Litigation Finance 101
At its most basic, litigation finance — also referred to as litigation funding or third-party funding — is the practice in which an outside party invests in a lawsuit in return for a portion of the profit. While the market is still relatively small and unexplored, it’s developed into a multibillion-dollar global industry that is expected to double in under a decade, boasts impressive average returns on investment (ROIs), and even thrives in economic downturns. On top of that, the frequency, diversity, and demand for litigation financing, not to mention the number of funders, continues to rise at a rapid rate.
When a legal claim is financed, the investment isn’t structured like a loan but rather like an asset or a venture capital. As with any investment opportunity, it comes with the potential of risk and reward.
These investments are conventionally non-recourse, meaning that if a plaintiff isn’t awarded recovery or offered a settlement, they aren’t required to repay the investor. For this reason, litigation finance firms perform extensive due diligence before funding a lawsuit, to ensure that they select cases likely to win and appropriately balance the risk among their claims. Though the high ROIs, which blow all other alternative asset classes out of the water, make the possibility of reward worth the gamble — per Steven Friel’s The Law and Business of Litigation Finance, financiers are typically earning three to five times more than their initial investment.
Additionally, any assets you require through litigation financing operate independently from the capital market, making them an excellent counterweight to traditional investments and a welcome means of portfolio diversification. For instance, if the stock market were to crash, or interests rates were to skyrocket, the performance of your litigation assets would remain protected from negative impact. In reality, they likely would thrive — as this asset class is not only separate from the state of the economy but is also regarded as countercyclical. For example, while economic fallout was globally felt in response to COVID-19, the demand for litigation financing shot up. Holding litigation assets is therefore a helpful tool for buffering unnecessary losses in unstable financial markets.
Beyond offering appealing investment opportunities, this industry serves to level the legal playing field by providing access to justice, regardless of socioeconomic background. Financial hesitation is a major factor in why potential plaintiffs shy away from pursuing worthy claims. It’s no secret that lawsuits are expensive and slow-moving, and as the price tag on court decisions continues to increase, the less deserving individuals and entities can equip themselves with basic legal protections.
Litigation financing supplies plaintiffs, lawyers, or law firms with the necessary capital to offset legal costs, cover personal expenses, or keep their business above ground during legal proceedings. When court decisions aren’t decided by who can add the most zeroes to a paycheck but rather by the merits of the case at hand, it’s only logical that they become more impartial. This opens the door for new businesses to hold mega corporations accountable when they’ve done wrong, for resource-limited individuals to stand up to big-pocketed bullies, and so on. In this sense, litigation financing is a powerful and needed equalizer that pushes egalitarianism forward.
In its twenty-five-year history, litigation financing has largely been monopolized by venture capitalists, hedge funds, and elite financiers — until now. To even participate in litigation finance as an individual, it was required that you not only be an accredited investor but also earn at least $200,000 a year with a net worth above $1,000,000, making the barriers to entry unjustly exclusive. Liti Capital is making it possible for investors of all backgrounds to take part in this attractive alternative asset class through our merging of private equity opportunities with blockchain technology. Learn more here.