- Investors looking for high returns have poured at least $11 billion into litigation finance.
- One funder, patent-focused iPEL, said it would bring big cases and notch nine-digit wins in China.
- But one of its top investors has predicted a loss of $41 million, new documents reveal.
- See more stories on Insider’s business page.
Litigation finance has been called the legal industry’s hot new job, pairing savvy lawyers with Wall Street financiers to generate double-digit returns for yield-hungry investors.
But success doesn’t always come easy. The biggest financial backer of a litigation finance firm that claimed to have raised $200 million by pursuing cases in Chinese courts has estimated it will incur a $41 million loss on the loan, according to court documents reviewed by Insider. The documents offer a rare peek behind the curtain of an industry where confidentiality is the norm.
Patent investor Brian Yates and litigator Rasheed McWilliams founded iPEL in 2017 with the goal of buying patents and filing infringement suits. They struck an agreement to borrow up to $100 million from Direct Lending Investments, or DLI, to get off the ground.
iPEL reportedlyacquired patents from ZTE, Panasonic, and Huawei. It filed patent infringement cases in China against AsusTek, a Taiwanese electronics maker, and Yates reportedly said in 2018 that cases against “household names” would come soon, including one he predicted would result in a $100 million award.
The claim raised eyebrows in the patent-enforcement industry. Nine-figure patent verdicts come along a few times a year in the US, but Chinese intellectual-property courts typically award less than $1 million. Those courts also tend to move slowly in cases with foreign parties involved, said Mark Cohen, a lawyer and scholar focused on Chinese IP law.
China “is quickly proving to be the best place in the world to license and litigate patents for an innovator,” Yates was quoted saying in the industry publication IAM. “I could write an entire article explaining why Chinese patents [are] a superior investment to US ones!”
But in November, DLI predicted it would lose tens of millions of dollars on its investment in iPEL. DLI’s chief executive faces criminal charges alleging that he overvalued parts of its portfolio, and DLI was sued by the Securities and Exchange Commission for allegedly manipulating performance data .
A judge appointed consultant Bradley Sharp to size up the fund and salvage what he could from DLI’s portfolio, including its iPEL loan. Sharp subsequently sued Duff & Phelps, a consultant to DLI, and included details about a company he referred to as “Investment M.” A review of documents by Insider reveals that the firm in question is iPEL.
The receiver has not sued iPEL, but he accused Duff & Phelps of inadequately scrutinizing the terms of DLI’s investment in Investment M. Sharp said iPEL paid millions to its owner, with “substantial losses expected” for DLI. He called DLI’s loan to iPEL “overvalued” and “insufficiently underwritten” and said iPEL’s China strategy was “far more challenging and risky” than the one it initially planned.
According to Sharp, iPEL only pivoted to Chinese patent litigation after a strategy focused on US courts became untenable. By August 2018, iPEL’s agreement with DLI was tweaked to let it use borrowed money to pay interest.
“Despite the fact that China was developing its intellectual property legal system and that there was no real data to which one could look to predict the results of future litigation efforts,” Sharp wrote, Duff & Phelps “rubber-stamped DLI’s valuations” of its iPEL loan.
iPEL was identified in the Duff & Phelps lawsuit as “Investment M,” a litigation finance firm focused on China. A search of patent assignment records for DLI entities uncovered a publicly filed agreement between DLI and iPEL, and financial records of DLI entities filed by Sharp included payments to and from iPEL that added up to a $6.5 million net payment from Investment M.
Despite DLI’s receivership, iPEL has remained active, announcing last summer that it reached a confidential settlement in Chinese litigation it brought against Extreme Networks, a publicly traded company that sells networking equipment.
Court records also indicate that DLI received $3.3 million in 2020 for “iPEL payoff (Parabellum Partners)” and a $1 million “anniversary” payment in 2021 involving “Parabellum.” Parabellum Partners is the name of at least one fund managed by Parabellum Capital, a well-known litigation finance firm. Two executives at Parabellum Capital didn’t respond to a comment request.
Yates, iPEL’s CEO, said in emails that Insider got its facts wrong, but he wouldn’t say which ones, citing confidentiality agreements. Shown the financial records found by Insider, Yates said his lawyers were investigating.
iPEL is not the first litigation finance firm to have taken money from an entity that later fell under regulatory scrutiny. Platinum Partners, a hedge fund manager that was taken into receivership in 2016, had a very illiquid portfolio that included some litigation investments.
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