Author: Cecile Cao

Allocations to alternative investments have risen rapidly across institutional investors, family offices, and high net worth individuals over the last few years. According to a 2023 survey by Goldman Sachs, the average portfolio allocation to alternatives among institutional family offices is 44%. This is up notably from an estimated 20-25% average allocation a decade ago. 

Certain alternative investments offer returns that are uncorrelated with the broader public equity and credit markets. According to the Preqin Global Report 2023, the global alternative assets under management have demonstrated resilience amidst economic uncertainty, growing to $13.7 trillion in 2021. This represents a continuous growth trajectory, with expectations set for the assets under management to reach $23.3 trillion by 2027, growing at a compound annual growth rate of 9.3%. This growth underscores the robustness and expanding appeal of alternative investments in diversifying investment portfolios and mitigating market volatility.

These numbers show a fundamental shift towards the alternative asset classes. In this series, we discuss two specialized strategies in particular that allow investors to diversify their portfolios and returns.

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ARTICAL SUMMARY

• Siltstone Capital’s Expertise: Discussing our specialized experience in niche asset classes such as minerals and litigation finance.
  • Mineral and Royalty Opportunities: Outlining Siltstone Capital’s strategy in identifying accretive mineral and royalty acquisition opportunities, and the attractive investment characteristics of this asset class, along with common FAQs.
  • Litigation Finance Insights: Detailing Siltstone Capital’s approach to litigation finance, an asset class that offers uncorrelated exposure and countercyclical returns, along with common FAQs.

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The Siltstone Capital Approach

Based in Houston, Siltstone Capital is an alternative investment and advisory firm focused on niche, uncorrelated investments in the real assets and private credit sectors.

Founded in 2012 by investment and legal professionals with over 100 years of collective industry experience, the Firm manages assets across several private equity funds.

What sets Siltstone Capital apart from other asset managers is our team’s deep operational experience and domain expertise in the real assets and litigation finance sectors. 

Through rigorous boots-on-the-ground research and leveraging cutting-edge data analytics, we aim to maximize risk-adjusted returns and provide our investors with differentiated alternative investment exposure.

Mineral and Royalty Rights 

At Siltstone Capital, we specialize in identifying mineral and royalty acquisition opportunities, predominantly in the Utica and Marcellus shale plays.

Siltstone Capital believes that mineral interests are a favorable asset class within the energy sector for multiple reasons.

First, mineral rights can be owned in perpetuity. This allows the owner to be patient during times of falling commodity prices. In addition, as drilling technology improves, other productive pay zones may be discovered and may become economic, thereby increasing the value of the relevant mineral interests.

Second, owning mineral interests provides investors with multiple opportunities for profit. Mineral interest owners can receive cash payments from: 1) leasing for oil and gas development, 2) royalties if development occurs, 3) delay rental payments if development does not occur and 4) renewals of leases once the existing lease has expired.

Third, we believe mineral rights are attractive relative to other asset classes in the energy space as minerals are not subject to direct lease operating expenses or well costs.

Top Mineral Rights FAQs:

What are mineral rights?

Mineral rights are legal entitlements allowing the holder to explore, extract, and profit from mineral deposits beneath the surface of a property. These rights can be owned separately from the land itself, leading to some scenarios where one party owns the surface rights, and another holds the rights to the minerals below the surface. This distinction is crucial in real estate and natural resource extraction industries, as it affects how landowners and investors can utilize these resources.

How do investors profit from mineral rights investments?

Investors can profit from mineral rights through various methods, including leasing agreements with mining or drilling companies, receiving royalty payments from the extraction of resources, or through the appreciation of the value of these rights over time. When a company extracts minerals, the mineral rights owner typically receives a percentage of the income generated from the sale of those minerals, known as royalty payments. These payments can vary based on the agreement and the value of the extracted resources.

What are the key factors to consider when investing in mineral rights?

When considering an investment in mineral rights, it’s essential to evaluate the geological potential of the land for having valuable resources like oil and gas. Legal and regulatory considerations, such as the clarity of the mineral rights ownership and any potential environmental restrictions, are also crucial. The market demand for the minerals or resources in question, and the terms of any existing lease or royalty agreements will impact the profitability of such an investment. Additionally, understanding the process for transferring or inheriting mineral rights can affect long-term investment strategies​.

What is the outlook for mineral rights?

The future of mineral rights remains robust, reflecting a sustained interest in the energy sector’s foundational components. This positive outlook is propelled by several key drivers such as the ongoing advancements in technology that enhance the efficiency of mineral extraction and exploration, and the steady global demand for energy. Additionally, mineral rights offer significant portfolio diversification benefits, serving as a hedge against the volatility of traditional markets. 

