My guest today is Adam Gill, a co-founder of the litigation finance firm GLS Capital and the very first guest this podcast ever had. Before litigation finance, Adam was a patent litigator at Kirkland & Ellis, and he came into the industry through the startup IPXI and then Gerchen Keller. We get into why he calls himself a risk manager rather than a prospector, how dealmaking actually works in litigation finance, and what changes when you go from underwriting cases to running three funds at once.
Top Insights
- Adam frames his firm as a risk manager, not a prospector: the goal is to underwrite risk accurately and get paid an appropriate amount for it, not to chase VC-style blockbuster returns.
- Because capital in the space is almost always competitive, pricing sits near a fair cost of capital. Price a standard case for a 10X return and a rival funder will just outbid you, so those cases tend to clear around a 4X or 5X.
- He runs the book at the portfolio level, watching concentration across claim types and risk profiles so that any single loss cannot sink the fund's intended returns.
- Incentives explain the gap between a funder and a law firm: hourly billing rewards doing more work, while GLS gets paid only on an efficient resolution, so even at a great firm the two sides can pull in different directions.
- The craft of litigation finance, for Adam, is dealmaking: reading a counterparty, understanding what matters to them, and moving terms around so both sides get what they need.
- Success brought a bigger target. A proposed 41% federal tax aimed only at litigation finance in last year's reconciliation bill, plus state disclosure bills backed by the Chamber of Commerce, would have been financially devastating.
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Full Transcript
Khurram Naik: Adam, I am thrilled to have you back on, because you were the first podcast guest. You helped launch this podcast.
Adam Gill: That's probably giving me too much credit, but I was the first guest, I guess. Happy to be part of it.
Khurram Naik: And how many more are there to come?
Adam Gill: I'm happy to be a part of your success.
Khurram Naik: I love it. Yeah, okay. So I think that raises an interesting question. You were early to trying something out, and that seems to be a pattern in your career, where you're willing to take risks and be early to something. I imagine that can be exciting, and it can be uncomfortable. Do you like sitting in the space of being new to something?
Adam Gill: That's a really interesting question. I do. I haven't really... I don't think I've sought out being early to something. There's a ton of risk doing that. And I think venture capital would be kind of a terrifying place to be as an investor, because they're often so early, sometimes even before a product, not even before a market. As I sit here, I think in my career I've looked for opportunity, and I guess being early into some things kind of shows that my judgment on opportunity leads me to accept things that are a little bit early.
In fact, I came out of law school in 2002 and into a patent litigation group. And back then patent litigation hadn't really taken off the way it has now, or has in the last 20 years. Most big law firms did not have a patent litigation group. Very, very few did. There were all these small boutiques doing patent litigation and patent prosecution that have now been snapped up and incorporated into big law, as big law saw that there's money to be made there. So I saw that that was an opportunity. I wasn't really looking to be early, and certainly patent litigation predated my tenure for a long time, but it wasn't quite as mainstream with big law as it is now. And I thought I saw an opportunity: these guys are good and the business model seems solid.
And so I joined. I don't think I was early to the party when I lateraled to Kirkland. They had a very well established group, and that was going to a leader in this space. I was happy to do that. My move from Kirkland was more driven by wanting to go into an area that I thought was interesting, which was finance, and also to go in-house. I was willing to accept... I went to a startup called IPXI. I was willing to accept the risk of them being a startup for the opportunity that provided to switch to an in-house role and to have a significant say in how things were developed. It was exciting, but it was a little bit nerve-wracking as well.
The Gerchen Keller move was really a confidence in Adam Gerchen and Ashley Keller. They were, I think, doing something pretty exciting. I had consulted with them. I worked as a consultant underwriting some of their matters for a while. They were seeing good things. The business model seemed very reasonable. And I had a lot of confidence that they were going to be able to execute.
Khurram Naik: So is part of the calculus of making these moves how you're managing downside risk? How are you assessing the upside? From a career vantage point of how you've entered the space, how does that map onto how you evaluate investments in the space?
Adam Gill: I think, among the three founders, I'm probably the biggest risk taker. And I think if you're investing in patent litigation, you have to be somewhat of a risk taker. It's high risk, high reward. We have a pretty conservative bent here, and we've been told that our bar is very high for getting investments across the line, intentionally so. And I've said this to people several times: we are not prospectors, we are risk managers. So I don't think it does map on very well to my view as an investment manager. I'm willing to take some risk. I like to take a data-driven, fact-driven analysis of those risks. And I like to sit on the conservative side of those as we underwrite. I would say... oh, go ahead.
Khurram Naik: So tell me some more what you mean by that, that you're not prospectors, you're risk managers. I take you to mean, I guess, that maybe other people are more willing to underwrite a different profile of case. I'm curious: somebody who is comparably talented to you with a different risk profile, how would they approach the work? How does that differ from yours?
Adam Gill: So when I say I'm not a prospector, I'm a risk manager, I don't mean to suggest that other people in the industry are prospectors. I don't think that's a very good approach to the space. This is more when we're talking to lawyers about our view of the world, or if I'm speaking on a panel to policymakers or to lawyers. Sometimes there is a mindset, especially I think on the defense side of the world, that we're out there looking for these blockbuster, crazy returns, always pushing the numbers higher, higher, higher. In reality, what we are doing is looking for an economically rational solution to a problem, right?
And so if we see a settlement that's being offered to a counterparty that takes into account what we view as the risks properly, even if it's not a blockbuster number, we would advise the counterparty that in our view it's a fair settlement. If it's not sufficient for the claim that's being brought, we would say we don't think it is sufficient. Our counterparty gets the final say in that, but our goal is not to hit VC-style returns. Our goal is to underwrite risk accurately, get paid an appropriate amount for that risk that we're taking, and then to see the matter managed in an economically rational way.
So that's what I mean by that. Switching over to how people might look at it differently if they have a different view than I do: I think there are some investors in the space that are not as conservative as we are, and that are willing to take higher levels of risk in certain spaces than we're comfortable with. That's just judgment and individual risk tolerance for various things. There are litigation finance providers that don't invest in patents; they don't feel comfortable with that risk. So in some ways we are more risk takers in certain spaces, and in some spaces others are higher risk takers than us.
Khurram Naik: Why is it possible, how is it possible, to have a fund that isn't pursuing this power-law payoff, like you're saying VCs do, where they expect a very small number of investments to return the fund? A corollary of what you're saying is that your goal is to have the variance be much lower. Is that part of what you're saying?
Adam Gill: Yes. Hey, if we can generate those types of returns, that would be great. If that ends up being what we hit, that's fantastic, but that's not what the goal is.
Khurram Naik: I guess, why isn't that the goal? I mean, it works in VC, it works in other contexts. Why wouldn't that be an approach you'd want to use here?
Adam Gill: I think there's a market that doesn't really allow it. Our capital is almost always competitive with other capital, and our counterparties are looking for a reasonably priced cost of capital, so you have to underwrite the risk in that way. If you price it for a 10X, either you're looking at something where you have a sub-10% chance of winning, which we would never even come close to getting through underwriting, or the market has failed in some spectacular way, because there's other capital that will come in and provide much less than a 10X cost of capital. And given the price of litigation, I don't know how you could take a 10X on your capital if you litigated something fully and leave enough for the counterparty.
