Cesar Bello, Partner, Research and Portfolio Management at Corbin Capital Partners, L.P.
I wanna welcome everybody to another edition of the Asset Backed podcast. This is your host, Andres Sundate. I am joined today by Cesar Bello of Corbin Capital Partners. Cesar, welcome to the Asset Back podcast.
Cesar Bello:Thank you. Thanks for having me.
Andres Sandate:I, I can see you have a lot going on there, so I'm really glad that you could take, an hour and join me live from from the trading floor, from the investment floor. Thanks for joining me. We're gonna talk about litigation finance today, and, you put out a really great white paper that I'm gonna post to, the the the comments and the recording of the show for for folks, but that really inspired me to reach out. We hadn't met, and I just thought the paper was terrific and really gave a a true an overview, but it was a great primer, but also went into some good depth on the litigation finance space, which is which is booming and is is interesting and is very much something I wanna dive into. Before I do that, though, I'd love to learn more about you, and and, your background.
Andres Sandate:You're at Corbin Capital Partners. You guys run, you know, 8 or 9,000,000,000, dollars, and a lot of that's in credit strategies. So tell us a little bit about your background and how you kind of arrive to where you're at.
Cesar Bello:Yeah. Sure. So first of all, thanks for the comments on the white paper. We're trying to strike the right balance between not making it 20 pages and super deep, on, you know, having enough in there that had some meat. So appreciate that.
Andres Sandate:It was great. Yeah.
Cesar Bello:So my background. So I, I'm an attorney by training. I I've been an investor for the last 5 or 6 years, but I practice law for about 15 years. I was at big law firms, Skadden, Arps, Kramer Levin. Then I went in house, ultimately was the deputy general counsel here at Corbin, deal counsel.
Cesar Bello:So on our private transactions, I I really was involved in all of them, structuring them, negotiating them, working them out when there were issues, litigating and managing litigations when that happened. I have a really good understanding of how law firms work, I would say, in in managing those processes. But about 6 years ago, I was tapped by our CIO to focus on this space. It it was sort of a a an emerging space, that was interesting for a few reasons. Right?
Cesar Bello:So it's uncorrelated, which is super valuable to to fund return streams that are not tethered to the market. I would say in a in a world right now that feels a little bit like a powder keg geopolitically, and and, you know, when when things go bad, most correlations tend to go to 1. To have something that is a true diversifier that's not gonna move up and down with everything else is valuable in Polk's portfolio. So so that attracted us to it. You know, we kind of approach it with a credit lens.
Cesar Bello:That that's sort of our DNA. So we're always thinking about off ramps and downside protection and trying to mitigate the binary risk that's often inherent in these situations. Right? We're not trying to take a lot of single case risk where we're swinging for the fences, or making a 0. Right?
Cesar Bello:That's not our approach. And there's a lot of different ways to play this space, frankly. Each, you know, subsector within the space has a very different risk profile. But, you know, I've I've transitioned. I've been investing in the space now, for about 6 years.
Cesar Bello:We've had a lot of good results and interesting experiences and learnings, which I tried to somewhat share in the white paper. We have to keep some secrets to ourselves. But, but, yeah, I mean, that that's kinda what brings us here today.
Andres Sandate:Yeah. No. That's that's terrific. Well, I I have to give you kudos. I mean, with all due respect to my my lawyer friends, you don't speak like a lawyer anymore.
Andres Sandate:You you sound like an investor. You sound like you you you, you know, you've been, pitching to investors and talking portfolio and talking underwriting, which, obviously, you can't do this with without, being able to do that, but but I would imagine that legal background and at the organizations and firms you you you you mentioned, was terrific training ground, not to mention being w to GC at at a firm the size of Corbin. Probably gave you a lot of really good experience to say the least Yeah. To be able to to lean into this offering and strategy.
Cesar Bello:It's a good observation because the background is really good for the substance of the work, but it's not so great, you know, when you're trying to sell something or pitch it or talk about it. You know, you need to kind of shed all of that and, you know, be a little bit more, normal.
Andres Sandate:A little bit more economical or commercial.
Cesar Bello:Yeah.
Andres Sandate:And you have to be kinda tight and succinct in how you present. Right? Like I said, my my good lawyer friends can explain points in such fine granular detail, but the investment community, you know, puts a premium on present the idea, keep it simple, but make it so plainly obvious that I would want to invest. Yeah. And and so I took some notes as I was preparing for our conversation today from your white paper.
