How to invest in litigation finance?


The lawsuits branch of business is so large and profitable, it is worth over a trillion dollars, and litigation finance is one of the top-earners from its treasury. Litigation finance, [owning for](https://www.law.com/americanlawyer/2023/02/16/the-am-law-200-backed-away-from-litigation-funding-in-2022/?slreturn=20230328081445#:~:text=Westfleet's%20recent%20reports.-,In%202022%2C%20%2413.5%20billion%20assets%20were%20under%20management%20by%20litigation,and%20%2411.3%20billion%20in%202020.) $12.4 billion dollars as of 2021, and rose as far as $13.4 the next year, is what makes it possible for plaintiffs without the funding to take a case to court with enough financial backing.

A business that is worth approximately $13.5 billion in dollars is not something an investor should shy away from as the field tends to reward investors in large amounts of money  when all goes well.

![US Legal Process Outsourcing market growth chart (2020-2030) with trends in offshore and onshore outsourcing](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/How%20to%20invest%20in%20litigation%20finance/u.s.-legal-process-outsourcing-market-min.webp)

This article will explore litigation finance, detailing the benefits and risks of being an investor in the business, the kind of person that should invest in the business, and how one can invest in the business in order to make profit.

## **What is litigation finance?**

Understanding what litigation finance is helps in better mastering the field, and thereby increasing fluency in it.

Litigation finance (also known as legal funding) is a term used to embody the situation where funds required for legal proceedings are provided as a form of investment in exchange for a predetermined share of the eventual settlement or judgement reached on a court case. Put simply, litigation finance is the involvement of a third-party by a plaintiff to help fund court proceedings in exchange for whatever profit is made from it.

![Litigation funding investment market by type chart](https://hedonova.b-cdn.net/Hedonova%20images/%20All%20Hedonova%20blogs/How%20to%20invest%20in%20litigation%20finance/litigation-funding-investment-market-by-type-min.webp)

In this situation, investors provide capital for plaintiffs who are unable to carry the burden of legal representation during the period of their case. In return for the funding provided, the investors receive a pre-agreed portion of the settlement. This form of investment helps plaintiffs stand a chance of equal, efficient representation in court during the period their case stretches.

## **Types of litigation finance**

Legal funding is divided into two types, namely:

- Consumer funding
- Crowdfunding

### **Consumer funding**

This branch of litigation finance provides funding for people or companies in need of financial backing to settle financial disputes that have caused them financial or personal harm. This form of financing is usually offered as non-recourse. In that, should the legal proceeding not result in any profit, the person/organisation does not have to pay back any amount to the investor. The advances provided by investors in this type of funding is usually between $500 and $2000.

### **Crowdfunding**

A lawsuit that could drag on for a long time is usually allowed to gather funding from a number of investors in order for it to stand a chance against the time the case will drag. This type of funding is usually done by gathering funds from a number of investors, with each getting a predetermined share of the settlement.

People can also help in providing funds for a case on a cause they believe in for a profit after the settlement has been conducted.

This type of funding can be categorised into three different types:

- Single-case funding, which involves the provision of legal finance and expenses in support of a single case or arbitration. It could also include satisfaction of dents, working capital and all other items subject to recovery from the case.
- Portfolio financing which provides the lawsuit finances of the legal finance in order to support the multiple cases of the law firm/company or the arbitrations. In this case of portfolio funding, the legal finance the firm gets from handling the portfolio cases is used in recovery of the funder's investment and returns.
- Multi-party financing is available in non-US jurisdictions and it is when an action is financially funded or provided on behalf of a group having similar claims against a particular defendant.

