LexShares Review: Invest In Litigation

LexShares is a litigation finance company that has opened its doors to individual investors. Litigation finance is an investment opportunity typically limited to lawyers and hedge funds.

In litigation finance, a third-party company like LexShares invests “working capital” into lawsuits that it deems likely to yield profitable outcomes. The lawyers and plaintiffs use this money to fund the suit. If the plaintiff wins a financial verdict, the third-party financing company is entitled to a share of the profits.

Due to the technical and legal knowledge required, litigation finance isn’t typically an asset class open to regular investors. However, LexShares has opened its doors to very high net worth individuals seeking exposure to litigation finance. Keep reading to learn how it works.

What Is LexShares?

Founded in 2014, LexShares is a company that focuses on funding high-return lawsuits. The company includes a mixture of legal, financial, and underwriting experts who work together to fund litigation opportunities and manage LexShare’s “litigation finance” funds.

In 2018, LexShares created its first litigation finance fund. It raised $25 million of investor money for that fund. In 2020, it launched the second litigation finance fund with a cap of $100 million in investor money.

LexShares is one of the first companies to create a market where individual investors can gain exposure to litigation finance. But the innovation doesn’t stop with the market. The company uses data, machine learning, natural language processing, and legal knowledge to rank potential lawsuits based on their likelihood of profitability.

What Does It Offer?

LexShares allows individual investors to invest in its litigation finance fund called LexShares Marketplace Fund II. This fund is set up like a “lock-up” hedge fund where investor money is locked up by the fund for 7 or more years. Decisions about how to deploy the investor money are left up to the fund manager with oversight from LexShares.

LexShares also allows individual investors to browse suits to invest on their own. However, the details of these vary on a suit by suit basis, and can change over time.

LexShares Online Marketplace

Opportunities posted on the LexShares online marketplace are indirect legal claims investments offered through single-purpose, pooled investment funds. It enables accredited investors to invest in single cases “a la carte” at various commitment levels.

Minimum investment amounts for marketplace offerings are typically $5,000, however some may be lower. When you invest in a case through the LexShares marketplace, you're purchasing equity in an LLC as a limited member. And the LLC contracts directly with the funding recipient (such as the case lawyer or plaintiff)

LexShares boasts a 1.4X return on capital since its inception in 2014 with a 15-month median duration of resolved investments. This translates to a 40% internal rate of return (IRR). Of course, historic returns can't be used to predict future outcomes.

LexShares Marketplace Funds

If you'd like for your money to be spread out among several cases, you can do that by investing in LexShares Marketplace Fund II. Money investing this fund is allocated across all of the LexShares' cases that opened during the investment period. The target size for LMFII is $100 million.

This fund has a relatively long “lock-up period” where investor capital is deployed (7 years with up to two one-year extensions). Investors can't sell or liquidate their shares during the lockup period. Lock-up periods are typical for hedge funds. But investors who haven’t used hedge funds may be surprised to learn just how illiquid the fund is.

The investment minimum for LMFII is $250,000. That makes this type of investment more appropriate for super-high net worth individuals who want to deploy a large amount of cash.

Use Of Machine Learning To Identify High-Potential Cases

Over the life of the company, LexShares has received over 4,000 requests for litigation financing. However, it looks far beyond these requests to determine the likelihood of a successful (profitable) outcome. LexShares uses an in-house algorithm to compare prospective cases to a huge number of historical datasets.

By regularly “training” this algorithm with new data points, LexShares believes it can maintain a competitive advantage in predicting profitable outcomes.

Tools For Evaluating Investment Performance

After registering on the LexShares platform, you'll get access to a personalized dashboard that displays performance data for your specific investments. You can also view data regarding LexShares’ overall historical performance, including return metrics, quarterly investment activity, and portfolio breakdowns by case type and jurisdiction.

Are There Any Fees?

There are no management fees charged to investors who participate in individual cases offered through the LexShares online marketplace. But LexShares Marketplace Fund II advertises a 2.5% annual management fee. 

On top of that, 25% of all profits are considered “carried interest.” That means the primary manager of the fund receives 25% of the profits. 

If the LMFII fees sound high, it's because they are. The fund's fee structure mirrors the fees charged by most hedge funds. Very large investors may be able to negotiate lower costs. But the unique asset class makes it easy for LexShares to charge outsized fees.

How Do I Contact LexShares?

LexShares has offices in both Boston and New York City. The headquarters is split between the two locations. The New York City address is:

33 Whitehall Street
16th Floor
New York, NY 10004

Investors who want to know more details can call LexShare’s customer service line at 877-290-4443 or email [email protected].

LexShares also provides detailed investing information when investors request a free guide from the company. This guide comes with an introductory email and an opportunity to connect with an investment representative.

How Does LexShares Compare?

LexShares appears to be one of the few companies focused exclusively on litigation financing funds. YieldStreet, an alternative investment platform, also offers some exposure to litigation financing, but on a more limited basis. YieldStreet has a $1,000 minimum investment compared to LexShares' $2,500 to $250,000 minimum and recently added support for non-accredited investors.

Most investors considering LexShares Marketplace Fund II will also want to compare it to traditional hedge funds. Hedge funds often invest in alternative investments including litigation financing, commodities, options, real estate and more. But, for now, here's a closer look at how it compares to YieldStreet.

How Do I Open An Account?

Individuals who want to invest in LexShares first have to sign up and create an account. LexShares requires all prospective investors to submit proof of accreditation status before they have the opportunity to buy into the litigation.

Once verified, investors can purchase equity shares in individual suits or in the fund through a registered broker-dealer called WealthForge.

Is It Safe And Secure?

LexShares has one of the most buttoned-up investment websites we’ve seen. Its disclosures and risk profile are prominent, and explain just how risky it is to invest in LexShares. As a hedge fund, LexShares takes the privacy of its investors seriously.

LexShares does not technically issue or sell shares of its fund. Rather WealthForge Securities, LLC issues the equity securities for LexShares. WealthForge is a registered broker-dealer meaning it is regulated by FINRA and likely complies with all state, national and international privacy and security laws.

As a company, LexShares is trying to issue equities by the book. Investors can feel confident that an equity stake LexShares is a meaningful investment. They can even buy “capital preservation” insurance to avoid losing money in the fund.

However, LexShares Marketplace Fund II is still a risky investment. And investors need to understand the implications of locked-up money before choosing to invest.

Is It Worth It?

With minimum investments as low as $2,500 and no management fees, investing in cases that are listed on the LexShares marketplace could be a great way to add diversification to your portfolio.

However, LexShares Marektplace Fund II is not an investment for your “average Joe millionaire.” Even most accredited investors will find the $250,000 minimum investment too much to handle. It rarely makes sense for investors to put a large portion of their net worth into a single investment with low liquidity. Most will prefer more well-known assets such as real estate, stocks, or bonds over litigation finance.

If you are considering investing in LexShares Marketplace Fund II, be sure to weigh the 7-year lock-up period. In general, your money will be completely inaccessible during this time. You can't casually redeploy the money if you find a better investment. So judge an investment in LMFII carefully before opting in.

LexShares Features