The economics just don't make sense that way. In comparing VC funding to litigation funding... I can't pretend to be an expert in venture capital, so I want to limit the scope of what I'm saying here, but it seems to me that a key part of the value a VC funder brings is that money is fungible in any context. Andreessen Horowitz's money is fungible with some small regional fund; the dollars are the same, but there's a signal effect of saying, okay, we're the lead investor. And so that, at a public level, is absent right now in litigation funding.
So that seems to be a pretty different dynamic right there, because the criticism you have in venture capital, as I understand it, is that there are these runway economics of, okay, if Andreessen Horowitz is investing in it, then I want to be in the next series. Just like Warren Buffett has the same thing: the Warren Buffett touch of, hey, I invest in something, and therefore the stock goes up, because everyone's like, oh, if Warren Buffett's in this... So it seems that's a dynamic that's missing in litigation finance, at least not to the same degree, because it's not as public. Obviously VC works; it's produced a ton of huge companies, there are a lot of VC successes.
So that model, for whatever its problems are, has a sustainable working model. When you try to apply that to litigation finance... this is not a perfect analog in any respect, but it's like asking why can't you apply the VC model to real estate, buying real estate or renting out real estate. Nobody's going to sell you a house that you can turn around and sell for 10X. It just doesn't exist, right? There's a market; the market can see the value of the house. Maybe gold prospecting, or oil leases or something like that, might give you that kind of return. But again, you're looking at a fundamental, transformational event happening that isn't here now, that has to happen, and there's a low likelihood of it happening. And that's why you're getting the premium for taking the risk.
I just don't see how that happens in a legal case where we would be comfortable. Maybe it can happen, but it's very difficult to get comfortable. That said, actually, as I say this, there have been times where there are discrete investments available like that. There's one called risk corridors, where the Affordable Care Act promised certain payouts to insurers for participating in the marketplace. And then I think the federal government refused to pay out some of those defined payments. At some point along the way, the case was in a pretty serious loss position. It was getting appealed after a loss below, and it was getting appealed to a higher level. I forget if it was lost on appeal or if it was lost at the district court level, but it was in a loss position and getting appealed, maybe even getting appealed to the Supreme Court. And I think those claims were trading, or you could buy into them, for a very low amount, coming out of the court of appeals in a loss position looking for cert at the Supreme Court.
I'm not sure you'd get a 10X on that, but I think people did extremely well on those. You're taking a huge risk, because if the Supreme Court didn't take up cert and overturn the decision, you're going to lose all your money. So maybe you can get a confidence level there and make some investment. If you're betting your whole fund on that, that would be, I think, probably irresponsible, but there are here and there trades like that that you can get higher confidence on. But across the industry, if you're looking at a pretty standard case where someone brings you a contract case, it looks good, it's got good lawyers on it, the facts are good, they're going to shop it around and they're going to get kind of market economics. And if you put in an offer that gives you a 5X, or probably even a 4X, you're just going to get outbid by somebody else. You just want to get the case.
Khurram Naik: What are the benefits to being in a space where the capital is so competitive? In VC, it seems to me the trade-off is, yeah, these assets have a lot of variance in their value, who knows what this will be worth in a year or two, and that's the opportunity. So I imagine there are some benefits to being in a space where the capital is competitive and the pricing is so much more constrained.
Adam Gill: Well, as an investor, I think you're always looking for places where the capital is not competitive. Proprietary deal flow, that sort of thing, is always great, because presumably you can get a premium for that. For participants in the market, for the consumers, obviously a competitive market is great, because they get pricing that reflects the aggregate view of the market on what the risk is. It can make it easier sometimes, just knowing what market pricing is and understanding the market pricing, to come to terms on a deal. We can tell the counterparty, we've done multiple deals with this structure with these same numbers. They can feel comfortable that this is market pricing and they're not getting taken advantage of.
And there's also a point at which everybody needs to stop shopping around and looking for more and say, okay, let's do this deal. A functioning market with some transparency allows the claim holder, who really controls when you go into a deal and when they're going to accept, to say, okay, I can stop looking around, shopping around, and I can commit to somebody and we can go forward with the transaction.
Khurram Naik: How much has your thesis about the value you deliver for the people you work with, or your LPs, how you see the value you generate in litigation finance, how would you see that differently today than you did five years ago?
Adam Gill: You're asking how I think they perceive our value differently, or how we perceive the value of counterparties differently?
Khurram Naik: A better question is: how do you see your value in the market differently today than you did five years ago?
Adam Gill: I'm not sure that's changed a whole lot. We always came to counterparties with the pitch, and we believe in it, that we're value-add capital, in a couple of respects. One, we've practiced as trial lawyers at fairly high levels, so we think we have pretty good expertise in what we're doing. We have a friendly but different set of eyes on the problem, and I think that aligns more with the counterparty than with lawyers, potentially, because we get paid when the counterparty gets paid, and lawyers get paid to do the work as well as when the counterparty gets paid. Sometimes lawyers' interests are not perfectly aligned with the client, because they have their own ideas and they want to do the work that they want to do. They have accountability to their firm that might not be perfectly aligned with the counterparty. So we bring another set of eyes, and there could also be groupthink in some groups, if you don't want to challenge the trial lawyer or whoever is running the case, and so we are willing to question that. We are also always looking for what can go bad, what can go bad, what's wrong. And we see the case from a different level. We are somewhat more akin to the judge and the jury, in that we don't get to see all the nitty-gritty details, we don't get the expert reports, we don't get all the stuff filed under seal. So when we are hearing trial themes and that sort of thing, it's not from a perspective of going deep into the documents, it's really thematic and what's going to resonate. So sometimes we can push back on that.
We can also cross-pollinate. I think that's maybe one view that's changed. A lot of the benefit that we can provide to lawyers, and also to the cases, is not necessarily that we're smarter than them, but that we see so much. We might have come up in front of the same judge with the same issue, and we've already thought through it with a firm that we think highly of, and we saw how it went. You can pick up a lot of that in legal research, but then there is also a political and human aspect, understanding who the people are that are making these decisions and what some of the differences might have been. So we can cross-pollinate ideas from working on a problem in case A to working on the same or similar problem in case B, which gives efficiency and additional input. But I think we still believe that we provide value in an independent, friendly but critical view of what we are able to see.
Khurram Naik: That's an interesting point you're raising, because let's say there's an objective set of data out there, the public filings of every docket in every patent case, that's something that everyone has access to. When you have that as an equalizer, what remains is that judgment aspect, the situational and contextual. So much of what you do as a lawyer is that you have to exercise judgment and context for what you think will be persuasive in this moment, and somebody else has a different point of view. Maybe your opposing counsel has a different point of view, or maybe there's parallel litigation of some kind in another jurisdiction on a similar issue, and so you're exercising your judgment that way. So do you feel like there's some pattern or theme to how you solve problems, how to solve disputes favorably? Do you think you have some differentiated approach that a comparably skilled funder might have a different point of view about, to get the job done, what's persuasive, what's effective?
Adam Gill: In terms of settling matters, I don't think so. I think most funders would view a rational settlement positively and would encourage clients to take them. Where that line is for different funders may vary, but I think generally funders are in favor of settlement; it removes binary risk, it's good for duration. So I would imagine we're all of the same mindset there, and we don't have any kind of special sauce there.
