A Major Merger In Litigation Finance Means A Giant Payday For Three Young Lawyers
They're all in their thirties, and they'll split an eight-figure payout.
The Gerchen Keller team at work.
Back in 2013, I profiled a group of young lawyers with elite credentials who turned down the practice of law in favor of starting a litigation-finance venture. Harvard Law School graduate Adam Gerchen joined forces with two former law clerks to Justice Anthony Kennedy, Ashley Keller and Travis Lenkner, to form Gerchen Keller Capital, a firm would invest in high-stakes litigation.
It might have sounded risky at the start. Gerchen and Keller left jobs at a successful hedge fund, and Lenkner gave up a position in the legendary legal department of Boeing (led by former Fourth Circuit judge J. Michael Luttig). Launching GKC also meant turning down the possibility of working at law firms — Keller had practiced at Bartlit Beck, Lenkner at Gibson Dunn — which can be a lucrative and stable existence.
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But greater risk brings greater reward. Gerchen Keller just announced that it’s being sold to a major competitor — for a nine-figure sum. The Wall Street Journal reports:
Burford Capital Ltd. snapped up its main rival in litigation funding Wednesday, saying it will pay up to $175 million to buy Gerchen Keller Capital LLC.
The tie-up marks another step in the maturing of the litigation funding market, where third parties provide financing for lawsuits and legal work in exchange for a cut of any profits. In less than a decade, it has become a multibillion dollar industry and an increasingly popular investment with endowments, pension funds and some wealthy individuals.
The combined company will have more than $1.2 billion in investment assets and commitments, making it the largest funder by far in the growing market. Burford Capital shares jumped 12%.
Here’s how the deal is being structured, per the WSJ:
Burford will pay $160 million for Gerchen Keller in a combination of cash, shares and loan notes. It said it may pay a further $15 million in Burford shares to some Gerchen Keller executives if the Gerchen Keller funds make $100 million in performance fees.
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Left to right: Adam Gerchen, Ashley Keller, and Travis Lenkner.
The $15 million that could get paid to Gerchen, Keller, and Lenkner is just icing on the cake, additional money that they might earn in the years ahead. Let’s look into the current payday that they’re enjoying under the terms of this deal. Per the press release:
GKC’s selling shareholders include a number of financial investors as well as GKC’s three principals. The entire holding of principals’ shares will be subject to a three-year lock-up and they will also enter into three-year employment agreements and multi-year non-compete agreements. The principals are heavily incentivised to contribute to Burford’s future success given their holding of 5,976,602 Burford shares, including all 2,461,682 contingent shares, if issued.
It’s not clear how much of the $160 million is going to the financial investors and how much is going to the three principals. But we can figure out, based on this language, how much the principals are getting in actual and contingent Burford shares, which sets a floor for their compensation.
The 2,461,682 contingent shares represent the $15 million in incentive pay, so under the deal, a Burford share is worth about $6.09. So this means that the three principals are getting 3,514,920 in regular or non-contingent shares. That’s worth a cool $21.4 million (using the share consideration specified in the agreement; Burford stock closed higher today on the news). And the $21 million doesn’t include whatever the principals might be getting in terms of cash and notes.
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So at least $21 million in Burford stock now, plus the possibility of $15 million in Burford stock later, plus whatever they’ll be getting in cash and notes, both under the deal announced today and their three-year employment agreements with Burford. This kind of money far outstrips what these fellows might have made as junior partners at law firms. Note that all three are in their thirties: Gerchen and Keller are 35 and 37, respectively, and Lenkner is 37.
As we’ve chronicled in these pages, litigation finance is a growing field. As our law-and-finance columnist, Professor Michael McDonald, recently wrote, “From the investor’s standpoint, claims on cases are potentially an uncorrelated asset, and in a world where growth is scarce and investment returns vary greatly, litigation finance offers a unique opportunity.”
A unique opportunity indeed — not just for investors, but for lawyers seeking career opportunities that draw on their legal training while offering serious upside. Congratulations to Gerchen Keller and Burford on this win-win transaction, a landmark deal in an exciting and emerging area of finance.
UPDATE (12/16/2016, 12:40 p.m.): We heard from Judge Luttig of Boeing, who offered warm praise for his former colleague:
Travis Lenkner is one of the finest lawyers I have ever had the pleasure of working with. I was ecstatic when he joined us at Boeing, and his departure for Gerchen Keller was a tremendous loss for us. I have been as proud of Travis in his new venture as I was of him when he was with us at Boeing. He and his principals (and friends) deserve all the accolades that they are now receiving. They are terrific lawyers and, even more, terrific people.
Legal Financing Rivals to Combine in $160 Million Deal [DealBook / New York Times]
Burford Capital Buys Litigation Funding Rival Gerchen Keller [Wall Street Journal]
Burford Purchases Gerchen Keller for $160M [Big Law Business]
Burford Capital Adds Scale And Significant Private Capital Management Through Acquisition Of Gerchen Keller Capital
[Burford Capital / Gerchen Keller Capital (press release)]
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David Lat is the founder and managing editor of Above the Law and the author of Supreme Ambitions: A Novel. He previously worked as a federal prosecutor in Newark, New Jersey; a litigation associate at Wachtell, Lipton, Rosen & Katz; and a law clerk to Judge Diarmuid F. O’Scannlain of the U.S. Court of Appeals for the Ninth Circuit. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at dlat@abovethelaw.com.
