Lawsuit investing has emerged as an alternative investment strategy that provides investors with opportunities to achieve stable returns. This involves providing financing to plaintiffs and law firms in exchange for a share of potential lawsuit proceeds if a settlement or award is secured. As lawsuits can take years to resolve, lawsuit investing requires deep expertise to properly evaluate risks and select cases with high probability of success. When executed effectively, lawsuit investing can generate uncorrelated returns and diversify investment portfolios. This article provides an overview of lawsuit investing strategies, including how to source deals, conduct due diligence, structure financing terms, and manage a portfolio of legal claims to maximize returns.
Conduct extensive due diligence on merits of lawsuit
The key to generating returns from lawsuit investing is selecting claims with strong merits. Investors need to carefully vet the legal theory, evidence, jurisdiction, parties involved and other factors to determine the likelihood of a favorable verdict or settlement. This requires deep legal and investigative expertise to assess the strengths and weaknesses of each case. Background checks on plaintiffs should screen for credibility issues. Investors should obtain case documents, consult attorneys and hire third-party experts to validate claims. Strong cases feature clear-cut liability, sympathetic plaintiffs, deep-pocketed defendants and favorable venues. Weaknesses like contributory negligence, outdated evidence or tenuous legal arguments should give investors pause.
Structure financing terms favorably to balance risks
Investors provide financing to plaintiffs and law firms in exchange for a return from lawsuit proceeds. The financing terms should reflect the case risks and reward expectations. Investors may offer non-recourse advances to plaintiffs at discounted purchase rates compared to the face value of their expected recovery. This transfers risk from plaintiff to investor while providing an attractive return if the case succeeds. Investors may also structure terms as recourse loans charging interest and requiring principal repayment regardless of case outcome. Additionally, financing can be provided to law firms at more favorable rates given their in-depth case knowledge versus relying solely on plaintiff claims. Terms can include caps on returns and other provisions to balance risks.
Utilize portfolio strategy to mitigate individual case risks
Since lawsuit outcomes are unpredictable, investors should deploy a portfolio approach versus concentrating on a few cases. Investing in a diversified pool of 20-50 cases across varying jurisdictions, legal areas and plaintiff types can help smooth returns. Portfolio construction should aim for an optimal risk-return profile based on historical data. Active portfolio monitoring and case reassessment allows dropping underperforming cases and redeploying capital to new opportunities. Loss ratios on non-recourse advances can be managed under 20% with effective due diligence. Market-beating returns are achievable through disciplined portfolio management.
Leverage specialty finance expertise critical for success
Given the complex legal analysis required, lawsuit investing is a specialty finance market dominated by dedicated players versus generalist investors. Leading lawsuit finance firms possess extensive in-house legal expertise in evaluating case merits and structuring investor-friendly terms. They also cultivate relationships with top plaintiff law firms to access high-quality deal flow. Additionally, they have credit underwriting experience in modeling expected returns and setting appropriate purchase rates and terms. Investors should have a Heavyweight legal and finance team for sourcing, diligence, pricing, documentation, and portfolio management. Deep expertise in this niche market increases probability of success.
Lawsuit investing provides an uncorrelated return stream for investors seeking diversification. With rigorous due diligence, favorable deal structures, portfolio construction and specialized expertise, investors can generate stable yields from financing legal claims. However, improper case selection and pricing can result in underperformance. Disciplined underwriting and portfolio management are critical success factors.