Genesis, FTX and BlockFi Cryptocurrency Crashes Attract Hedge Fund Bankruptcy Attention

A $700 million asset management business focused on credit-oriented legal assets is exploring the market for FTX and other cryptocurrencies like BlockFi, Voyager and Celsius but is not yet a buyer.

As a customer depositing cash into an FTX account, “Will you be treated the same as someone who deposited crypto? The Bankruptcy Court has not yet made a decision,” Mr. Baer said.

The surge in crypto bankruptcies is sparking renewed interest from institutional investors in litigation, class actions, and other types of lawsuit funding.

Litigation funding includes raising money and then funding US law firms with millions and billions of dollars in lawsuits against companies such as talc maker Johnson & Johnson; opiate manufacturer Purdue and distributors CVS and Walgreens; Pesticide manufacturer Roundup Monsanto; and the Boy Scouts of America on allegations of violence.

In theory, judiciary funds are not linked to the stock and bond markets, so pension funds, endowments and foundations, and family offices are attracted to the asset class amid falling equity and bond markets.

“There is an increased demand from the institutional market to participate in the financing of litigation,” said Mr. Baer. The firm invests in pools of claims, typically 25,000 or more at a time.

“It’s a loan-centric approach because we lend against legitimate assets.”

Asset allocators “see this as an interesting diversification strategy,” Mr. Baer said.

Contingency Capital was launched in November 2020. His types of investors include university funds, pension funds, family offices and consultants.

Contingency capital is a minority property of TFG Asset Management. Mr. Baer previously worked for Fortress Investment Group. Fortress and Contingency Capital also signed a joint investment agreement under which Fortress can invest up to $500 million.

Other players in bankruptcy and litigation finance are hedge funds such as Armadillo Litigation Funding, CenterBridge Partners, DE Shaw, Pravati Capital, Rocade Capital and Virage Capital. Burford Capital and IMF Bentham/Omni Bridgeway are the most prominent third party litigation sponsors.

Many of their loans to law firms carry very high interest rates.

“These are loans with a high premium. One of the deals we recently closed was at the rate (overnight secured funding rate) plus 16.25%,” said Mr. Baer. The latest SOFR quote was 4.3%.

Why should lawyers and their firms borrow at such rates? It is often difficult to obtain capital. Private equity and venture capital firms are prohibited from owning law firms in the United States, and non-lawyers also cannot receive a share of profits from law firms due to restrictions in place in all states except Arizona.

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