Andres Sandate:So I'm just gonna read, and I'd love to get your reaction. So so litigation finance or Litfin as as, as as you call it is provision of third party capital to help finance law firms or plaintiffs pursuing legal claims in exchange for a portion of proceeds received. So that's kind of the opening of of your paper. It's an emerging asset class, and what really got me excited about having this conversation is I've spent a long time in alternative investing, and you say things in here about the asset class that I think a lot of investors are looking for when they think about non traditional diversifying alternative strategies, particularly in the private markets. Inefficiency, fragmentation, undercapitalized, misunderstood.
Andres Sandate:That all sounds like a lot of why would you want to go into that area. But tell us about the setup of litigation finance. Why is there a need for, more capital in the space? And you're provisioning capital to, to plaintiffs, and law firms. But let's understand the backdrop first.
Andres Sandate:There's there's some clear advantages to being in it, but as an investor, help us understand kinda why why it is so attractive.
Cesar Bello:Yeah. Well, look. I I think there's 2 sides of the coin always. Right? There there's risk, and reward.
Cesar Bello:So it's attractive, but it's not, a free lunch. Right? There there are a lot of I don't know if peril is the right word, but you really have to know what you're doing and who you're dealing with, and who the parties are and and think about things a little bit more holistically, not just in terms of the case, but who the attorney is. Even if you win the case, can you collect? Right?
Cesar Bello:So, you know, a a lot of, a a lot of these factors, any one of them can can kind of throw you off, and prevent you from having a successful outcome. So, some of these things are things we've learned over the years. Some of them are sort of more inherent and apparent. But, I mean, what's a good place to start? Should what
Andres Sandate:what do you think Well, I think a good place to start would be, you know, there are different types of cases. You have consumer, which is a more regulated area, which I know is where Corbin does not tend to play, And then there's the more commercial side, which is also sort of synonymous with institutional, and there's tends to be less regulation there per se. So let's talk about where Corbin focuses on the commercial side, and that can be everything from mass torts to intellectual property to, that. So let's just the the the opportunity in litigation finance is consumer and commercial. Within that, there's the commercial side.
Andres Sandate:Let's talk about what that represents.
Cesar Bello:Yeah. Yeah. And and I guess before we even get there, I would say, you know, why, why does the opportunity exist? Yeah. It it if you think about it at a basic level, you have an asset that is pretty hard to value.
Cesar Bello:Right? It's not like your collateral is, a piece of property, a home, a building that you can easily assess and take, you know, if if somebody doesn't, return, pay back your loan. Right? So so that, by definition, knocks out a lot of the traditional capital providers. Right?
Cesar Bello:Therefore, it's under banked. It's a little bit misunderstood, and that just limits the, amounts of folks who can get involved in in a more esoteric asset class. Right? And, you know, within Litfin, you're talking about to your just a segue to the types of things we do. Even within the commercial space, you have business disputes.
Cesar Bello:Right? Commercial, traditional partnership disputes, what have you. You have intellectual property disputes, antitrust, stuff that's in bankruptcy, international arbitration. So every one of those is very different and has a very different duration profile, return profile, sort of market, in in terms of how deals get done within that space. Right?
Cesar Bello:There's now a big push by insurance companies to come into the space, and and effectively, you know, provide a lot of downside protection, you know, if the next event in the case doesn't go as as you predicted. Right? So that is allowing people like us to do more and to scale more because I can put more money to work, if, I'm taking a view on a case, that is, you know, not as binary. Because if I'm wrong, I
Andres Sandate:I still have an
Cesar Bello:insurance policy to go tap. Right? So, constantly trying to find off ramps and ways to, mitigate my risk and and and and and, you know, move away from, again, the binary risk, the flip of a coin risk, which Yeah. Which you often see in this space.
Andres Sandate:Yeah. So and I I led you down that path, so I wanna back up a second, and I wanna talk a little bit more about the why, so why the litigation finance exists. So, you know, we we in the US let's talk about the US. I know there can be international opportunities, but let's talk about the US. This is a more meaningful percentage of GDP in terms of cases and settlements, etcetera, than people realize.
Andres Sandate:I think your your paper, put the stat out that it's over 2% 2 to 2 and a half percent of GDP, is potentially a result of, you know, cases, settlements, etcetera. So it's a big, big market, $1,000,000,000,000, I think your paper estimates.
Cesar Bello:International. Yeah.
Andres Sandate:Yeah. So but but in terms of the the the why, the perception is big companies may, have the financial resources. Right? Because in in litigation and in in the legal world, like, the deeper pocket typically has more resources, has more, of an advantage. But your paper outlines it's there's a lot of benefits for why, institutions and organizations that have financial resources might even consider litigation finance.
Andres Sandate:The same with big law firms. So can you kinda talk about the why the capital is needed? I know timing and the time frame for these cases is a big deal, but maybe you could give us a a couple of more.
