Having spent the past 35 years in the banking and specialty finance vertical, it is very apparent to me that the current expansion of alternative asset financing into the law firm loan funding model being offered by American Law Firm Capital, LLC (ALFC) is following a very predictable life cycle.
In financing any new or evolving asset class such as the cases owned in a law firm’s portfolio, you start with a challenge of little or no liquidity in the capital markets. This challenge is due to either a lack of knowledge as to how to value the asset or a risk assessment that exceeds current financial market and lender appetites. This phase of the cycle is followed by a combination of a few clever minds that see an opportunity coupled with a few aggressive risk takers that provide an opening for capital albeit at a very high cost.
The next phase in the cycle is the entrance of capital sources that have excess liquidity and are seeking high returns offered by these new alternate asset classes. Once a few risk-taking lenders make an above average return for this liquidity premium more lenders and other sources of capital now rush to the market as the early responders now have created a new knowledge base that can be exported to the next generation of capital providers.
Now the fun begins. We still have higher than average returns, but with a huge influx of capital, margins will begin to decrease as the liquidity premium is eroded or eliminated. This has already begun in the legal funding industry. We now have lenders entering the market that are chasing returns, but in many cases do not have the knowledge base to adequately assess the risk in the class. They presume that the efficiency of the markets will mitigate this lack of knowledge. The result is that some lenders will over leverage the asset class in hopes that they will be taken out by the next round of even more aggressive lenders (greater fool theory).
All the while both knowledge and liquidity eventually find an acceptable risk/return balance and the next generation of liquidity finds its way into the asset class. Eventually, the asset class either becomes an acceptable and quantifiable risk or proves to be too uncertain or volatile to attract significant capital to be of interest to the larger capital markets.
Here the staff of American Law Firm Capital, LLC believe that we are one of the most experienced and leading long-term legal funding companies in the industry who understand and have grown through the early cycle stage of law firm funding. Using our extensive knowledge base of the mass tort, class action and personal injury legal industries coupled with access to appropriate risk based capital and processes, we can provide our clients with a reasonable funding alternative to both monetize their existing portfolios of mass tort cases and provide firms with growth capital.