Litigation Finance: Why Retail Investors Are Missing Out
Professional investors, sovereign wealth funds, and family offices have a special new asset class for passive income: litigation finance. In recent years, financing lawsuits to help them proceed through the court in return for a portion of the payout has emerged as a viable strategy for generating fixed income.
However, access to this special asset class is remarkably limited. Most retail investors haven’t heard of it, primarily because they have no way to tap into this opportunity. Here’s why this asset class is so elusive and why blockchain technology could lower the barriers to entry. But first, a closer look at what makes this asset class so appealing.
Passive income from litigation finance
Two factors make litigation finance incredibly appealing as an investment.
First, the yield on financing lawsuits is much higher relative to the yield on private credit or private equity. In fact, most litigation finance deals target a low double-digit return. Compare that to low single-digits on corporate bonds, or negative yields on government bonds, and you can see why this is considered a wise investment.
Second, litigation finance has a positive social impact. The legal system is complex and expensive. Often, small business owners and individuals don’t proceed with justified lawsuits because they can’t afford the legal fees. This dynamic is magnified in “David vs. Goliath” situations where the plaintiff is a single individual while the defendant is a major multinational corporation.
In short, litigation finance is a way to fund justice across society, and help the little guy win while generating lucrative profits. Unfortunately, this attractive asset class isn’t easily accessible.
Barriers to access
Litigation finance isn’t in everyone’s portfolio or even on their radar. This isn’t because the uber-rich or Wall Street are trying to prevent access. Instead, it’s about the complexity of the asset class and the outdated nature of financial regulations.
It’s worth noting that litigation finance is a relatively new investment strategy. It’s not a common holding, even for the world’s wealthiest family offices and private equity funds. That’s because the skills required to determine the risk and reward ratio in any legal case are rare. The wealthiest investors rely on a team of experts with backgrounds in law, policymaking, and private credit to conduct due diligence. So far, these teams are small niche hedge funds. There are no publicly-traded companies or exchange-traded funds (ETFs) that offer this strategy to retail investors (at least not in the United States).
However, Liti Capital intends to plug this gap with blockchain technology.
Liti Capital’s solution
The ability to use blockchain technology to raise funds from a group of investors in a decentralized manner is already proven. Several major crypto projects, such as Ethereum and Solana, have been funded in this way. Liti Capital’s mission is to apply this technology to funding litigation finance.
By raising and organizing funds on a blockchain network, Liti Capital can lower the barriers to entry for ordinary investors. In fact, blockchain technology also reduces the costs of managing these crowdsourced funds. Know-Your Customer compliance, governance, dividends, and voting are all handled on-chain, which ultimately makes the process more efficient. In other words, it’s delivering better outcomes for both investors and plaintiffs.
This strategy seems to be working. Liti Capital’s early investors have helped deploy $29 million across four cases. 80% of profits from case collections are earmarked for LITI token holders. As these cases proceed and rewards are delivered, the viability of this strategy should become clear.
Bottom line
Regulations, costs and complexity have prevented ordinary retail investors from accessing litigation finance. However, blockchain technology is helping to make this passive income, socially positive investment strategy more approachable for everyone.
Find out more at www.liticapital.com