Cesar Bello:Yeah. So there's there's a spectrum to that answer. Right? So on on one end of the spectrum, you have just folks who have a good case but can't afford to fight the other side because the other side may be a a big corporation with unlimited resources. Right?
Cesar Bello:So that's your typical David and Goliath situation where, you know, frankly, in our legal system, it's not necessarily merit based. It's, a lot of it has to do with who has more money and resources, in terms of who's gonna win. Right? So to the extent, you know, you can even the playing field a little bit. And, by the way, we're doing this it it has to be, obviously, things that we are highly convicted and believe in because this is typically nonrecourse financing.
Cesar Bello:So, you know, we're not gonna put our money, and our investors' money into things that that we don't have, a high conviction in because we could lose our money. Right? So so that speaks to, us backing and funding, compensable cases that we think, you know, we have a good chance to win. And and and, you know, back to what I initially said, the initial demand is is for folks who don't have the money and can't and can't compete. Right?
Cesar Bello:And could be, you know, in a mass towards setting, it could be sort of a collective action problem. Right? So let let's pick 1. So one case we funded, a law firm involved in representing individual claimants against the Sackler family in their bankruptcy, as a result of the opioid crisis. Right?
Cesar Bello:If you are a victim or your son's a victim, you individually don't have the resources to take out on the the Sackler family in a bankruptcy. That'll never happen, so there's a collective action problem. But with our legal system, you know, if you if you can actually create enough of a group, and create enough incentives, for a a law firm to be willing to work on contingencies. So they're also pretty aligned because if they don't win, they're not gonna get anything, you know, with financing from folks like us to sort of pay for experts, you know, pay for the law firm's, you know, to to grow their team, to to manage a caseload, to find the claimant, then you can see kinda you're starting to even the playing field a little bit, and can actually challenge and take some of these, big, large corporates on. But so that's one end of it, and that and that's a little bit, you know, I would say, more obvious.
Cesar Bello:Right? But even for corporations that have resources, oftentimes, this is looked at as sort of a if you have a case that that's worthwhile and and, you know, it's on your sheet, it it's often sort of a a think of it as a back office function. It's like the, you know, the the company has, it makes widgets, and it's focused on making widgets. And that's that's how it's valued, and, you know, that's what drives its p and l. And the earnings reports are based on making those widgets.
Cesar Bello:It's not based on well, we actually have this other asset over here that that can be worth a lot of money, but we need to put, you know, $10,000,000 into funding this case to monetize it. Right? They're not in that business. Right? So, and in fact, I would argue that they're often penalized for funding those themselves because, you know, any any credit that they get if they actually win a case is sort of viewed off viewed as a onetime event that's not gonna really get them, a a a multiple, which is how they're normally valued.
Cesar Bello:You know, it's gonna be sort of discarded from a valuation perspective. So, to them, if they can find somebody to finance that case and they don't have to spend their budget on the one off legal event, that they don't get credit for in the markets from a valuation perspective, then that's great. Right? They're sort of largely off risk, and so long as they're willing to share some of the upside with the people investing, it can be a win win for everyone.
Andres Sandate:Yeah. And and from the standpoint of, you know, transitioning to how, you know, investors can start to think about exposure to the space, you know, you all talk about in your white paper, there's a there's a couple of things that make it a pretty compelling area, in a diversified portfolio. One of them is, you mentioned this earlier, Cesar, the uncorrelated nature of of the asset class. And then within the portfolio, somewhat of the uncorrelated nature of the individual cases to the extent that you're partnering with the right asset manager. So that that's one thing I'd love for you to talk about.
Andres Sandate:How do you how do you how do you all think about that at Corbin in terms of, correlation and diversification? Because I would assume when you're building, we can't talk about your fund, but when you're building a portfolio, you're thinking about diversification.
Cesar Bello:Yeah. So so, clearly, you know, we're investing in idiosyncratic legal outcome. It's got nothing to do with the stock market. You know? So so there's broad uncorrelation that's attractive to the asset class.
Cesar Bello:But within the portfolio, if you're doing it right, the positions themselves should not rise and fall together. Right? The, you know, earthquake in Japan has nothing to do with the Johnson and Johnson, you know, talc, mass tort. Right? So, the covariance of the portfolio should be negative, or or close to it if you're doing it right.
Cesar Bello:I mean, you know, just gotta be mindful not to put the same type of legal risk on, but that's pretty easy to manage, in terms of our pipeline and what we're seeing. But what you get then is something truly powerful because it's not just uncorrelated to the broader market, but it's it's truly diversified within itself, within the portfolio.
