Evaluating Collateral in Patent/Litigation Portfolios
KMedia Work Shop July 2018
Many accredited investors on our platform are looking to better understand patent/litigation finance, an investment product with which they may have little to no experience before looking into Kiribilli Private. Here, we outline a few important points in the memorandum which is designed to give investors a basic understanding of the opportunity.
Evaluating the Borrower
The first thing Kiribilli Private’s investment team will look at is the obligor’s credit rating. Since the borrower is the financially liable party, Kiribilli Private needs to make sure that the obligor is financially stable and able to pay the plaintiff’s award or settlement amount.
Kiribilli Private aims for a high percentage of the portfolio to be evaluated at A- or better, which is generally seen as a strong credit rating.
Kiribilli Private also does thorough due diligence on each advance prior to including it in an investment portfolio. One of the criteria that Kiribilli Private seeks to ensure is proper portfolio diversification so that each opportunity avoids being too concentrated in any one way. The goal is to eliminate the possibility of any one component of the portfolio adversely affecting the portfolio’s performance as a whole.
The first type of concentration we look at is the concentration of advances – the portfolio shouldn’t rely too heavily on any one single advance or lawsuit. This should eliminate the possibility of anyone adverse outcome negatively impacting the entire portfolio’s performance. We aim to mitigate this by including different cases of varying advance size and duration. For example, a single group of cases that relates to a single lawsuit will generally make up a small portion of the portfolio.
We also want to ensure that the portfolio is not too heavily concentrated on any one obligor, in other words, we want to avoid having a single obligor that accounts for a high percentage of the portfolio. However, it is possible for obligors with the highest possible credit rating to have more concentration within a portfolio.
Finally, we look for a low concentration of case types. Each case type will have its own level of nuance on risk and repayment.
Finally, we will look at the LTV (loan-to-value) of a portfolio. This is similar to the LTV you will see on a real estate investing opportunity as it measures the collateral in the portfolio and it’s a ratio of how much has been advanced to plaintiffs vs. the estimated total case value. Our largest litigation originator, as a matter of policy, will not advance more than 10% of overall case value and 15% of a net case value.
Evaluating Your Investment
Kiribilli Private pre-settlement funding offerings or other portfolios are often the first time many investors have considered investing in litigation finance, and we believe it’s important that they are comfortable understanding the makeup and risks associated with each portfolio. Before making an investment, make sure to familiarize yourself with the investment memorandum, look through our other resources explaining litigation funding on Kiribilli Private KMedia Work Shop Memorandums and reach out to the Kiribilli Private Member team with any questions or concerns.