Current Managing Director at Bench Walk Advisors
Adrian Chopin is a Managing Director of Bench Walk Advisors, a litigation funder, based in London. Bench Walk manages $500m and has allocated $300m in litigation cases over the last 3 years. Prior to joining Bench Walk, Adrian founded a new litigation funding business for a large hedge fund, which he built into a market-leading, highly profitable and well-diversified business of over $100 million in under 2 years. Before entering the litigation funding market, Adrian was head of the Debt & Equity Solutions Group for Deutsche Bank, New York, where he ran a large number of ground-breaking structured finance and regulatory capital transactions. Adrian began his career at Allen & Overy in London where he worked as an associate in the Derivatives and Structured Finance group.Read more
Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.
Can you provide a short introduction to your background in litigation finance?
I began my career as a transactional lawyer at Allen & Overy. I did that for four years then became an investment banker for just under 10 years and then I moved to join one of my clients who works a structured credit hedge fund to set up a litigation funding sleeve in their multi-strategy fund. I built that for two years and then I moved to set up my own dedicated fund called Bench Walk.
What was your role at Orchard and what type of cases were you funding there, as you left investment banking?
I joined Orchard to set up a litigation funding business inside a multi-strategy fund. We built that to a $100 million business over just under two years. What we funded tended to be medium to large commercial disputes portfolios. We tended to run the full range of commercial disputes that you would tend to see for a litigation fund as much as we do now.
What were the IRRs that you saw on that $100 million?
Generally, the IRR for the most successful funders should be, across your book, mid-20s to low 30s if you're doing it about right. There are now more and more interesting business models coming out where people are taking lower risk positions, doing more portfolio transactions and more structured deals. From a Bench Walk perspective, as of year-end 2020 which is our three-year point, we have our track record audited and we're on track for well over a 30% IRR on concluded cases to that point, so a very successful funder. It’s comparable to private equity for a successful funder.
Certain types of private equity investment tend to be spiky. You'll have some cases that generate IRRs in the tens of thousands and millions and you'll have some that are slightly lower, by way of example a portion of our book is invested on a fully insured basis and the IRRs on that can be mid-teens but your capital’s fully insured so the risk is appropriate to that.
Can you give a quick overview on the type of cases you invest in, structure of Bench Walk etc?
To take that second question first we are structure of private equity style managers so we manage a series of funds on a close-ended basis. We draw down capital for our investors as and when we need. We are entirely discretionary capital which distinguishes us from some of our competitors – by no means all but some – still running quite large pockets of purely advisory money and that's it. We have tended not to use much leverage although that's primarily driven by investor appetite. Most of our investors have said we don't need the leverage. That's how we are run.
In terms of how the market more broadly looks, I would say probably the majority, by number of funders, are structured in similar ways; private equity style, close ended, LPGP type structure. There are a couple of hedge funds run as my old business was run, as part of a wider fund with redemption subscriptions, so no specific time limited fund structure. Then of course, you've got the listed funders who are effectively permanent capital.
How do you look at the optimal structure of a litigation finance business?
I think you can make any one of a number of different financing structures work. I think the listed structure has its attractions. What I've seen is that having started at least in some instances as a listed fund with a separate manager, I think they have all converged on effectively a listed opco structure, so the manager was bought in-house by the fund. I think that's an interesting development.
What does that do? It breaks the link between the fee structure that the private capital market has to charge. It tends to be 2 and 20 or some variation thereof so that link’s broken. Now you’re an operating company and all those people who were previously sitting in the manager are now your employees and you operate more like a listed company so you can pay your staff whatever shareholders sign off as an appropriate level of remuneration. Sometimes those numbers are eye‑wateringly high compared to 2 and 20. One of the listed competitors, certainly more recently, has the scale to make those numbers reasonably competitive so I don't think it's as easy as saying this model bad, this model good.
On that point, looking at Burford for example, they spend $90 million on operating expenses, of which the majority of that is, I think, labor for the lawyers and the employees. How do you look at the potential economies of scale or advantages or disadvantages of that high labor spend on the employees?
It's a great question and, for what it's worth, I'm writing an article on this right now. I think Burford probably has the scale to make that work. The time you have difficulty is if you try and run that extremely human capital-intensive model and you don't have the scale that, for example, Burford has. It’s certainly worth looking at for a listed fund because you can get the transparency. You’re looking at what your operating costs are and what your deployed capital has been and what's been your fee generation from your gross profit from cases and then look at that as a percentage. In some instances, you see some extremely surprising numbers.
It's not a problem that's peculiar to some of the listed funders. Some of the private capital funders, anecdotally at least, have fee structures that I think are interesting and attractive for the management. We operate on a pretty standard two and 20 or zero and 30 model.
What do those ones that you said are interesting look like?
For a lot of them, you can go to the website of a funder and look at how many people they’ve got on their carousel that goes past and see what those people’s job titles are. I think that is a really interesting test. What are their CVs? You will find a lot of them are very highly qualified, very talented lawyers; sometimes there are a few accountants but not really people who are cheap. If you look at those numbers, you can do a mental calculation and what their annual salary bill is. Their rent costs will obviously be a function of the number of employees. You can pretty quickly do the mental game of, if they're running on a two and 20 model, they're charging their investors.
Are they able to make it work with the two? Do we think the 2% management fee is likely to cover those salaries and their rental costs? If not, these guys are mortgaging their future. They're having to win something and get paid a performance fee to make it work and I think most of my competitors are successful enough they probably could do that even if they have those very high costs. It makes you build your model in certain ways.
Litigation Finance: Portfolio Construction, Case Due Diligence & Future IRR’s
March 16, 2021