Andres Sandate:Yeah. Yeah. And then the second thing, and you brought this up earlier, when you think about the commercial side, and and more of that institutional side where you all focus, you have a spectrum of risk and return opportunities. And so if if you wanna go further out on the risk spectrum and reward spectrum, you know, you have things that are more equity or even equity like in terms of, like, your your single case, type outcomes. But all the way on the other spectrum in terms of, you know, call it lower risk but lower return, there has been a settlement, but the settlement is not final, I e, there hasn't been distribution of of any, any capital or or any, any dollars.
Andres Sandate:And and and then there's a number of things in between. So as you're thinking about risk and return, how does how does your team and how do you go about sort of thinking about that continuum, and sourcing and originating cases and opportunities.
Cesar Bello:Yeah. So it it it's a really good point because I think I I tried to touch on this before, but just to expound on it. So within litigation finance, there's probably 6 or 7 different subsectors that are all very different from each other. So on the safest end of the spectrum is the post settlement stuff. Right?
Cesar Bello:So that's the case is settled. The money's coming. It's effectively a receivables lending exercise, akin to factoring to some extent. So so what are the dynamics that play there, that make it interesting for everybody involved? So could be a law firm has been working on a case for 4 years.
Cesar Bello:They're working on contingency. They haven't gotten a dollar yet. They settle the case, but it's still gonna take a year or 2 to get cash, and you can imagine why. Right? So let's go back to the opioids example.
Cesar Bello:So okay. You know, you have a a a a wide disparity of victims. You could have some folks who died, some folks who didn't die, but, you know, have serious complications, some folks who will need sort of medical oversight forever, but maybe their their injuries were were less mild. So there has to be a process of gridding all of this, and getting the proper, you know, medical documentation to back it up. And as you're going through this for, you know, tens of thousands of people, it's gonna take time.
Cesar Bello:But if you zoom out, you you have an asset, that is close to money good as you can get. So if you if you're willing to lend at, let's say, a 50% LTV to that, you know, settlement amount, that feels like pretty good risk. You're getting paid, you know, low to mid teens for that, and it's short shorter duration. Right? So if you want shorter duration credit like risk at those levels, that's an interesting sort of subsection of the space to play, and you can keep going up the risk curve.
Cesar Bello:Mhmm. Let's skip all the way to the end to make the to juxtapose the two examples and and come up
Andres Sandate:with the
Cesar Bello:most dramatic one. So the riskiest thing you can do is invest in a single case, at the very beginning. Right? So, you know, we typically don't do a ton of that, but, you know, we have a pretty wide, sourcing funnel. So we will see stuff at times that that it makes sense to structure, and and and swing a little harder on.
Cesar Bello:That way we would size them much smaller, right, because you're taking more risk. But think about that as, okay. We really like this case, but we haven't gotten past summary judgment motion yet. So you you have to analyze, okay, what's the budget of the case gonna be if it goes all the way through? It's gonna be $5,000,000.
Cesar Bello:Right? So how do you start to tackle that and create a structure that works from an investment perspective that aligns incentives there? So you could imagine, saying, hey. We'll we'll commit to $5,000,000, but, really, we're only gonna fund $250,000 at this stage. Once you get past summary judgment motion and this thing, you know, looks like it has more legs and derisked, and then you will need more budget to go to trial, etcetera, Then we'll make more money avail available.
Cesar Bello:And then, you know, set another milestone and and do the same there. Right? So the idea is, yes, those are risky propositions where if you lose the case, you're gonna get a 0. But if you scale into them, methodically, you know, you're only really growing the position as the thing is working, as you're having more observation points. So even there, right, with the right type of profile, the structuring comes into effect, and and, you know, in theory, you're creating a portfolio of these.
Cesar Bello:Right? So if you have, 52 ultimately don't work and 3 do, the ones that do, you're you're you're underwriting to make, 2, 3, 4, 5 x, that's more of a venture capital kinda return profile model that on a blended basis should really work, especially if you're losers. You're kind of not fully funding. You're losing earlier. They're smaller.
Cesar Bello:Right? And the thing that's that's important to keep in mind, which is often not top of mind for folks, is you don't need, unlike venture capital, a capital markets, solution here. You don't need another company to buy you out. You'll need to IPO. These are, you know, idiosyncratic legal outcomes that a judge is gonna rule, and and there's gonna be a a self, you know, liquidating outcome independent of whether the stock market's crashing or not.
Cesar Bello:Right? So then it's more of an exercise about, okay, who's your counterparty? Can they pay? Hopefully, you've done that work ahead of time. But all of that, I think, is very different than most asset classes, and, you know, there there should be a a place in folks' portfolio for taking that type of risk.
