WTF is litigation finance?

  • over $1 billion financing litigations since 2011
  • Burford Capital claims 670% net return on invested capital

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WTF is litigation finance?
I’m not a lawyer, and even if my mother wishes I were, my legal career was over when I played hooky for the LSATs. That legal education would have come in handy to invest in a growing industry: Litigation finance. There's been over $1 billion put to work financing litigations in 2011, and the market has been growing since.

What’s litigation finance?

Litigation finance is the funding of a litigation by a third party in return for a share of the claim. Litigation finance turns a lawsuit into an asset class.

Who invests?

Individual lawyers, SMBs, or legal firms are the usual suspects for small litigation investments (under 100k in settlement value), while alternative asset managers and specialized funds are the most likely equity providers for larger litigations (over $2M in value).

Why do people invest?

3 magical words: Return on Investment. Because of the hit-or-miss nature of litigation finance, modeled returns must be much high enough to offset the risk. Large litigation finance funds like Burford Capital claim an impressive 670% net return on invested capital. Investors also like the lack of correlation with other markets, as economic changes have little effect on court proceedings. The moderate life cycle, around 28 months, of litigation funding, is also appealing. Lastly, people with any legal expertise are able to monetize their own experiences without the need to step back into the courtroom via 3rd party litigation investments.

Is litigation finance popular with investors?

Sure. In Burford Capital’s 2016 Litigation Finance Survey, 28% of law firms used litigation finance, up from 7% in 2013. There are countless business and individual investors who invest in small personal injury litigations, and crowdfunding platform Lexshares has made litigation finance more accessible to the general public. For larger cases, companies like Burford Capital, IMF Bentham, and Gerchen Keller Capital are a few of the larger litigation finance investors.

Is litigation finance a good thing?

It depends who you ask. Josh Schwadron, CEO of Mighty, a software firm that services litigation financiers, calls litigation finance "the great equalizer" of the judicial system. Proponents of litigation finance would say 3rd party investments give plaintiffs the endurance to see a litigation through to its end. On the other hand, some people aren’t so hot on the idea of investors profiting from legal proceedings. In a 2012 report, the US Chamber of Commerce Institute for Legal Reform called litigation finance a "clear and present danger to the impartial and efficient administration of civil justice in the United States". Opponents argue that litigation finance doesn’t level the playing field -- it just attracts more money to slam-dunk cases.

Why is litigation finance important?

With 0% interest rates, investors need to look outside of the status quo for new opportunities, and alternative investments like litigation finance may fill the void. High returns and new investment platforms have already brought large and small investors into the litigation finance market.

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