How does litigation finance work as an alternative investment?

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AcadiFi · Accepted Answer

Litigation finance (also called legal finance or third-party funding) provides non-recourse capital to plaintiffs in exchange for a share of any eventual recovery. If the case loses, the funder loses its investment; if the case wins, the funder receives a multiple of capital or percentage of proceeds. Deal types: commercial litigation (breach of contract, IP disputes, antitrust), international arbitration, insolvency-related claims, and increasingly class actions and mass torts. Claim sizes range from $1M to $100M+. Funders typically provide 8-12% of potential damages as working capital for legal fees and expenses. Underwriting: specialized lawyers and analysts assess merits (is liability clear, are damages provable, will courts enforce), defendant solvency (a judgment against a shell company is worthless), duration estimates (cases last 2-5 years), and attorney quality. Diligence often takes 3-6 months and may cost $50K-$200K even if the case is not funded. Return structure: the funder typically receives either a fixed multiple (2-4x capital) or a percentage of proceeds (15-40%), whichever is higher, with tiered structures that grow over time to reward faster resolutions. Gross IRRs of 20-35% are targeted; realized net IRRs for top funds run 12-20%. ```mermaid flowchart LR A[Case
screened] --> B[Due
diligence] B --> C{Fund?} C -->|Yes| D[Capital
deployed] C -->|No| E[Passed] D --> F{Case
resolved?} F -->|Win| G[Multiple
returned] F -->|Lose| H[Zero
recovery] ``` Imagine Halcyon Justice Partners underwriting an IP infringement case against a large tech company. The plaintiff cannot afford top-tier counsel. Halcyon commits $8M for legal fees. After three years, the case settles for $75M. Halcyon's contractual return: 3x capital, receiving $24M net of plaintiff's attorney fees. Risks include case losses, prolonged duration, adverse precedent, regulatory changes (several jurisdictions are restricting third-party funding), and binary outcomes that defy traditional portfolio diversification logic.

How does litigation finance work as an alternative investment?

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