Ares-Omni deal signals private equity's game-changing entry into legal industry

Ares Management Corp's acquisition of a 70% stake in an Omni Bridgeway litigation fund could mark a turning point in how institutional capital flows into the legal industry, some industry observers say.

"It's a back door into the highly profitable world of Big Law, which PE has been eyeing for years," said Peter Zeughauser of the consultancy Zeughauser Group. "Lets them get into the business of law with a diversified portfolio of litigation investments as opposed to buying a law firm. If it works as planned, higher returns, less risk."

In a joint announcement, Ares and Omni called the $204 million deal one of the largest secondary market transactions in legal finance. More notably, it was structured as a continuation fund--a first for the litigation funding industry. Omni said over 150 individual cases were rolled into the new Continuation Fund 9, with Ares paying triple the original investment.

"What this is demonstrating is [legal funders are] now playing the big leagues," said Michael Sherman, a Los Angeles litigator who has partnered with funders on litigation for years and watched closely as the industry has developed.

A continuation fund is a private investment vehicle designed to extend ownership of existing assets by transferring them into a new fund, typically managed by the same sponsor. In this case, Omni Bridgeway will move litigation claims--assets from an aging fund approaching the end of its life--into a newly created continuation fund. This new fund then sells interests to new investors, in this case Ares, who provide liquidity to the limited partners of the original fund. The original LPs are usually given the option to either cash out or roll over their stake into the new vehicle, maintaining continuity while offering flexibility and liquidity.

"It's a very good business, but we'll see if PE firms can put together the case-vetting chops that are the key to making it lucrative," Zeughauser said.

Arizona and Utah are the only U.S. states that permit non-lawyers to own stakes in law firms--a sharp contrast to countries like Australia, where accounting firms have long held ownership interests and where litigation funding, including by Omni Bridgeway, first took root. In February, KPMG became the first Big Four accounting firm to enter the U.S. legal market under this model. Approved by the Arizona Supreme Court, KPMG Law US will operate as a wholly owned subsidiary, offering tech-driven legal services in areas such as contract remediation, M&A integration, and legal managed services.

Zeughauser said traditional law firm structures have been another barrier to private equity's designs on the industry.

"The upward pressure on partner compensation requires law firms to distribute all net operating income to partners in order to retain them. Nothing left over for PE investors," he said. "By investing in litigation, the PE firms can earn high returns on litigation they cherry-pick based on likelihood of success beyond what they would earn if they bought the entire firm. Plus, they can invest in litigation they cherry-pick from a number of firms."

"Skimming the cream off the top, so to speak, provided they are vetting the cases in which they invest well," he continued.

Whether other litigation funders will follow the Ares-Omni model remains to be seen. Several declined to comment or didn't respond to inquiries, and it's unclear how their limited partners view a secondary market for legal claims.

Litigation finance has long been a high-risk, opaque space with unpredictable timelines and complex valuations. But the entry of Ares, with $525 billion under management, may signal growing confidence in the sector's maturity--and its appeal to institutional investors.

"If you go back 20 years, this industry barely existed," Sherman said. "There was nothing but payday loans for personal injury claims."

But with volatile equity and bond markets and a sluggish IPO scene, he said more major players may turn to litigation funds.

"These are exciting investments," he said. "They are counter-cyclical. Any serious investor nowadays has got to be thinking about this as an alternative asset class."