Litigation finance refers to providing funding to a party involved in a legal dispute in return for a share of the proceeds if the case succeeds. As an emerging alternative asset class, litigation finance investing has attracted growing interest from investors looking to diversify their portfolios. This article will provide an overview of core concepts and key considerations around building an investing strategy in litigation finance.
Understanding litigation funding business models
There are several business models for litigation funding firms, mainly around financing law firms/corporate legal departments (law firm financing), or funding commercial claims directly (commercial litigation funding). Investors need to understand these models and their risk/return profiles. Factors to evaluate include types of cases funded, fee structures, underwriting criteria, portfolio diversification and management, and track record.
Evaluating litigation case attributes
As with any investment, assessing the attributes of the underlying asset is crucial in litigation finance. Key case attributes that investors analyze include the legal merits and evidenciary basis of the case, jurisdictional risks, the experience of lawyers/law firms representing the case, claim amounts versus potential damages, and more.
Building a diversified litigation finance portfolio
Since not all litigation cases succeed, diversification is important to manage risk. Key considerations for diversification include funding a portfolio spanning different case types, jurisdictions, law firms, etc. as well as incorporating other alternative investments to further spread risk.
Leveraging expertise of litigation finance managers
Assessing litigation cases requires specialized legal and financial expertise. Working with specialist litigation financing firms as a limited partner allows investors to leverage experienced teams for case underwriting, portfolio management, and collections.
Litigation finance investing can provide portfolio diversification but requires an understanding of key concepts around legal funding models, case attributes, risk management through diversification and partnerships with veteran specialty finance managers.