Why investors are fancying a bet on litigation

08 July 2022

A media roundtable staged in the London office of law firm Macfarlanes this week drew attention to both the opportunities and challenges associated with litigation finance, a fast-growing corner of the private debt universe.

Typically placed in the speciality finance bracket, litigation finance involves third parties unconnected to the litigation bankrolling the legal fees of a court case. If the case is successful, the funder is paid from the proceeds; if unsuccessful, the funder will not obtain any return on its investment.

There are two main reasons why litigation finance has become highly popular. One is the possibility of private equity-like returns of 20 percent or more - not to be sniffed at in today's environment. Two is that it is a highly distinctive area of investment that fits well with portfolio diversification objectives.

As a result, strong growth is being experienced. In its early days, funders would typically only back single cases. These days, more and more funders are taking a portfolio approach - backing multiple cases and putting a larger quantum of capital to work as a result. Other ways are also being found to deploy capital, including lending directly to law firms to enable them to fund cases and build their books, as well as financing spinouts from law firms where start-up capital is required to establish litigation finance boutiques.

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