Litigation finance investment, also known as third-party litigation funding, legal financing or litigation funding, refers to funding provided by external investors to a party involved in a lawsuit. This innovative approach allows plaintiffs or law firms to obtain financing for civil cases from institutional investors. The investor usually receives an agreed return from the settlement or award if the case succeeds. With the rapid development of globalization, litigation finance has gained increasing popularity as an alternative to traditional legal financing. In this article, we will explore the essentials of litigation finance investment and how it benefits different stakeholders in the legal system.
Litigation finance provides funding for high-cost civil lawsuits
The main application of litigation finance investment is to fund high-cost lawsuits, especially in cases of personal injury, breach of contract, intellectual property rights disputes, etc. The plaintiff or law firm obtains funds from a third-party financing company to cover the upfront costs of bringing a lawsuit, such as attorney fees, court fees, expert witness fees, etc. Without adequate capital, many plaintiffs have to abandon legal pursuits or accept unfavorable settlements. Litigation funding helps alleviate the financial burden and allows more people to seek justice.
Litigation finance increases access to justice and promotes corporate accountability
By providing funding for high-cost lawsuits, litigation finance investment increases access to justice for claimants who cannot afford the legal costs. It levels the playing field between claimants and large corporation defendants with deep pockets. The funded litigation will prompt potential offenders to improve compliance and accountability. Corporations are deterred from malpractices like environmental pollution, product defects, discrimination and harassment, knowing that victims can now afford to bring legal action against them.
Litigation finance offers investors high returns uncorrelated to financial markets
For investors seeking high returns beyond traditional assets, litigation finance provides an attractive opportunity. The investments in litigation can generate double-digit yields largely uncorrelated with capital market risks. The high returns come from funding strong cases with high damages. Moreover, the non-recourse feature ensures the investors will not lose more than the funded amount even if the case is unsuccessful. Such risk-return profile makes litigation finance appealing to institutional investors like hedge funds, private equity firms, etc.
More capital influx improves liquidity issues in the litigation finance industry
A major problem plaguing the litigation finance industry is the lack of capital. More investors and funding are needed to satisfy the growing demand for litigation financing and to better evaluate the risks in new cases. As the industry matures and becomes more mainstream, increased investor participation will drive down the cost of capital. Cheaper financing cost will allow more cases to meet the return hurdles of the investors. More capital influx improves the liquidity and enables more funding at scale.
Litigation finance investment is an innovative way to fund high-cost lawsuits while providing attractive uncorrelated returns to investors. It increases access to justice, promotes corporate accountability, and alleviates liquidity constraints in litigation financing. As the industry grows, litigation finance will likely play an important role in upholding justice, fairness and the rule of law.