You mentioned earlier sending a signal by who's invested in a certain case, in a VC matter, whether it's Sequoia or Andreessen or whoever. I've heard that being thrown around in litigation finance, that it sends a signal to the other side. I haven't really seen that operate in practice; the fights seem to be the same before and after funding is known. I think most defendants, or a lot of defendants, assume that most cases are funded now anyway. And what would we see, because the defendant wouldn't tell us if they view us funding a case differently than somebody else? I don't think they do, though. No big law firm is going to cower in fear because of some litigation funder that they think they're smarter than, that they think they can win against, because that's what you have to do, is litigate. If they're not afraid of the lawyers that our counterparty is using, they're not going to be afraid of us; we sit even further in the background. So I haven't really seen that operate in practice that much.
Khurram Naik: I'm trying to hone in on what is the judgment component that you are exercising, because as a litigator there's a judgment component for how to approach a case, so of course different people could have different approaches. How can you characterize the judgment and approach that you use that a comparably skilled funder wouldn't use?
Adam Gill: I think different people have different ways to approach the asset class generally. Based on various things that I've seen, I think some funders are more focused than others on watching the budget very carefully and metering out money much more conservatively, just working on budget issues constantly. I think some funders are more focused on trying to either invest in matters, or when they're invested in matters, really constantly advocate for settlement opportunities, exploring settlement. And if you do that, I think you can push down more of that mentality onto the client and the counsel, and maybe that helps get more of a focus on, let's see if we can settle things, instead of fight, fight, fight and then right before trial say, hey, is there an ability to settle? Some people have more of a conversation along the way than other funders do. Those are the big ones that come to mind. I can't say with authority, because I only have a limited view into what our competitors do. You hear it at a conference, or you might talk to somebody at a conceptual level when you get together at a meeting, or if you see them from time to time, but we don't have real deep insight into what our competitors are doing at a granular level.
Khurram Naik: You frame your role as risk manager, and so a first question I have about that role is: from your experience, how does the risk management that a funder is doing differ from the risk management that a firm is doing? Because a firm is also a portfolio of patent cases; there's something analogous, they're thinking in terms of, here's the portfolio of matters that we have and the income that will generate, and the reputational benefit, and all the things that go into selecting the cases that you do and the risks associated with that. How does your role differ from that of a practice group at a firm thinking about this?
Adam Gill: That's a good question. I think it's all driven by incentives, and I say often that people act in accordance with their incentives, and in particular their economic incentives. Our economic incentives are to have an efficient resolution as soon as possible. If you ask yourself, does the law firm have that same incentive, maybe, maybe not. When you pay somebody by the hour, you're paying them to do things. So if you pay somebody to do things, they're going to wake up every day and say, what can I do, because that's the value you've shown them. When you pay someone to resolve something efficiently, which is how we get paid, they wake up every day and say, how can I resolve this efficiently. So I think it just leads to a different mindset. Even if you have a lawyer who's doing a majority of defense work and has the occasional plaintiff's case, it's not an easy switchover into that mindset necessarily. And they still need a budget, therefore, that's what we're there for, to provide. Sometimes we provide just the hard costs of litigation, but in almost all of our investments, the vast majority, we provide a significant piece of counsel's fees as well. So they're economically incentivized to see those fees continue to be deployed, even though the firm is going at risk for some of them. That's a little bit different.
We try to keep as much incentive aligned as we can. We never want to be at odds where we want to be settling and it'll be best for us if the case settles, but it'll be best for the client or the counsel if the case did not settle, because we don't have a say in whether it settles. So we need our incentives to be aligned so that we can trust that counsel and the client, when they're making their decisions that are in their best interest, are also making decisions that are in our best interest. So we try to align as carefully as possible, but perfect alignment is not really possible. One thing I learned early in this business is that you don't know, even at a great firm, what somebody's particular position inside of that firm is. It could be a very strong firm, a great group, but if you have a lawyer who's bringing you a case who needs this case for their book of business, to make the economic case that they want to make for their compensation that year, they might be incentivized to push a little harder, to overlook some risks, to have the case go forward. And I don't say that people are saying, well, this is not a good case but let's do it anyway because I want the money. I just think they're incentivized to say, let's take this risk, I think it's worth it. For them it probably is worth it; for us it might not be worth it. But they're thinking of themselves, as they should. When you incentivize someone to do that, they're going to do that. That's how people work, that's how humans work. So that can drive differences in how we act and view risk differently.
Khurram Naik: From your vantage point, you litigated on the billable hour, and now you work with firms that operate on the billable hour. Do you see any advantages to the billable hour?
Adam Gill: It's a broad question. Yeah, because it's easier, right? It's an easy thing to agree on. I'll do as much work as needs to get done, and you'll pay me for the hours I work. It's an easy transaction. Whereas if some people say they bill on the value that they create, that's a harder metric to coalesce on, because does that mean they're not going to get paid if they're not successful? Take a lawyer who has that view: I don't get paid by the hour, I get paid by the value that I create, but I'm also not a contingency lawyer, we're going to bill on some agreed budget, we're going to have a monthly number or a phase number. Well, if you don't win, and you're paying for the value that you create... or let's say win is whatever the stated objective is, because sometimes the stated objective on the defense side might be, cap our liability, we'd like our liability to be less than a certain amount, so you might not win the case but you can win what you're trying to do. You don't always see that. The folks who say we're getting money on the value we create, if you don't have the risk on the other side, and if you don't have a meeting of the minds of what that value is worth and how much of that value that's created should go to the lawyer and how much should go to the client, that becomes a more difficult negotiation, which is, I think, why the billable hour has persisted.
Khurram Naik: On that topic, you talked about what winning looks like for the client, and I think that's an important point. I had a recent episode with Louis Tompros at WilmerHale, and he was talking about how you can win a trial but lose something for the client, if in order to prevail you got some financials into evidence that they were looking to exclude, and that helped you in some way to get some advantage, but then that blew something much more important to the client. So what have you learned over time about how to structure things to the benefit of the client, what winning looks like to a client, what has changed in your perspective that way, and what is your process?
Adam Gill: Maybe a slight increase in my view of how much validation is important to inventors, as opposed to money. Certainly money is important, but there's a very real component to inventors wanting to get credit for having invented a piece of technology. It's maybe their legacy, their life's work, and they don't just want a paycheck, they want an acknowledgement that they've contributed this to the world. I knew that was there, it's been talked about for a long time, but seeing it in action occasionally alters my perception a little bit. The vast majority, I think, are still driven by economic interests, so that's a very small piece. How has it affected my process? It hasn't really affected my process.
Khurram Naik: What is your process for how you figure out what is a win for the client?
Adam Gill: We ask them. When we're doing underwriting, we want to know, are we dealing with a rational person here, a rational company? And we will ask them, what does winning look like? And it's not just at one point in time, it's, what would you settle for now, what do you think is a reasonable settlement midway through the case, maybe at claim construction, approaching trial? Do they have reasonable amounts in mind, and are they not what we call a lottery-ticket holder, which we don't really think is a great situation to be in? It's too much risk if someone's going to demand incredible amounts of money that are going to force you to go through trial and also the Federal Circuit, probably. And if they're not a reasonable person in that regard, there's a chance that they're not a reasonable person in other ways, and that's going to come out, and that doesn't really translate well in front of a jury, in front of judges. So another one of my truisms is that people are consistent across time and situations, and so if somebody's completely unreasonable in that context, you're going to find other places where they're completely unreasonable, and so that would be a red flag for us.