The resilience of mineral rights investments makes them a compelling investment for those seeking exposure to real assets. As the legal and economic frameworks continue to evolve, the outlook for mineral rights is characterized by a blend of challenges and opportunities, with the potential for significant returns for well-informed and strategic investors.

For more detailed exploration on mineral rights, the resources provided by Geology.com offer comprehensive guides and insights into navigating the complexities of mineral rights ownership, leasing, and investing.

Litigation Finance 

Siltstone Capital is focused on litigation finance investments where the firm has sector domain expertise. We provide non-recourse funding to meritorious plaintiffs and in return, earn a preferred return and profits interest on any proceeds recovered from the funded matter.

We believe litigation finance is an attractive asset class within private credit for several reasons:

• It offers investors uncorrelated exposure and countercyclical returns.
• It provides a hedge against volatile market environments.
• Through the use of portfolio construction and other financially engineered products, investors can mitigate downside risk without sacrificing material upside.
• There is a meaningful ESG impact by focusing on underfunded plaintiffs with legally and socially meritorious claims.

With a rare combination of legal and financial expertise, the investment and legal teams at Siltstone Capital employ a rigorous, bottom-up fundamental approach to identify and execute litigation finance investments.

Top Litigation Finance FAQs:

What is litigation finance?

Litigation finance, also known as legal financing or third-party litigation funding, is a financial arrangement where a third party provides capital to a plaintiff involved in litigation in exchange for a portion of the monetary recovery from a successful judgment or settlement. This model is designed to enable plaintiffs who might lack resources to pursue justice.

Litigation finance may cover a range of legal costs, including attorney fees, expert witness fees, and court costs. It is typically non-recourse, meaning the funding recipient owes nothing if the lawsuit is unsuccessful​. Litigation finance allows individuals or entities to litigate or arbitrate without bearing the upfront costs, thus leveling the playing field against well-funded defendants.

What are the key factors to consider when investing in litigation finance?

Investors might consider the expertise and track record of the litigation finance firm, the legal merits of the cases funded, the potential return on investment, the duration of litigation, and the risk of adverse outcomes. Understanding the legal and regulatory environment is also crucial.

How does litigation finance benefit plaintiffs and law firms?

Litigation finance benefits plaintiffs by providing them with the necessary resources to pursue justice without financial strain. For law firms, it allows them to take on more cases on a contingency basis, spreading their risk and enhancing their ability to serve clients effectively. If the litigation funding is structured as a law firm loan, it can provide working capital to the law firm, thereby enabling the firm to invest in additional resources or take on larger, more complex cases.

How large is the litigation finance industry?

Over the last decade, the litigation finance industry has seen remarkable growth, escalating into a globally recognized multi-billion-dollar sector. This maturation is notably marked by Chambers and Partners‘ recognition of litigation funder rankings, reflecting the industry’s solidified reputation within the legal arena. Once considered a novel concept, litigation finance has now grown into a robust market, recognized for its crucial contribution to democratizing access to legal resources and reshaping how legal services are accessed and funded.

An increasing awareness among plaintiffs and law firms of the benefits of litigation finance is apparent, as well as by investors seeking uncorrelated returns. As the industry continues to mature, it is expected to expand further, with additional capital being allocated to litigation finance funds and a greater number of cases being funded. 

Siltstone Capital, with its specialized focus and strategic approach to litigation finance, is leveraging its expertise to identify and capitalize on the growing demand for legal financing solutions​​​​.

What is the outlook for litigation funding?

The outlook for litigation funding is increasingly positive, highlighted by its growing integration into the legal ecosystem. This dynamic shift is most notably recognized through its broader acceptance and utilization by top-tier law firms and major global corporations. A pivotal survey by Above The Law, in partnership with Lake Whillans, underscores this trend, revealing that a significant majority of in-house legal professionals at large corporations—including those within the Fortune 1000 sphere—now have direct experience in engaging with litigation finance. This data highlights the growing use of litigation funding solutions by some of the world’s largest companies.

The consistent high satisfaction rate, with over 80% of those who have worked with litigation funders willing to do so again, also underscores the perceived value and benefits of litigation finance. 

This positive trend suggests that litigation finance will continue to grow as a critical tool for leveling the playing field in legal disputes and offering strategic financial solutions​​.

For comprehensive exploration and analysis of litigation finance, Harvard Law School‘s Center on the Legal Profession offers valuable insights into how this financing model is transforming litigation and providing equitable access to the legal system​​​​. The American Bar Association also provides an introduction to litigation finance, highlighting its role in rebalancing financial asymmetry in legal battles​.