Content Published Last Week

1. IP Research: Burford Capital: Risk from Insurance-Backed Financing

2. Litigation Finance: Judgment Preservation Insurance & Pre-Judgment Insurance-Backed Funding

3. The Gym Group: Clustering Units & Post-Covid Customer Behaviour

4. AppFolio: Selling to 5,000 Unit Property Managers

5. Trupanion: Hurdles to Growth

6. ACV Auctions: Operating Model

7. Evolution Gaming: Asian B2B Landscape

8. Choosing LTL Carriers: A Customer's Perspective

Burford Capital & Risk of Insurance-Backed Funding

In our survey of law firms last month, respondents claimed new, insurance-backed funding products entering the market are one of the biggest risks to traditional funders. Such products aim to provide a lower cost of capital to law firms and plaintiffs compared to funders like Burford. Over the last month, we’ve spoken to various brokers, carriers, and lenders to understand how and why insurance-backed financing may be a risk to BUR.

We’ve published an interview with a leading insurance broker and a piece of analysis exploring how JPI and pre-judgment insurance works and the potential risk to BUR.

Insurance products have existed for decades in legal finance. Funders and law firms insure all types of risks across pre, post, or adverse judgment assets. There are broadly three types of insurance products in the market:

1. Funders insuring single cases or portfolios

2. Judgment Preservation Insurance (JPI)

3. Pre-judgment insurance of single cases and portfolios for law firms and plaintiffs

Funders insuring certain risks in their portfolio is the largest and most mature market with JPI the second largest. Pre-judgment insurance-backed financing include newer products launched within the last 2 years and seem to be the biggest potential risk to funders.

There is ~$1bn+ in pre-judgment insurance capacity available each year and it's growing.

CAC, since its inception about four years ago, has done over $4 billion in insurance limits. This includes multiple types of products, not just JPI, but portfolios and other products. Based on what we know about what we're placing and what we anticipate is being placed in the market, this is a robust market, with at least a billion in post-judgment, and probably another billion dollars or more in other types of products that are being placed. - SVP at CAC Specialty, Insurance Broker

The combination of an insurance policy and a direct loan aims to undercut the IRRs funders require. We’ve directly seen financing opportunities where law firms are disintermediating funders to take lower cost of financing for portfolios fully on contingency.

As always, the devil is in the details; these structures are fairly complicated and are not an apples-to-apples comparison with funding. This analysis walks through the specific terms of a typical insurance policy and loan including collection, judgment, and duration risk coverage.

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We also work through specific examples of pre-judgment insurance-backed financing and the cash economics for each party in a typical structure.

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This work is interesting for anyone following BUR and litigation finance and is important to understand the durability of returns of the core BUR-only balance sheet business.

The Gym Group & Clustering Units

Last week, we published an interview with the Former CEO of Domino's Group exploring the company's fortressing / clustering strategy. This week, the Founder and Chairman of UK discount gym, The Gym Group, explores how it clusters units in market to combat competition.

To be frank, this is a key differentiator in the low-cost gym market. In our experience, you can put two low-cost gyms close together and they don't necessarily have to compete. It could be two of our gyms literally within a mile of each other, or one tube stop away. For example, in Brighton, our first site was on the seafront near the marina, and the second site is about a mile away on London Road. They cater to totally different markets. The big advantage with clustering for large groups is that independents can't compete by definition. In Brighton, for instance, we have three sites that are not far apart. What they provide is an appeal for our premium membership. You pay a little more for it, but percentage-wise it's significant. So typically £5 to £7 more per month. You're likely to have a gym near your home and work. - Founder of The Gym Group

We also explore how customer behaviour around fitness has evolved in a post-covid, hybrid working environment. The biggest risk to the clustering strategy is that the deployed fixed cost at scale doesn't yield the expected mature ROICs due to a change in the market competition or customer demand.

If you cluster 5 gyms in a town of 200k people, will the format, pricing, and overall offering still be relevant in 5-10 years? Or will there be new offerings at attractive prices and formats that customers demand? How can one handicap such a risk?

We explore such topics throughout this interview.

AppFolio: Selling to 5,000 Unit Property Managers

As part of our ongoing coverage of APPF moving upmarket, this interview walks through the sales process to 5,000+ unit property managers relative to SMBs:

The industry has become extremely competitive. Everyone is offering similar solutions. The challenge is deciding where to invest as a company. If we're offering point solutions that they can use, do we still invest in leasing and maintenance? It's about deciding where to invest their money and product that will continue to earn more business. There's also the challenge of overcoming the paradigm shift that the company has made. We've always said we're sticking to one lane, and now we're not. There's probably a little bit of credibility in proving that out before people are like, okay, you're just going to revert to your old ways. So I think that's a big challenge. - Former Sales Executive at AppFolio

Trupanion: Hurdles to Growth

While there is tangible evidence that having high pet insurance penetration rates at the veterinary hospital level significantly improves the level of care veterinarians can offer their patients, trying to convince pet owners to insure their pets is not a veterinarians' top priority.

