Litigation funding has emerged as an attractive alternative investment option for investors looking to diversify their portfolios. As lawsuits and legal claims continue to rise, litigation funding provides investors the opportunity to finance high-value commercial lawsuits and litigation in exchange for a share of the award if successful. However, investing in litigation funding requires thorough due diligence and an understanding of the risks involved. This article will provide a guide on how investors can invest in litigation funding and 5 key steps to follow.
Understand how litigation funding works
Litigation funding, also known as legal financing or third-party litigation funding, involves an investor providing the finances needed by a plaintiff to cover litigation costs in exchange for a share of the award if the case succeeds. Law firms or plaintiffs with high-value claims partner with litigation funding firms who conduct due diligence, evaluate risks, and provide financing in exchange for a cut of the settlement amount or award, typically ranging from 20% to 50%.
Research and evaluate litigation funding firms
Investors should thoroughly research litigation funding firms, evaluating their experience, expertise, historical success rate, risk management framework, fee structure, and portfolio of cases. Reputable firms like Lake Whillans, Burford Capital, and Longford Capital have extensive experience in legal financing and a rigorous evaluation process for funding cases.
Assess potential cases for investment litigation funding
Investors should work closely with litigation funding firms to assess potential cases for investment. Factors to evaluate include the legal merits of the case, financial damages sought, jurisdiction, legal team, estimated costs, timelines, and potential settlement amounts. Cases with strong evidence, high damages, and good legal teams offer the best investment potential.
Negotiate terms and execute legal agreements
If pursuing an individual investment opportunity, investors need to negotiate terms like investment amount sought, % of proceeds for the funder, payment options, etc. Legal agreements stipulating the rights and obligations of both parties need to be executed covering areas like confidentiality, payment timelines, proceeds sharing, etc.
Monitor case progress and manage litigation funding investment
Post investment, investors should monitor case progress, key milestones, and material developments by working closely with their litigation funding partner firm. Portfolio management principles like diversification across multiple cases can help manage risks.
Litigation funding allows investors to tap into the high-growth litigation financing asset class. By understanding how it works, conducting due diligence, evaluating cases, negotiating terms, and managing investments, investors can prudently tap into the lucrative returns of legal claims and settlements.