Litigation Finance

A company with a strong legal claim may lack the money to pursue it — litigation is expensive and takes years. A funder pays the legal costs in exchange for a share of any recovery.

The defining term is non-recourse: if the case loses, the funder gets nothing and the claimant owes nothing. All the downside sits with the funder.

• For the claimant it converts an unaffordable, all-or-nothing legal fight into a free option on a share of the outcome.
• For the funder it is a portfolio of binary bets whose outcomes depend on courts rather than on markets.

The appeal to investors is unusual and real: a case's outcome has essentially nothing to do with interest rates, equity markets or the economy. In a world where correlations converge in a crisis, that is a rare property.

How the funder gets paid

Why the returns must look extreme

At a 60% win rate, a 3× multiple gives 0.6 × 3 − 0.4 = 1.4, a 140% gross return on deployed capital — over an average life of two to four years, so an IRR far below what the multiple suggests. Headline multiples in this asset class are systematically misleading about annualised return, which is why the IRR distinction matters more here than almost anywhere else.

The four risks

• Merits risk — the case loses. Diversifiable across a portfolio, if the cases are genuinely independent.
• Duration risk — appeals extend a three-year case to seven. The multiple may rise; the IRR falls anyway.
• Collection risk — winning is not being paid. A judgment against a defendant who cannot or will not pay, particularly across borders, is a well-known way to lose after a victory.
• Adverse costs — in loser-pays jurisdictions, the funder may owe the defendant's costs too. Insurable, at a price that changes the economics.

Valuation before resolution is the unsolved problem

An unresolved case has no market price. Funders carrying assets at fair value must estimate one, and the inputs are legal judgements:

• Fair-value marks typically step up on favourable rulings, class certification or a survived appeal — reasonable in principle, and entirely model-driven.
• Listed funders have faced sustained criticism over exactly this: reported returns depend on marks that only a resolution can validate, and the gap between carrying value and realised value has been material in individual cases.
• The honest metric is realised return on concluded cases, by vintage, including the losses. Any portfolio still dominated by unresolved matters is reporting an opinion.
• This is the same critique as appraisal smoothing in private real assets, sharper because the underlying outcome is binary rather than continuous.

Concentration is the real risk, not merits

The mathematics rewards diversification heavily — a portfolio of twenty independent cases at a 60% win rate is a very different object from three. In practice, funders have repeatedly concentrated: a single very large claim can dominate a fund's outcome, and the correlation between cases is higher than it looks when several depend on the same legal precedent or the same defendant's solvency.

The regulatory direction

• Disclosure of funding arrangements is increasingly required in several jurisdictions, so opponents and courts know who is funding a claim.
• Champerty rules — historic prohibitions on funding another's lawsuit — have been relaxed in most common-law jurisdictions but not everywhere, and enforceability is jurisdiction-specific.
• Consumer protection concerns concentrate on funded claimants receiving a small share of their own award after fees and funding costs — a live policy debate, and a genuine one.
• Any of these can change the economics of an existing portfolio, which makes regulatory risk a first-order exposure rather than a footnote.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.