## **Benefits of litigation finance**

Knowing the types and/or categories of litigation funding is one thing, understanding the gain or benefit is another. The following are benefits of litigation funding

- **An alternative to loans:** For a company or firm, often the capital obtained from litigation funding is more attractive than when getting the funding from a bank. Why that is is because no matter the outcome of the case, a loan that bears interest must be repaid in full. However, this does not apply to litigation funding firms as the borrower has no obligation to repay back the loan if the case is lost, repayment is only done on successful cases. Aside From avoiding the accumulation of debts regardless of the result of the dispute, the claimants who make use of the litigation finance are also burdened free as regards the payments of interests and the ongoing principal. This does not just help the claimant but also does not in anyway jeopardize the law firm financing partners personal assets since the litigation funder's investment has the lawsuit as its collateral.
- **Flexibility:** One of the many advantages that many claimants tend to look for in litigation funding is the kind of arrangement it brings along and that is its flexibility. The nature of this financing, allows for its use in paying legal fees and sorting out other expenses associated with dispute pursuits and in some cases, it may even be used for other purposes the funded party deems appropriate.
- **Unlocks company values:** Companies have been able to unlock new values via dispute financing. This also means a company can use the litigation funds to: hire lawyers that it is usually unable to afford; cut out a portion of the company's legal finances which would allow for more flexibility; lastly, it could turn the company's legal department potentially into a revenue source rather than the fees and expenses unit.

## **Risks of investing in litigation finance**

\
Investing in litigation finance can be quite risky and may as well result in a total loss of the investment made. Also:

- It can be risky if the case gets dismissed, does not settle, the trial is lost, or on appeal which would result in the total loss for the investors.
- It can be risky when the lawsuit results in a recovery of assets that is insufficient, meaning unpaid or underpaid investors s. This may even result in a partial or total loss.
- Lawsuits generally may take time and since there is no time limit of a set time for them to either settle or go to trial, it makes litigation risky. And if it takes years to conclude, it may result in uncertainty with investors.
- The law firm may also withdraw the case as the counsel.
- Claims could be made by senior creditors to the litigation as it proceeds.
- The law firm in charge of the litigation may even get sued for matters that do not relate to the litigation and this may negatively affect the litigation.\
  Investors may withdraw funds which would result in a dismissal of the lawsuit.

## **What to expect when investing in litigation finance**

- **Non-disclosure agreement:** Funding processes usually ßtart with a non-disclosure agreement (NDA; also known as a confidentiality agreement) from both parties. This NDA is a building rock that allows for the free low of information among the claimant, the lawyers and funders.but also protects the confidentiality.
- **Initial case or portfolio analysis:** This analysis determines whether the case fits into the litigation funder's criteria for investment. To know this, information are gathered and proper documentation is made from the claimant and the lawyers under the parties NDA. This analysis is done by the litigation funding firm.
- **Term sheet:** This is proposed by the litigation funding firm when the parties share a common interest in the proceedings. This sheet outlines the financial terms of the investment, if the case is funded that is. This however varies with the litigation funding firm and the regional market
- **Due diligence:** This consists of a deep analysis to determine the merits of the claims made, the potential damages that may incur and the amount of capital needed to pursue the case. Due diligence is usually conducted by all reputable funders when an investment opportunity arises. An analysis of the claimant's background is made and the financial capabilities of the law firm are looked into.
- Others include funding decision, litigation finance agreement and monitoring.

## **Conclusion**

Litigation funding or financing without doubt has more advantages or benefits than risks and this is more reason why proper research should be made into the case, the law firms and other investors before making any decision at all. Because of the nature of litigation funding or financing, it may be assumed that it bears a resemblance to taking out a bank loan, which as explained earlier, is quite different. Litigation finance is not a loan. Also, the basics, the risks, benefits and reasons for investing in litigation finance must be well understood before investing. For example, if a litigant loses a case, the investment cannot be regained or reclaimed in any way which results in a loss for the investors.


Litigation finance, worth over a trillion dollars in the lawsuits branch of business, is a highly profitable investment option attracting investors seeking steady cash flows and attractive returns. Litigation finance involves providing funds for plaintiffs who lack the financial means to pursue legal cases, with investors receiving a share of the eventual settlement. There are two types of litigation finance: consumer funding and crowdfunding. Benefits of investing in litigation finance include being an alternative to loans, flexibility, and unlocking company values. However, investing in litigation finance carries risks, including the potential for a total loss if the case is unsuccessful. Investors should expect a non-disclosure agreement, initial case analysis, term sheet proposal, due diligence, and funding decision in the investment process. Proper research and understanding of the risks and benefits are essential before investing in litigation finance.

How to invest in litigation finance?

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