What is litigation finance and what returns should investors expect?

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AcadiFi · Accepted Answer

Litigation finance (third-party funding of commercial lawsuits) provides non-recourse capital to plaintiffs or law firms in exchange for a contingent share of recoveries...

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Deal economics: funder advances $2-30M per case covering legal fees, disbursements, and sometimes plaintiff working capital. If the case wins, funder receives its capital back plus a multiple (1.5-4x MOIC) or a percentage of proceeds. If the case loses, the funder loses everything — hence non-recourse.

Portfolio-level returns at mature commercial funders target net IRR 12-18% over 3-5 year average durations. Case outcomes are binary and bimodal, so diversification across 30+ matters smooths returns. Correlation with public markets is extremely low because litigation outcomes are driven by legal merits, judges, and procedural timing rather than economic cycles.

For Marble Creek Endowment: a 1% allocation to a diversified commercial litigation fund could yield attractive risk-adjusted returns. Key diligence items: (1) Manager track record on IRR and loss ratio. (2) Case selection rigor — win rates of 60-70% at trial are common but settlements dominate outcomes. (3) Average duration risk (COVID extended many matters by 12-24 months). (4) Regulatory risk — some jurisdictions (Ireland, parts of Australia) restrict or require disclosure of third-party funding. (5) Ethical constraints — champerty and maintenance doctrines vary by state in the US.

AcadiFi Level III insight: litigation finance is genuinely uncorrelated, but J-curve is steep and portfolios take 4-6 years to show true performance. Do not commit without multi-year capacity.

What is litigation finance and what returns should investors expect?

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