Litigation finance refers to providing financing to law firms or plaintiffs to fund the upfront costs of litigation, in exchange for a share of the settlement if the case succeeds. As an alternative investment, litigation finance is gaining popularity among investors looking for uncorrelated returns. The key aspects of litigation finance investing include assessing the merits and potential value of lawsuits, pricing risk appropriately, and portfolio construction to manage risk. With increasing litigation and regulation globally, litigation finance presents new opportunities.
Assessing merits and value is critical
The first step in litigation finance investing is rigorously assessing the legal and factual merits of lawsuits. Investors need to evaluate aspects like liability, causation and assess potential damages. Complex valuation models are used to price cases and estimate settlement values. Detailed due diligence by experienced litigation funding professionals is essential.
Pricing risk is key for returns
The second key aspect is appropriately pricing the risk of lawsuits not succeeding. Only a small percentage of filed cases go to trial, so assessing risks like cases being dismissed, settlements below expectations or even fraud requires quantitative models and experiential judgment. Investors need to price risks into funding decisions to generate returns.
Portfolio construction to manage risks
As litigation outcomes have low correlation to markets, portfolio theory can be applied. Constructing a diversified portfolio of lawsuits can help manage risks like single-case failures. Key factors include case mix by area of law, jurisdiction, law firm as well as investment duration. Portfolio monitoring and management is also critical to ensure return objectives.
In conclusion, litigation finance is an emerging alternative investment with opportunities as well as risks. Assessing case merits, pricing risks appropriately and constructing diversified portfolios are key to successful investing in this asset class.