the pandemic, Shang said, as it started thinking about areas into which it could expand that would be countercyclical to litigation.
With DIP financing, it is able to serve the same middle-market niche that it does through its litigation financing, she said.
Legalist was formerly advised by retired 7th U.S. Circuit Court of Appeals Judge Richard Posner. He left that role last year, and the company is now advised by Jeremy D. Fogel, formerly a U.S. district judge for the Northern District of California and now executive director of the Berkeley Judicial Institute at UC Berkeley Law School.