Khurram Naik: You mentioned noticing, discovering, how significant credit for inventorship is, these non-economic criteria. What are other surprising non-economic criteria that go into funding that you've noticed over time?
Adam Gill: This is not going to be very surprising, I don't think, but the reasonableness and the integrity of your counterparty, and also counsel. If people hide things, if they misstate things, if they over-represent things, if they dismiss things in a way that is not reasonable, that shows us that they're not going to help us be a good manager of the risk here. I like Tim Ferriss, and I listen to his podcasts. He wrote The 4-Hour Workweek, and he has hundreds of episodes, and he had an episode where he was interviewing the guy at NASA, the one person who decides go/no-go at launch time for launches, and he's the person who sits in the chair if things go badly and answers to Congress why the launch happened. So this is kind of like the ultimate risk manager, right? He talks about his process and what he's looking for. It was a super interesting episode. And he said, if you want to get him mad, tell him everything's going great, tell him everything's fine, there's nothing to worry about, and he will be as unhappy as he can be, because he knows that's not the case; there are always complications, and he wants to deal with people who are capable of having a serious conversation about real risks.
We're the same way, obviously much lower stakes, but that dynamic is what we want. We want people who say, well, there's risk, here are the risks, here's the way we see them, and here's how we're going to overcome them, here's why we think we're right. So you can have a clear-eyed evaluation and acceptance of that risk. There's always risk in all of these, and we're going to find what it is, I believe. So it's just faster for us; you're talking with somebody who's approaching you as a partner rather than just a bag of money that they're trying to get from you. When you see that dynamic, versus when you see the opposite, when you see people assuring you of things that they shouldn't be assuring you of, skipping over risk, then it's concerning.
One example of this that surprises me: in Section 101 patent-eligibility issues, we have a very low tolerance for risk in that space. The gray area that has been created by the courts is incredibly wide. Our process is, we need to get to a high confidence level that our counterparty is going to succeed, and if you have a real 101 issue, it's really not possible to do that, because the case law is unclear. I think a lot of people have recognized that, and the level of abstraction that gets put to your patents is also unclear sometimes from the outset. You'll have a defense lawyer come to you where, if one of their defense-side clients were fighting this, they would tell their client, don't even worry about this, these guys are dead on 101, and then they come to us, and you say, well, we see a 101 issue, and they say, oh yeah, that's fine, it's a technical solution to a technical problem, and they kind of wave it off, or it's, there's a computer in the claim or something like that. It's not even close to the analysis that you're going to need, and it's not even close to a clear answer, and a clear answer is not possible, but they will argue that this is not an issue, this is fine, even though I have to think they know on the defense side that this would have a very difficult time passing muster, or whatever they're proposing to us. So that's an extreme. We don't see too many of those, but that's one extreme example. Another would be damages. The numbers we see in damages, when people say the addressable market is at least this much, in memos or proposals that we get, we see unrealistic numbers that I think everybody knows are not going to happen, over and over and over again, and it's disappointing to see, because what we really want is a serious discussion of the risk and the reality of the situation.
Khurram Naik: I'm really interested in this concept you're describing of risk manager, because you mentioned NASA, I don't know what the role is, an executive maybe. As someone who is in a risk-management role, when you first said risk manager, the first thing that came to mind for me was a financial sense, like in financial ecosystems you have different entities that take on risk and share it, that's the purpose of these entities, to take on risk. In finance you can quantify things and say, okay, here are the various outcomes we expect, and this is our Sharpe ratio, or whatever; there are different ways of measuring risk. I'm curious how you think about risk. What is the risk that you are managing as a portfolio, apart from the risk in any given case? As a portfolio, what is the appropriate... because one of the key findings of finance in the past 70 years now is that in a portfolio, the variance of each of these is collectively reduced by holding a portfolio. So I'm sure at some level that's true, or can be true, in litigation finance. I don't expect that sort of quantification, but that's an illustration of what it means to hold a portfolio of risk. So I'm interested, what is it like holding a portfolio of risk, what is it you're managing in the portfolio, different from the properties of the individual risks?
Adam Gill: Another good question. I think it all comes from the way that we have defined our business and what we talk to our investors about that we're doing. If you told your investors, we're going after VC returns, this is super high risk, high reward, but we have the edge here for whatever reason, we're getting paid more than acceptable amounts for the risk that we're taking, and we're experts, we have edge, and here's what we're doing, then you should execute on that. But that's not what we are going for. So we're going for a more down-the-middle... it's legal risk, so it's high risk across investments, like we take zeros, you're going to lose a case if you're running a portfolio of litigation finance assets through trial. So we manage to that across the portfolio.
Can we take some higher-risk matters? Some patent litigation is high risk. If you have a single patent matter against a single defendant in any jurisdiction, that's highly binary, probably high risk. International arbitration, high risk. Pre-certification class action, high risk. You should get paid for that risk, and so some of that is acceptable in the portfolio, but not in a way that's going to skew the intended performance of the portfolio if that goes badly. If that's one where you're taking a loss, which you're taking the risk of, you don't want to be in a position where one loss is going to damage your portfolio returns. So you have to look at sizing of individual investments, you have to look at concentration of different claim types and also different risk profiles across the portfolio.
I've mentioned a couple of times that patents are higher risk. Now, you can do patent investments that are lower risk. If you have a highly collateralized group of cases, some of which are far along and looking to be very successful, some of which are less far along, you have a great coverage ratio, your costs are low, but the expected value of the overall portfolio is quite high with a good confidence level, then that investment starts to look more like what we call a commercial litigation investment. Here, commercial means anything that's not patents. We don't do consumer litigation finance, we don't do somebody waiting for a settlement for their car crash, that sort of thing; that's a whole different industry. But commercial would be breach of contract, financial fraud, competitor antitrust, that sort of thing. So we try to build a portfolio that delivers predictable returns across a number of matters, that shows that we're getting things right across a portfolio in how we assess risk and how we price that risk. We don't really look necessarily at each individual claim type, other than for overall concentration. You don't want a fund that's half antitrust risk, because if the antitrust law changes in the middle, then you can have a big change in value. Aggregate risk profile we look at as well: how much single-case risk do we have, how much low-risk, low-return investment do we have. And there's a threshold to that too. We don't want a ton of low-risk, low-return investment in the fund, because we're built to take more risk than that. We have people come to us sometimes with something that's fully insured, and they want a low-double-digit return, a 12% cost of capital, they might have it protected to the point where that's appropriate from a risk-return standpoint... we would not do that, because where we sit in our investors' portfolios is higher risk, higher return. We're not a credit fund; if we delivered credit-fund-type returns, I think our investors would say, this is not the bucket that we put you guys in. We're also not a VC-rich fund, so they're not looking for that either. So to the upside and to the downside, we manage how our portfolio is poised to hit the metrics that we are trying to achieve.
Khurram Naik: Let me switch gears slightly. What is it that you loved about patent litigation as a practicing attorney?