Andres Sandate:Yeah. For sure. I keep thinking back to, two words that I think are early on in your paper in describing this industry and this ecosystem, and I I I could have read another paper, but is inside baseball synonymous with what you're describing in terms of just knowing the attorneys, knowing who the players are, knowing the cases. Am am I imagining something or or is that a term
Cesar Bello:that's used in your That's I I use that term often, so you probably probably use it in my paper.
Andres Sandate:Yeah. I think it is.
Cesar Bello:It it really matters. Right? Because now now let's go back down to, you know, in the mass tort space. But let's say a case that hasn't settled, that is sort of midway. Right?
Cesar Bello:So it's riskier, and there's various stages to the life cycle of a mass tort. Right? Let's say, you know, you you get a an MDL certified, so it becomes now a mass action, a multidistrict litigation, and you have to go get through a Daubert process where it's effectively a battle of the experts to see if there is a a a scientific reason, that's valid to allow the case to potentially move forward. Right? So all all these all these, at every step of the way in the ecosystem, you have a ton of different players.
Cesar Bello:Right? So, what do you need? 1st, you need to build a book. You need to find claimants. So let's let's pick a case like Camp Lejeune.
Cesar Bello:For those of you who aren't familiar, this is a a marine base camp where for decades, there was a water contamination issue, and a bunch of folks on the base, veterans and their families, got cancer, leukemia, had other complications. Pretty bad stuff. So the the history of it is, you know, it sort of was not talked about for a long time. Eventually, the government admitted that there was an issue, but they said, hey. The statute of limitation had lapsed.
Cesar Bello:So sorry. You can't do anything about it. Well, the the Congress, actually, in a bipartisan manner, which is quite rare, passed legislation to create a window, for people who were harmed by this, to bring their cases. Window's about to end in August this year, actually, but it's been open for a couple years. So there's a big rush to to sort of advertise and find these folks, to get the claimants together to bring suit.
Cesar Bello:So there are to the inside baseball question, there are folks in this space who are more focused on the marketing and the aggregating of claimants that are lawyers. Yeah. There's also other lawyers along the the the life cycle here who are focused more on, you know, actually trying the case, and they're in leadership, and they're the ones in the steering committees, and they're the ones, you know, doing the real litigating. And, you know, at any and there's stuff in between, sort of the handling firms that are maybe set somewhere in between, and they they kinda cocounsel with folks. And the lines start to get a little blurred, but, you know, each of these folks, you know, their law firm may be at a particular point in time when, you know, maybe they don't have a lot of runway in terms of their OPEX, or maybe they do.
Cesar Bello:Maybe they're a big brand name, and there's no issues about them ever running out of money, and they can continue to bring cases. And, you know, the latter are the folks that scare the big corporate defendants. Right? Because if you don't settle with them, they're just gonna keep coming at you. And, you know, they may tag you for a 100,000,000 here, a 100,000,000 there, a couple billion there, which has happened.
Cesar Bello:But there's a lot of folks, again, in the ecosystem that are kinda just, you know, drafting, not not able to drive an outcome themselves. So they're it comes back to this really knowing who the players are.
Andres Sandate:Yeah.
Cesar Bello:And, there's a lot of dispersion in terms of, you know, ultimate settlement outcomes, not having anything to do with the case, but just on who the law firms are. Right? So you you kinda need to be in the space and have a sense for that as well.
Andres Sandate:Yeah. Well, you're just reiterating a lot of the things, that, you know, I think make alternative investing. It's it's it's really important, right, who the jockey is. Like, who who's the jockey? Who's who's training the horse?
Andres Sandate:Right? The horse matters, but, but at the end of the day, you know, this is an asset class, I think, that that just really does sort of is synonymous with the inefficiency, the information, the the the lack of liquidity. And so knowing you are in good hands, right, and and with experienced hands, is is so critical. I wanna shift a little bit and talk a
Cesar Bello:little bit
Andres Sandate:about regulation and and, and innovation in the space. It is emerging, and it is an international asset class, when you when you include, what's what's going on in Europe in in particular. So talk about innovation and regulation for a second, Cesar, because there's there's been some new laws, I know in the state of Arizona that's had a pretty meaningful impact, here of late. For folks that are maybe less aware of what what has happened. Can you kinda give a summary?
Cesar Bello:Yeah. That's something that's always evolving and changing, and it's, you know, varies per jurisdiction. So there's a lot of time we can spend talking about that, but what you're speaking to in in particular is a more recent, development in Arizona where, for the first time, they've allowed nonlawyers to take equity interest in law firms. So, historically, there's been concerns about how law firms are financed, and some of those, I think, are sort of, archaic and a little bit, you know, don't make sense in the modern world. But the the concerns were, hey.
