Litigation finance · Global
Litigation finance: how it works, and why it is harder than it looks
An unbiased look at funding legal claims for a share of the outcome, and why investors should be cautious.
Summary
Litigation finance means funding a legal claim in return for a share of any recovery, and it carries unusually concentrated risks that make it unsuitable for many investors.
- A single case is close to a yes-or-no outcome, and a loss can mean losing the whole investment.
- Cases can run for years, which reduces annualised returns even when they succeed.
- Capital has been harder to raise in recent years, and rules and enforceability vary by country.
What is litigation finance?
A funder pays legal costs for a claimant, or buys an interest in a claim, and is repaid from any damages or settlement.
If the claim fails, the funder usually gets nothing back, because the funding is typically non-recourse. If it succeeds, the funder takes an agreed share or multiple. Funding can be for a single case or for a portfolio of cases, and for companies, law firms or claimant groups.
Why does it appeal to investors?
It offers returns that do not depend directly on stock markets, which is why it is described as uncorrelated.
Outcomes depend on legal merits, not on market prices. That is a real feature, but 'uncorrelated' does not mean 'low risk'. The risks are different and often more extreme.
What can go wrong?
Cases can be lost, delayed, settled for less than expected, or become impossible to collect.
A single case is close to binary: win or lose. Duration is a central risk, because a long case lowers the annualised return even if it succeeds, and costs can rise. Courts, judges and procedure can change the odds. A defendant may be unable to pay, or enforcement abroad may be slow or uncertain. Conflicts can arise between funder, claimant and lawyer over control and settlement. Valuations of a funded claim before a ruling are estimates, so reported values can change sharply.
How does regulation and law affect it?
The law on funding agreements, disclosure and control differs between countries and can change.
Some legal systems have historically restricted funding rules, often called champerty and maintenance, and the rules vary by country and even by state. In England and Wales, a 2023 Supreme Court decision (known as PACCAR) raised questions about the enforceability of some funding agreements that pay the funder a percentage of damages, and reform has been debated since. In the United States, disclosure of funding is debated and handled differently by courts. The industry has also seen capital become harder to raise in recent years, with some funders slowing or pausing fundraising. This area moves quickly, so check the current position.
Frequently asked questions
Is litigation finance a good investment?
It can suit a small number of experienced investors who understand the risks and can lose the whole amount. For most investors it is a speculative and concentrated area, and we would encourage caution.
Why is it called uncorrelated?
Because results depend on court outcomes rather than market prices. That is not the same as being low risk.
How long do cases take?
They can run for years and are hard to predict. Appeals and delays are common.
What is the safest way to approach it?
Understand the portfolio's diversification, the funder's track record and conflicts, the duration assumptions, and how losses and costs are shared. Take independent advice, and only use money you can afford to lose.
This article is general information for eligible investors. It is not investment advice or an offer. Capital is at risk. See our Terms and Risk warning.