Adam Gill: I really did like some parts of it. I like just doing a deep dive into slices of technology. I still do that now, and I actually do more of that, because we're evaluating so many cases all the time, and we don't really go deep until we're farther in underwriting, then we really start to understand. I love that; it's really fun to understand how things work. We have a case that's public, Nanoco, and the technology that was involved there was quantum dots. These are semiconductor particles that are so small that only certain wavelengths of light can escape them, so you can shine a blue light into a four-nanometer quantum dot and you'll get one color, and you shine that same light into a six-nanometer quantum dot and you're getting a different color, and not just a different shade of red, you could go from yellow to green to red. And it's the same material; the core and the shells of the molecule are the same materials, it's just the size. And then that goes into the lighting stack of TVs. So just to learn about all that, and why it's used, and then how they make it... the invention was really taking cadmium out of the process of making these particles, and the particles that result. So doing a deep dive in all that stuff, I really enjoy. That's fun.
The practice-specific areas I liked: I really enjoyed taking depositions. I didn't love defending depositions, I felt like that was always... you're always waiting, what's next. I have some fun stories from defending depositions that worked out great and are amusing, but when you're working on high-stakes matters, for the most part, at Kirkland, when you're in that position, you don't know what the next question is, and there's this level of stress. But when you're doing the deposition, you know what question is coming next, and that can be a lot of fun, especially... I found a lot of experts on the other side, surprise surprise, to be, I would consider, disingenuous in the positions they took or their refusal to answer certain questions. I was taught a rule of thumb by a lawyer there, Paul Steadman, who I had a lot of respect for. He said he prepares seven hours for every hour of deposition that he takes. The rigor that you have to go into, preparing for an adversary that's probably smarter than me generally, but certainly smarter than me on the topic that we're talking about, and then making them... you're saying, what am I going to make this person say, and how? It was always a really fun exercise, because there's only so much you can do, and then the question is how much you're going to be able to accomplish. So I really enjoyed that. Working on trial themes, trial strategies, I really enjoyed.
One of the things that I really enjoyed about part of my practice, though it wasn't much of my practice, and part of what led me to leave the firm, was I had a couple of instances where friends of mine came in to talk to me about potential representation. I knew, based on the size of the company, the size of the matter, that we probably weren't the right fit for them, either from a conflicts perspective on our side or from a budget perspective on their side, but for personal reasons, and also to help, I would have them come in, I would do intake, and sometimes I was able to give them some suggestions on directions they might go, or make an introduction to somebody that I knew that was really good. One client was trying to get patents on software, and this was right when Alice was coming out, and he said, my lawyers say software is not patentable anymore. So I introduced him to a PTO expert that we used regularly, that I thought was one of the best in the business. He was able to get patents, and he sold his business ultimately, and having the patents was important to the buyers, and it worked out very well for him. Being able to help people in a tangible way like that, and have them come back and be truly grateful, was a great part of practice. Like I said, I didn't get quite enough of that working in a very narrow piece of gigantic cases, so that was part of what made me realize that I should probably be doing something else, where I'm closer to solving business problems. There's a role for that, there's a need for that, but I just didn't feel like it was what I wanted to do at the time.
I also liked working on some of the big issues that we worked on at Kirkland. We did the Samsung-Ericsson world war, their first world war, where they were fighting all over the globe, ITC, district court, Asia, Europe. Being able to see and learn about the strategy involved there, working on cases that are in the news... I worked on a non-patent case, I worked on the BP Deepwater Horizon case for a couple of years, that was fascinating. The technical issues were fascinating, but also just working on something that's in the headlines is kind of fun, it makes it a little bit more... another layer of interest there for you. Live fire, it's a real drill. I remember being in the boardroom at BP in one of their buildings, sitting with an expert and an associate, starting to put pen to paper, the expert putting pen to paper on his draft, and thinking, is this really how this is going to happen, how the world learns about BP's position on this issue? And the answer is yes, it was the three of us, mostly the expert, but certainly with input from us. That kind of stuff was really fun and interesting.
Khurram Naik: I'm laying this as a foundation for how that compares to your work now, because I think about inventors' credit, and how much more aligned you are with the work you're in now. I can tell, from listening to you talk about this NASA engineer or executive, whatever this person is, you're excited to pull ideas and use other domains, and to me that gestures at your approach, this being beyond a skilled technician, you're viewing this as a craftsperson. So I'm interested to hear from you: what is the craft of litigation finance for you?
Adam Gill: I think the word that comes to mind is dealmaking, for me. It's a complicated and competitive space, and it's not easy to get deals done. I think any litigation funder will tell you that the focus and the work that it takes to get from diligence into signed documents can be pretty intense. You're always hitting some snag, some things overturn that you have to deal with, misaligned expectations, or you just hit a deal term that the other side needs something different on. I think the soft skills, being able to listen to your counterparty, understand what's important to them, and be able to move pieces around so they get what they want in a way that allows them to give you what you want, is particularly valuable. And that same dynamic, listening to people, trying to give them what they want so that you can get what you want, is also, as you're looking for deals, originating deals, important too, and I think that's been important in a number of our deals that we've done.
Khurram Naik: So then what do you see as... can you penetrate the essence of that craft? What is the thing that is the infinite game for you, that you're going to keep coming back to again and again as years go by, the thing you're going to keep iterating on? Maybe for a trial lawyer it's that opening statement, that cross, or whatever, maybe there's that singular thing that they really just love to focus on. What do you see in yourself? What is the thing that you take pride in, and maybe one measure of it is, hey, sometimes I feel like I didn't do as good a job as I could have, I'm going to sit and watch tape and go through that and figure out what I could do better next time. What is the craft that is driving you forward?
Adam Gill: So I think the business changes in subtle ways. Different areas of law might change and be more attractive, different venues might change and be more attractive, certain areas might get more competitive, so the opportunity set is less on any given potential deal, or pricing goes flat, or there might be some new area that you realize, hey, that might be interesting to go into. So in that way it's always dynamic and always changing. But across that, I think getting to know people, getting to know the industry that you're in, the people in that industry, the businesses in that industry, what drives them, and then thinking about how you can fit into that, or how you do fit into that, to help them accomplish their goals, is a very valuable set of skills, because there are a lot of skills in there, and there's a lot of information in there.
One is knowing your industry. Working in patents, I don't come close to knowing my entire industry, because that would be knowing the semiconductor industry, semiconductor fabrication, semiconductor packaging, semiconductor design, sales, all these areas of the ecosystem, and then downstream, what is going on in the industry right now in terms of margin, and what companies are going which direction on which technologies. For example, now, what technologies are dominant in memory, and the price of memory is through the roof now, and what does that mean for companies that are involved in the memory space, in terms of what they're going to do with their patents, and how they're going to react to patent litigation either offensively or defensively. Then understanding the people within that ecosystem, getting to know high-quality people that manage or control high-quality portfolios that have the same view of the world, or at least a view of the world that's somewhat consistent with what we do, litigation funding. We're never going to do a deal where some Silicon Valley company divests a big portfolio to us; there are some companies that are just not going to do that, no matter how much they might like any of us here, but some will. And that changes with time. BlackBerry never did much monetization until they did, right, coming over that product curve and starting to look for other ways to generate value from their IP.