Cesar Bello:We don't want people who are nonlawyers being able to influence the case, and, you know, this really is a profession that, is special and should be, you know, you're just creating, you know, interest to barrier barriers to entry. And and the flip side of that is, hey. A law firm's a business like any other business. Why should, you know, they not be able to finance themselves as they see fit, to grow their business? Right?
Cesar Bello:That's fairly anti capitalist. But Arizona, being a little more progressive, and there's been a couple of states that are follow suit, has said, you know, we need to register and we need to, kind of, you know, verify who this is. But, here, you can actually take financing from nonlawyers for your law firm, and that's created an ability to sort of partner, with law firms in a different way and express maybe the same risk in a much better way to capture more upside, you know, to better align incentives, I think, with the law firms, because, otherwise, it's just a very, sort of one dimensional lender borrower relationship. And to the extent you can sort of have more of a an equity relationship or a different type of partnership, you know, it just creates optionality for for folks, right, to sort of design what they think works best for them.
Andres Sandate:Yeah. Makes sense. I I you know, there was a point in time where I said, I wanna go to law school. And and, you know, the one of the things that I was attracted to it is the the best lawyers are great writers, and, credit to you because the terminology in in the paper and, again, I'm gonna post this for folks. Is about expressing risk.
Andres Sandate:You know? When you when you say risk and investing, some people, may say, well, I don't want risk, but, you know, we all know you can't make money unless you're willing to take risk, and the way, that that you outline, expressing risk throughout the paper just makes a complete ton of sense. So so credit to you, but I wanna talk about 2 other things, before we before we get into some of the challenges of the space, because every asset class, there's no free lunch like you said. The first is I wanna talk about insurance companies, and insurance has moved into the litigation finance area. And I wanna ask, how how is that development at Corbin?
Andres Sandate:It sounds like it's they're looked at similar to funders as a sort of adjacent party to, to the conversation and and to to these opportunities. Can you talk more about that point that you're making?
Cesar Bello:Yeah. So it's a tool in the toolkit. Right? So let let's pick an example. This is a live case that we're working through right now.
Cesar Bello:So, there was a, commercial lease, where the, tenant defaulted, and there was a parent so, you know, the big parent company is supposed to, pay the difference between, you know, for the period of time where they stopped paying their lease. This went to trial for a few years, and, ultimately, there was a judgment, say, $14,000,000 judgment for, the, the the landlord. Okay. That's great. So so you you've come very far, but not quite to the end yet because it's still subject to appellate risk.
Cesar Bello:Right? So maybe we have a couple more years where this could drag on, and we don't think it'll be overturned, but it could. So, when folks have that, judgment, that that's effectively an asset. Right? So, you know, they're smart.
Cesar Bello:A lot of them will try to monetize it because there's still some risk on the back end. So they'll say, hey. Will you lend me some money? I've already gotten the case 90% there. I'm gonna win.
Cesar Bello:Will you give me some money against this? And, you know, when I get the money in a couple years after the appeals, I'll I'll pay you something back. So that's, you know, claim monetization. You wanna monetize your claim. Well, you know, if I'm taking binary risk, and I could lose it all, I'm gonna price that very differently, and I'm gonna size it very differently.
Cesar Bello:I would I might say, hey. I'll lend you $2,000,000 on this, but I wanna make back, you know, 4a half or 5.
Andres Sandate:Yeah.
Cesar Bello:And I can't take much more risk than this because, look, I don't you know, my my risk tolerance is such that I don't wanna lose more than $2,000,000 on this trade. And then you really need to take a big chunk of the upside for the risk. But now let's say there's an insurance company involved, and the insurance company would say, well, I'll give you a policy, to insure the entire $14,000,000. You have to pay me, you know, 13% of the policy up
Andres Sandate:front. Right. Yeah.
Cesar Bello:So okay. So that allows us then if if if the claimant gets that policy, they can come to us and say, hey. Not only do I have a judgment, but I have an insurance policy on this.
Andres Sandate:In hand.
Cesar Bello:How much money, yeah, how much money can I get out of this now, and what will you charge me for it? And once I say, well, that's a very different risk profile. So I will actually lend you $8,000,000 and charge you only, you know, 14% interest. And if the appellate decision goes against me, well, then I can look to the insurance policy. Right?
Cesar Bello:And that's that's much better risk reward, a better Sharpe ratio in our in our jargon, than taking the more binary, more lucrative on an absolute basis bet. So the insurance companies have come into this space in a big way, and it's allowed us to be a lot more creative with the structuring and a lot and allowed us to do a lot more size, than we otherwise would.
Andres Sandate:Well and and I think you said it at the very beginning. It's another lever. It's another tool. So, that's that's great. Let's talk about AI and and LLMs, large language models.