There is indeed some intriguing data out there. I'm going to share some thoughts, although you may already be familiar with much of this information. One interesting point to note is that there's a veterinarian named Jules Benson who works for Nationwide Pet Insurance. Despite being a veterinarian, he often speaks at conferences. I've listened to some of his talks and he does an excellent job of presenting the data. For instance, he mentioned that if around 20% of your patients are insured, it could potentially double the revenue of the hospital. This suggests that the higher the penetration rate of pet insurance, the more valuable it is to the hospital. I find this extremely intriguing. - Former Chief Medical Officer at Veterinary Hospital

Vets are too busy and don't prioritise insurance:

One of the challenges we face as veterinary teams is the limited time we have to discuss various topics with clients. We have 30-minute appointments, but after check-in and technician consultations, we're left with about 15 to 20 minutes of face-to-face time with the client. Clients often come in with their own list of priorities. Our philosophy is to address their concerns before we present our own agenda. We find that this approach fosters better relationships with our clients. However, sometimes their agenda takes up the entire appointment. When we then need to discuss vaccines, flea and heart prevention, behavioral issues, and pet insurance like Trupanion, it's just one more topic to cover. For veterinary teams, pet insurance often falls to the bottom of the list, as there's a perception that we're not insurance salespeople. There's an expectation that discussions about insurance should take place in a different setting. We're not trying to sell pet insurance, but rather educate clients about its existence and make recommendations, just like we would for any other topic. - Former Chief Medical Officer at Veterinary Hospital

In this interview, a Chief Medical Officer at a full-service veterinary hospital facility sheds light on Truapnion's hurdles to growth. In parallel, we are rolling out a project to understand what is standing in the way of veterinarians when it comes to converting pet owners to becoming Trupanion policyholders.

ACV Auctions: Operating Model

Even though the online used car auction model removes friction within the physical auction process, many independent dealers still do not buy cars from ACV because they believe the condition reports of the listed vehicles lack accuracy. Arbitration costs are a major line item in ACV's cost structure:

Overall, ACV's arbitration rates are slightly higher than those on the wholesale side, at a physical auction. The rate might be between 4% and 8%, compared to about 2% at a physical auction. So, we do have a higher rate of arbitration, which is one of the largest contributors to our overhead costs. This includes the cost to unwind a deal or the cost of goodwill to satisfy both buyer and seller in a transaction that ends up being arbitrated. - Former VP of Operations Strategy at ACV Auctions

In this interview, the Former VP of Operations Strategy at ACV Auctions sheds light on the company's operating model. Additionally, during the past month, we have been surveying independent used car dealers in the US and will soon be releasing our findings on how they use auctions - physical and online - to buy and sell vehicles and the challenges they face during the process.

Evolution Gaming: Asian B2B Landscape

Around 40% of Evolution's revenue and growth is from the APAC region. This business is opaque to investors. This interview with an aggregator with experience in Asia explores B2B aggregation in detail:

I can tell you that when we contract for Playtech and Evolution products, we don't contract directly with them. We contract with another entity. I'm not sure who owns that entity, but it's a third party. I still receive emails from people with Evolution email addresses, but I'm contracting with a third party. - Current Emerging Markets iGaming Aggregator

Regulation is also becoming increasingly stringent:

"The regulation of virtual and remote services is becoming increasingly relevant. When entering a new country, one must consider if there is licensing available. Is it clear, precise, and relevant? Does it allow for my products and services, or is it more specific? Every country faces this issue, and those that don't offer any form of licensing are referred to as gray markets. In these cases, we tend to use licenses from places like Curacao or Malta. These jurisdictions don't regulate individual countries, but rather set up a regulation and a portal for compliance. If you have a license with them, they won't allow you to advertise that you're regulated by them. However, some countries will simply say, go there if you want to, it's your choice. - Current Emerging Markets iGaming Aggregator

The interview further explores how the distribution of live casino works across the APAC region in more detail.

Choosing LTL Carriers: A Customer's Perspective

When it comes to LTL transportation, local density is very important for shippers. This is one of the reasons why the LTL market is still very fragmented and represents a fertile ground for small, local carriers to carve out a regional niche.

National players like Old Dominion and XPO often don't compete well on my first component, service level. They also don't often compete as well on cost, my second component. Quality, which I define as Over Shortage and Damage (OS&D), can be a wash. In our experience, when you have these tight regions where you're running, let's say, 500 miles or less, the larger guys can handle it, but they don't perform well enough on service and cost.There could be several reasons. Regional local players have been operating in those spaces for so long that they've mastered the 500 miles or less segment. Anecdotally, they tend to care more for their larger customers because they rely on them a lot. On the other hand, larger LTL carriers wouldn't be significantly affected if they lost a client like John Deere. - Director of Corporate Logistics at John Deere

In this interview, the Director of Corporate Logistics at John Deere sheds light on how large shippers go about choosing their preferred LTL carriers.