So knowing that, knowing the people who are involved, having relationships of trust with those people, because especially a lot of the work we do is in Asia, you can't just show up at a meeting and say hi, have some coffee, and have someone give you access to senior executives or their portfolio. It takes a track record, it takes a long relationship where you get to know each other and they kind of come to trust you. And then understanding what they're trying to accomplish, instead of trying to shove a round peg into a square hole, trying to see where your objectives and their objectives align and see where there's opportunity there, and then through the negotiation process doing the same thing: how do their goals align with ours? It's not always money. Sometimes we look at people, and we're working with an operating company, and they say, the risk here is, here's a pocket of risk that worries us, what can we do to resolve this, can you help us with this piece of it? And you have to listen and try to see if you can solve it, and if you can, then it pulls you closer to them as a partner, and if you can't, then it might kill the deal.
So doing that over time, I think, is very valuable. I've been doing some of that since I've been in litigation finance. I started going to a lot of conferences and getting to know people, because coming from a law-firm background, I said, okay, I want to build my brand out. It's hard to build your brand as a junior partner; a curriculum and all is too much, but now I'm in a new area, I can do that. So I started going to a lot of conferences and meeting people, and over the years I've gotten to do that, and then applying that to really being helpful and doing what you say you're going to do over time builds a lot of value. Those are things that I'd describe as soft skills that will persist and that I think will remain valuable, even though the core underwriting analysis, is this patent valid, is this patent infringed, what are damages, what does this venue look like, those questions are going to remain the same, even though the answers might change.
Khurram Naik: When you first started in the space, you were relatively early to litigation finance, compared to almost everybody else, and back then you were explaining the most basic aspects of litigation finance, what it is, that it's legal, and so on. Fast-forward to today, the market has matured. Building on what you're talking about, looking for ways to communicate your value and create that value in the parties you work with, what do you see today as the biggest bottleneck to unlocking more value for your counterparties in litigation finance?
Adam Gill: I'm not sure what the answer is there. Some lawyers might be a little bit more collaborative in strategy and planning; I think that would be helpful. Some are very collaborative, some less so. Some say, we've got this, we've got our own plan, we don't need any help. On the systemic side, in patents, from a structural perspective, United States patent litigation is incredibly expensive, it generally takes a long time, and there's a low level of certainty, even as you get through district courts, but certainly through the whole process. Are you going to have to go to the PTO? I know the PTO has changed in the last couple of years, but we've seen it change several times as the director of the PTO changes. So even if you're investing now, there's two more years left for John Squires, so what's that going to look like? You don't know. Then going through the district court, there's uncertainty; if your appellate lawyers give you uncertainty, more than a judge... and then the Federal Circuit is a real level of risk as well. So if you put those together, it's a system that has a lot of risk in it for inventors and for patent holders. So I think there could be changes there; there are some that have been introduced in Congress that I think might help. But that's something that could unlock value in what I do specifically, for our counterparties, for inventors who have poured their resources into developing technology.
Khurram Naik: Going back, you mentioned there are certain big tech companies that could do business with you, but there's some obstacle to them doing that. You mentioned law firms, there's some obstacle to being collaborative. What do you see as the underlying assumptions they're making that your experience would shed light on? Is this an education issue? Early in litigation finance there was the education issue, explaining, hey, here's how this would even work, this is legal and helpful. That was the issue then. What do you see as the education issue now for, let's say, corporates or law firms?
Adam Gill: For some corporates, I think there's just a fundamental disagreement on the value and the use of patents. If you're dominating a product category, you make your money, you harvest your premium, from selling products, which is fine. Elon Musk said patents are for the weak; I think he said that. It's true, they are for the weak, because if you're dominating in the product category, you don't need to assert your patents to make your money. But if you're not, and you've contributed technology that's valuable, or if somebody's using your technology that's valuable... somebody comes out to make networking equipment or cell phones or data centers, competing with those economies of scale that already exist, with the entrenched incumbents, it's just unbelievably difficult. So even if you develop brilliant technology, you might not be successful in the market. Those are the people who need patents, the midsize players, to protect their markets in some ways. But there are some companies that just dominate in their product categories, or sell enough, that they say, this is what we do, we don't want to monetize, and they're just positionally adverse to patent monetization, and I don't think there's any education that we can do to change that, because it's economically reasonable for them to view the world that way, and I don't see ever changing that culture.
For some others, I think there's inertia. For example, there are some companies that are historically more conservative, who don't divest, or haven't divested, many or any patents for monetization, and they just haven't thought through, is this something that we should be doing. It's easier to coast along doing what they're doing. I think some of those companies, it would be worth evaluating what's best for their patent portfolio, are they really getting use out of their patent portfolio, using it defensively or offensively as they should. If you start using your patent portfolio only when you're sued by one of your competitors, you're already behind the ball; they're going to get to trial first, especially if you're in other jurisdictions, they're going to get to injunctions first, and it's a question whether you'll be able to sustain those before you have your own leverage after you bring your patents. So sometimes a comprehensive overview, or comprehensive reconsidering, of the value and the use of the patent portfolio, in some companies that haven't done it, could produce the decision of, yeah, actually we have a lot of assets here, we don't need all of them, it could be a pretty big value generator for us to either divest or monetize some of them.
Khurram Naik: And what about... is there any education point for law firms?
Adam Gill: Yeah, I think so, the same thing that I was talking about earlier with respect to getting to know an industry and the people in the industry and how you can be helpful to them. I'll give you an example: Mike Renaud is an attorney at Mintz Levin, and I think he is very successful at doing this, counseling his clients on the value of IP, because there are several of his clients that I know, that he really understands the business segment that they're in, the commercial realities of it, not just the law. I see him able to be an advisor to them, and he also understands, I think, litigation finance and the commercial aspect of patents, so he's able to speak to his clients in a way that helps them generate revenue from some of their portfolios, or think about generating revenue, or the uses of their portfolio, uses of litigation finance. I think over the years he's been pretty successful doing that, because it's not just a one-time, hey, do you want to think about litigation finance for a minute, but as he thinks about his clients' needs and the industries that they're in, he thinks about, or I've seen him talk about and think about, how litigation finance, or how divesting, or how something different from what they're presently doing, can generate value for them. A lot of firms... there are lawyers at Kirkland that used to do that very well too. But I think a lot of lawyers will look for a case to pop up, make a pitch, or look for some specific scenario to pop up, then they make a pitch on that case, they'll do what they need to understand that case and the context of that case, and if it's a repeat client, maybe they understand something about the client's business, but a lot of times it doesn't seem like it's an ongoing conversation with the client about the industry, their business within that industry, and ways to use either their patent portfolios or litigation finance in a way that is beneficial.
Khurram Naik: A reaction to litigation finance is that there are people out there that have money, and a litigation funder just wrangles a bunch of people that have money and says, okay, we can cut checks for litigation, so hey, I'll cut you a check and then we'll see what happens, and we'll make some money. So I think that's the naive take on what litigation finance is, probably the dominant naive take. So I'm curious to hear from you, what is hard about litigation funding, and what do people think is hard that isn't hard?
Adam Gill: What is hard? Doing deals is hard. Finding and executing good litigation finance transactions is hard. So I think people don't appreciate that sometimes; there's a narrative that it's an ever-growing, expanding, ballooning field of finance, and we've always taken a contrary position on that. The space that we are in takes focus, it takes discipline, and it's competitive, and it's tough to get those deals across the line. And then litigation is hard. Especially in patents, my business relies on litigating against the most sophisticated technology companies in the world, in large part, and that is not easy. They're very experienced, they are very well-resourced, and they're very smart, and they are strategic, so you have to match that on the other side, which is not easy. Raising money is hard. I think people are finding that out as the industry matures.