Andres Sandate:You know, they have, become synonymous with, you know, innovation, and I I just am curious. We don't spend a lot of time on it, but I'm curious. How how is AI and and and LLMs going to impact the work that goes into just what is synonymous with the legal field, which is just documentation.
Cesar Bello:Yeah. I I would actually take it a step back and just say digitization generally and technology has really shifted the landscape on a lot of this stuff because, you know, back to that Camp Lejeune case, 20 years ago, it was, you know, 1800 Camp Lejeune and, you know, you had to put out TV ads and radio ads and take a physical phone call and, you know, that's how you found the folks that were harmed and tried to get them, some some justice. Now, a lot of the outreach is digital. You know? Mhmm.
Cesar Bello:So the digitization of everything has created an opportunity to sort of reach more people faster and cheaper, and it's totally, you know, transformed the the economics. And, you know, that that so that's one aspect of it. Right? So the cases are getting bigger now. The the potential, damages are are are bigger.
Cesar Bello:The you know, it it's more it's simpler and more complicated in some ways, to to sort of, get to people and and sort of build a book. This is more particular a mass towards. But AI in general, I mean, there's always been folks, you know, who have had proprietary technology to find cases sort of scraping dockets. Right? So they have some algorithms that'll look through the Illinois state court docket for certain keywords that they think are important or phrases or, you know, to to sort of call that docket and figure out, hey.
Cesar Bello:These 20 cases are interesting, and these we're gonna actually download and have humans read because we think there's an an ability to to to maybe provide some financing that just kinda fits our box. So all of that is getting more and more accelerated as these LMs get more powerful. And, you know, I'm sure, some folks are gonna do it better than other. I don't have the the ax, or or sort of crystal ball on, you know, kind of where that's gonna end up. I think you have to be a little wary because everybody, effectively oversells
Andres Sandate:Yeah.
Cesar Bello:Kind of, you know, their AI capabilities today and what what this is actually doing. Ultimately, there's a big human element to this of of judgment and and decision making, and, you know, you can't really outsource that, at least not yet. But, certainly, another tool that can help you, you know, mine the the playing field faster and better and, you know, better curate things, and who knows where it's gonna go. Right?
Andres Sandate:Yeah. I mean, I heard I heard another credit manager describe their use of AI and and machine learning, and it effectively, allows them to do a lot, bigger filtering of a of a broader universe. And then for the human that's gonna be touching it, because there is a human element that's absolutely involved here. But at this particular credit firm, similarly, it just instead of having 300 opportunities, they they can look at what are potentially, like, the 15 most promising ones. So it's a signal.
Cesar Bello:And and it so, ultimately, that means it increases the efficiency of There
Andres Sandate:you go.
Cesar Bello:You know, that employee, and you you get more operational leverage out of each employee because you have this other toolkit you can use. Right?
Andres Sandate:Yeah. And and you all are are, as a firm stepping way back. I mean, 9 8 or $9,000,000,000, $9,000,000,000 I think you said, and and, what, 50 employees? I mean, so talking about operationally operational leverage. We wouldn't be talking fairly about any asset or investment if we didn't talk about some of the challenges.
Andres Sandate:So as we finish up here, I wanna spend maybe 5 minutes talking about some of the challenges that that you've encountered at Corbin, and that just the space in general presents. One of the most obvious ones is just the time involved, the duration. So when when you think about as a credit investor or through a credit lens, obviously, time is a risk factor, duration. So let's I don't wanna, pigeonhole you, but let's just talk about some of the bigger challenges in the space.
Cesar Bello:Yeah. So duration is the biggest one. No no no qualms about it. It's a challenge, for a bunch of reasons. It's it's largely out of your control.
Cesar Bello:Look. Generally, when there's illiquidity, you wanna be getting paid a premium. Right? This is an illiquid asset class. But the way we try to tackle it is we try to be intentional about our entry point and not come in early, come in later in the process.
Cesar Bello:So think 7th, 8th inning. Think insurance wrap. Think diversified portfolio, things that make it more of a a credit like risk profile. Not that we're necessarily just making loans or we're finding different ways to invest, but we want to do it where we're closer to monetizing. And sometimes you think you're in the 7th or 8th inning, and you're actually in the 4th, and that's unfortunate.
Cesar Bello:You gotta deal with it. But, you know, if if you structure your your deals correctly, you have some IR maintenance and, you know, you're getting paid to wait. Right? So you you gotta build all these things in ex ante. So even if if you're in a place where you don't wanna be, you're at least getting compensated for it.