Khurram Naik: Can you talk about that? Because that seems counterintuitive. As more money comes in, it seems like it would be easier to find people, as the industry gets more validated, then more money will come in, and in that sense it's easier to raise. Can you say more about that?
Adam Gill: Well, there are funders who existed previously who no longer exist, and who are no longer funding things. I think when litigation funding first appeared on a lot of investors' radar, it was a shiny new thing. There were a lot of promises, or projections, by some litigation funders that didn't pan out, and so that makes it very hard for them to raise money. And the private equity world, for years now, has not been returning investors a lot of cash at the expected pace, so just structurally there is difficulty. Yeah, I think it's just, getting people to trust you with their money is a difficult thing.
Khurram Naik: What do people think is hard but isn't hard?
Adam Gill: The math. People sometimes assume that we have super sophisticated mathematical models, and at the beginning maybe we thought our mathematical models were a little bit more sophisticated than they actually are, but the math itself is quite easy. It's addition, subtraction, multiplication, division, percentages. The real work is in the judgment. If you know what the probability of something is, you can set the pricing pretty easily. If you have a 50-50 chance of something, you need a 200% return to break even. That math is easy; the same works for 30%. We have a pharmaceutical business that does some pretty complex modeling with respect to pharmaceutical products and sales across years, but that's very niche, and it's a very small part of what we do. For the most part, they're pretty simple models: how much is it going to cost across time, what is the potential return across time, and if there are multiple potential returns, what's the weighted average, and then risk-adjust that by what we think the chances of success are, and then, is that high enough to justify... is our return, based on that, high enough to justify the investment that we're making? We don't seek to do precise valuations. We say, using conservative assumptions, extremely conservative assumptions, is our return going to be over a threshold that we need to make this investment work? That's complicated because of all the judgment that goes in, like I said, but the spreadsheets are not complicated. The actual math... it's just like when you're calculating waterfalls, generally the math isn't hard for that either.
Khurram Naik: So when you came to the space, you described how you came to the space and the risk management involved there, and now you're in a fund, you are a manager of funds, so you're growing this business, and these funds overlap in time, and they stack on top of each other, and you keep going. So this is a business for you for the foreseeable future. And so I'm curious, how do you... the skills that brought you here, the skills that said, hey, here's where opportunity is, do you switch gears and say, now I'm in operations mode where I'm just executing, and that's where your brain goes? Or is there still some of that muscle that first got you here, of, hey, I'm curious what else is out there, what are the other opportunities, and how am I going to use everything I know to identify new opportunities? What happens to that muscle, that skill set?
Adam Gill: That's a great question, I deal with that a lot. My role has changed, certainly, here at the firm since starting GLS Capital. At the very beginning, when the portfolio was zero matters under management, it's all underwriting, right? Underwrite, underwrite, underwrite, let's get matters in the book. Now we're in our third fund. We're harvesting, if you will, kind of running off fund one; most of the investments have concluded, some of them are in their late stages, but that's what we're doing on fund one. Fund two is kind of active monitoring; all the investments have been made, but most of them have not resolved, so it's monitoring all of those. And then fund three, which we are investing out of currently, it's some monitoring of what's in fund three, and then also underwriting and origination. And then there's the management of three funds on top of that. So I find myself more and more in management mode, and then also looking to the future, I guess that's also management mode, looking to the future of what's next, what are the trends in the general industry and the IP industry, how do we position ourselves to navigate that. So I do less underwriting now. I still do some boots-on-the-ground underwriting, and I really enjoy it, but my attention is called oftentimes to more managerial, operations-type things that I just have to be there for.
Khurram Naik: But what happens to that instinct to think... maybe you're channeling it now into what comes next for the business itself, but I'm just curious about the instinct for the adjacent play, for the new space, the green space. What happens to that instinct?
Adam Gill: I'm not sure what happens to what... what instinct?
Khurram Naik: Well, there was a mindset that led you here, a mindset of... this is something we talked about, your proof, hey, you know, I think you can make investments based on insights you have about patent litigation and outcomes, and as you're doing that, start sharing that, and pursuing some that you're curious about, and creating opportunities from there. You don't necessarily know where it's going to go. Obviously, when I invest in stocks, and when you were buying and selling options, in litigation finance you couldn't have known where it was going necessarily, but you were pursuing edges, interesting things that were outside of your main thing. Your main thing was building by the hour, a curriculum, but you allowed yourself to venture a little bit and explore something new. I'm curious if you have that outlet, if you want that outlet, if that's even still an instinct, or if it's like, hey, that served a time and a function in my life, now I have other priorities, now I'm in management mode. What happens to that drive, that instinct?
Adam Gill: Yeah, that's interesting. So I think, for the benefit of listeners, you're alluding to how I found my way to litigation finance, how I ended up here, which was by doing some trading of stocks and options after I left Kirkland, with respect to IP companies, and then doing some writing on that, and through that I got to know Ashley Keller, and that's how I got into working with Gerchen Keller. So it was really an ancillary role to what I was doing, just a personal interest there. My moving from Kirkland was really motivated by not doing what I wanted to be doing, so in some sense an unhappiness with what I was doing, even though I had, and still have, a profound appreciation for working at Kirkland, and the opportunities and the skills that I got from there. It just wasn't what I wanted to do at the time. I don't feel that now; I feel very much that this is what I'm supposed to be doing. I'm not sure I ever felt at Kirkland... I enjoyed a lot of the job immensely, but I'm not sure I ever felt that this is what I'm supposed to be doing for the rest of my career, and here I do. I really enjoy it. So I don't think there's anything like that dynamic of, hey, I'm looking for something else, what else is there. In terms of inside the business, 100% of my focus is on, how do we make this business successful, how do we adapt to what's going on now to make the business successful. So whatever piece of me was looking to do something different, that inclination is not there now.
I don't think I'm the kind of person who's always looking to do something different; I just thought that was fun. I always thought trading stocks and options was fun. At Kirkland the conflicts didn't allow me to do it, except for Chinese microcaps, and then I was trying to program trading strategies and find patterns and that kind of thing, which I thought was fun. I don't really have anything like that that's going to turn into a gig now. I occasionally play the guitar; I don't think anyone is ever going to pay me to do that, they'll pay me not to. My hobbies are kind of like fun hobbies, where you put more money into them than you get out of them, that's just the way it is. So I don't see that happening. And then, in terms of seeing what's next, I always look for opportunity, it's fun to look for opportunity. It's a pretty defined space in litigation finance. We're kind of doing the same thing, I've talked about this before, kind of doing the same thing now that I was 10 years ago in many regards. But that, to me, signals success. If you're changing what you're doing all the time, new product, we're not doing that, we're doing this... I don't think that necessarily signals success. We're adapting, and we're looking at different assets and how to find assets, but the basic litigation finance that we're doing is very similar to what I was doing 10 years ago. It's working, I enjoy it, and I continue to look for opportunities within that space, look for new things within that, but I'd say that's the extent of what's next, what's new for me at this point.
Khurram Naik: Another aspect I'm curious about is how you size the proper opportunities, and how that has changed over time for you. How did you size up, okay, litigation funding is durable, there's a secular trend here that I can participate in, versus, say, within litigation funding there are things that have come and gone as trends, like judgment preservation insurance and other types of funding mechanisms or risk-transfer mechanisms. Or, let's say, within patent litigation, there are forums that have been very active, like the PTAB, and there are trends in any given domain. Within patent litigation, a number of patent litigators, maybe to strengthen patent prosecutors, said, oh, that's the space I want to enter, PTAB, or PTAB-disputes firms established PTAB-disputes practices, and then now there's this massive change that has really upended that practice. So how do you... of course there's maybe no reliable way to figure this out, but in your experience, what are the things you look for that say, okay, this is something that is durable and will sustain? What are the criteria you're looking for? You don't necessarily have to be acting on it today, because you're in management, you have the thing you're working on, but if that skill set is honed in any way from your practice, I'd be curious to hear about that as well.
Adam Gill: What's durable... I guess at the beginning, when I started in litigation finance, there was a risk of, is litigation finance durable, is this going to take off, either from the investor side or from the user side. I was willing to take the risk at that point. I thought the cost of it was not that much, and you can always go back to a more conventional in-house practice or law-firm practice. It seemed to make sense intuitively that this would be something that is useful and makes sense economically, and there seemed to be appetite for it. As we went out and talked to people, as lawyers got their heads around what this means, in those meetings where we were educating lawyers about what litigation finance is, somewhere in the middle of the meeting they realize that we give people money to pay them their hourly rates, and so then they became very friendly and very interested. So it made a lot of sense to me. That was kind of what satisfied me that it was durable enough to get into the space at the time, and certainly it's proven true that the industry has grown a reasonable amount and is pretty well used now.
What I look at as durability now, in our investments, is data. We get pitches all the time on new things, new ways to fund claims, new claims that are being brought, new theories, new jurisdictions, even outside the United States. The Competition Appeal Tribunal, the CAT, in the UK is a relatively new tribunal for class-action matters, and there are other venues, structures, and ideas that people bring up. But we really rely on data there; that's really the best way to assess risk inside of any particular deal. If you're going somewhere that doesn't have data, it's increased risk, and so you have to get paid for that. Take, for example, the UPC, the Unified Patent Court, which has been going on in Europe for a little while now. At the beginning of it, people had ideas about what was going to happen in certain cases, in standard-essential-patent cases, would they issue injunctions for standard-essential patents, would they do rate-settings for those cases. There were still a lot of unknowns, even though people thought the jurisdiction was going to be a good one for patent owners. But we were not in the first wave to jump in on cases; we were a little bit more, let's wait and see what is successful and what's not. So I think, looking at the industry from that lens, we're a little bit more conservative.
Khurram Naik: So what if you're moving into a new domain? When you entered litigation finance, there was very little data at the time. Was there some gut-level decision, or some structural aspect? I think you identified that already: once law firms understand, I can cut you a check and that gives you your rate, this is another way to get paid, from companies that couldn't otherwise pay you, and they say, okay, great. So I think that's a structural reason why this is going to win, and I suppose that's the measure you can use. You mentioned the early days when you were just underwriting, underwriting, underwriting, cases coming in the door, you had a thesis, it's going to work out, and you turned out to be right for the right reasons. But I imagine it was hard to project what it would be like to sit here now and have several funds, deploying capital and managing them. It sounds like a great problem to have: okay, great, we deployed all the capital in the first one, and we're having the investments resolve. These are all the problems, or the benefits, you wanted to have when you first started out. What are the problems that you're having today that you couldn't have predicted, the problems that come with the success you've had?
Adam Gill: Let me back up for one second. I just wanted to note one thing that I thought of while you were asking the question. The evaluation of litigation finance was made much easier, actually, by the view that I took of it, which is that it's replicating contingency economics. It's using contingency-fee economics, but with a different investor: instead of the law firm being the investor, you have an outside source of capital, which is a partial investor, and that lets you be aligned, and it also lets the client have a different choice of counsel. There are several firms that will do full-contingency matters, but there are a lot more firms, and some excellent firms, that will not do any, or many, full-contingency matters, but will do a hybrid contingency where they're getting 50% of their fees paid. So from an economic standpoint, both on the user side, it's kind of the same, from the client getting contingency representation from the law firm. We saw people saying, yes, we want that, we can do that, our firm would like that. So it gave me a lot more confidence. There was already data about, can these cases be underwritten consistently for a positive result, which is what contingency firms do; they have a better cost of capital than we do, but essentially the investment is very similar.
Turning back to the question you just asked, what are the problems that come along with success? It's kind of like the pie-eating-contest analogy, right, where the reward is more pie. So there's a lot of work, we work a lot, but I enjoy it. We're not just underwriting cases now; now we're underwriting and managing and sourcing and thinking about end-of-fund issues for our first fund. One problem that has come with success is a bigger target on the industry. Last year there was a bill introduced in Congress that would have been incredibly damaging, if not completely destructive, to the litigation finance industry in the United States, the tax bill that was put into the reconciliation package, that would have levied a 41% tax only for litigation finance, out of all the investment categories, just focused on us, at the fund level, which is not how all other funds do it; they pass through. And also taking away the ability to net any losses from that, it would have been absolutely disastrous. The Chamber of Commerce is pushing that, and I think they'll continue, along with some defendants, some potential patent-defending corporations that are also very supportive of that effort. Efforts to otherwise legislate or regulate the industry into hardship or demise are out there; there are bills in multiple states seeking higher disclosure regulations, there's a sustained and very well-funded campaign by the Chamber and others to push bills in state legislatures and in Congress on this. So that's one of the problems of success, that people who don't want you to succeed will start working harder to try to make you not succeed, take that away. Fortunately, even though we don't have the resources of those groups, I think we're on the right side of things, and when people are educated, they see that this is an access-to-justice issue and probably shouldn't be taken away just wantonly. So far, we're hanging in there, but that is a problem that's come with success, having to fight those battles.
What else... I mean, on balance, success is better than not success, so I don't have too much to complain about. But it's not all... success is, we still have a business that's going, and we are bullish about the future of it, and it's stable. Maybe this is one of the difficulties, or one of the unexpected things of success: some people view what we do as unlimited money, unlimited profits. It's not that; it's working hard for a reasonable return and delivering that to your investors. So there's a lot of that, but overall it's been great. Like I said, having success is much better than the alternative.
Khurram Naik: Well, Adam, I've got to add, on a personal note, that again I appreciate you being the first to get on this podcast, and watching you grow in this space. I reached out to you a number of years ago to learn about litigation finance, and we've been friends ever since.
Adam Gill: To your credit, you reached out to us, I believe in 2015, when I was still at Gerchen Keller, and when our pharma strategy was still relatively, or completely, unknown, and you had already thought through ways to do litigation funding in a very niche area that was super creative, and that was impressive. And your creativity continues to impress.
Khurram Naik: It's very flattering. Yeah, if things were different, maybe we'd be partners right now, but in the meantime I'll admire what you're building, and I appreciate what you're doing to share ideas about entrepreneurship in the legal space. I think that makes a big impact. So thanks for coming on, and for all the ideas here.
Adam Gill: You bet. Thanks for having me.