Cesar Bello:But, duration is a problem. It was a big problem during COVID when things kinda shut down and extended, you know, can have a big impact on your IRR. And, frankly, a lot of the the defense delay tactics here are to extend and drag it out, to make it more painful for these law firms, who are working for free until there's an outcome. Right? So
Andres Sandate:Yeah. Yeah. Well, I think you you say something that I learned as an underwriter way, way back in, many moons ago, when I was an investment banker, and we used to say, you know, the intention, the willingness, and the ability and the willingness to pay. You call it, you know, a reasonable path to settlement, collectability, and an ability to pay, but you sort of put all of that under collectability. And and early on in the paper, you talk about the the monetization aspect of these cases.
Andres Sandate:So, lastly, I think that kinda gets us to to sort of your approach, and you've kind of alluded to this throughout. So, I wanna give you a chance to sort of talk about the the firm and the culture and and and y'all's approach. You've you've described it as having, you know, a credit like approach and having, various levers to pull and different off ramps. Are there other aspects that you tried in the insurance? Are there other aspects that you try to sort of build in or you've learned to build in, beyond the inside baseball and knowing which cases and which players.
Andres Sandate:What other things have have you guys learned, that make it sort of unique to you without giving any special secrets away?
Cesar Bello:Yeah. I mean, I I think one of the most important things we haven't touched on is, like, the sourcing, your ability to find these cases. Right? Yeah. Because it's almost everything.
Cesar Bello:Right? You need to be seeing a lot, to do the good ones. So we have a partnership model where we have a bunch of sourcing partners, effectively, you know, dedicated in their particular, let's call it fishing hole. Right? So some guys are just doing IP.
Cesar Bello:Some guys are just doing mass storage. So that's a little more more broad. But but, generally, these are folks who we think are best in class in their, particular vertical, and we are constantly working with them to look at interesting deals, work on them together. Maybe they need some completion capital. Maybe they want our sort of, not just capital, but underwriting, and structuring expertise.
Cesar Bello:So, the idea is to have as, has to widen that as possible across partners and geographies with folks that we know and we have a shorthand with and we've got reps with that we trust to to really see quality stuff across the various pillars, you know, that we talked about before within commercial.
Andres Sandate:But Yeah. Because there yeah. There's so many themes. There's so many risk profiles. There's so many variables, and there are a lot of different segments, and each of them could merit its own episode here on the show.
Andres Sandate:You know, just just in wrapping up, you know, litigation finance or Litvin is, as you describe in your concluding remarks, in the in the white paper, is is an esoteric and evolving, asset class. As you think about it in terms of, you know, the conversation, with with the investor community. What are the what are the, what are the best ways for folks to kinda learn about the funding side? You know, you're you're one of the the funding side, but what are the what are some good ways for folks to continue their education around, this esoteric and kind of emerging asset class? Is it just called is it just called Caesar?
Andres Sandate:Yeah. That was gonna be my last question. How do they get in touch with you?
Cesar Bello:I mean, you can just email me or Yeah. You can hit me up on LinkedIn, but, cbello@corbincapital.com. But but, you know, honestly, there's a lot of stuff out there. There's good publications, just focused on the space and journals, But every everybody takes a different approach to this space, and some people are hyper specialized. Some not.
Cesar Bello:Some people like to play for the 5 x and, you know, are happy to hang out for 8 years. Some are, like us, trying to do things much shorter and much more kinda credit based. So it's a hard question to answer because it's still sort of, an underground asset class, if you will. Right?
Andres Sandate:It is.
Cesar Bello:It is. You know?
Andres Sandate:But but having said that, I think it's I think we're gonna just run with the inside baseball analogy because before we hit record, the one person I asked if you knew in the space that I knew pretty well and used to work with, you said, oh, I know him. So Yeah. That confirmed, I I had to each of these episodes has a theme, and this one was, it was gonna develop a theme because we said we were just gonna riff. Right? And none of the questions I had were prepared in advance, and, I think you did an outstanding job.
Andres Sandate:So, so we'll go with the inside baseball. Last comment is yours. You mentioned this a minute ago, Cesar. How do people, learn more about your firm and and maybe more importantly, how do they get in touch?
Cesar Bello:Yep. So, you know, website, corboncapital.com. You can email me directly, stevello@corboncapital.com. And, you know, whether whether you you wanna talk about the space in general, you have a good deal, I'm I I live and read this stuff, so I'm happy to chat with anyone on
Andres Sandate:it. I I I know you do. Well, I wanna thank you for joining me on the, the asset backed podcast, today to talk, litigation finance. I thought it was very interesting. There's clearly gonna be a lot of developments.
Andres Sandate:We'll be watching all the continued success at your firm, and I look forward to having you back on, a future episode. So, Cesar Bellow, thank you for joining me today on the Asset Back podcast.
Cesar Bello:Awesome. Thanks for having me on this. Okay. Take care.
Andres Sandate:All the best. Take care. Bye.
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