Litigation Finance: A Primer for Alternative Investors

What is Litigation Finance?

Litigation finance is the practice of providing capital to plaintiffs or law firms to pursue legal claims in exchange for a share of any settlement or judgment. The funder takes on the risk of loss in exchange for potentially outsized returns.

The asset class has grown from nearly nothing in 2000 to over $15 billion in capital deployed globally today. Major players include Burford Capital, Bentham IMF, and platforms like Yieldstreet that offer access to retail investors.

Why Zero Market Correlation?

The defining characteristic of litigation finance is its independence from financial markets. The outcome of a patent infringement case or commercial dispute depends entirely on legal merit, evidence, and judicial decisions, not whether the economy is booming or in recession.

This makes litigation finance particularly valuable during market downturns. While stocks, bonds, and real estate may fall together, litigation portfolios continue generating returns based on case outcomes.

Types of Litigation Finance

• Commercial Litigation: Business disputes, contract breaches, and corporate claims
• Patent Litigation: Intellectual property infringement cases
• Arbitration: International and domestic arbitration proceedings
• Class Actions: Large scale consumer or securities lawsuits
• Portfolio Financing: Funding a law firm's entire case portfolio

How Cases Are Selected

Professional litigation funders employ teams of lawyers and analysts to evaluate cases before committing capital. Key criteria include:

• Legal merit and strength of the claim
• Potential damages if successful
• Defendant's ability to pay a judgment
• Quality and experience of plaintiff counsel
• Expected duration and cost to litigate
• Risk of appeal even if successful

Most funders report investing in only 3 to 5% of cases they review, indicating rigorous selection processes.

Return Profile

Litigation finance typically targets returns of 15 to 25% IRR, with significant variation by case type and risk level. Returns are generated when cases resolve favorably through settlement or judgment.

The binary nature of outcomes creates a barbell distribution: most cases either return capital plus profit, or result in partial or total loss. Diversification across many cases is essential.

How to Invest

Individual investors can access litigation finance through:

• Yieldstreet: Platform offering litigation finance funds with minimums around $10,000
• Public Stocks: Burford Capital (NYSE: BUR) and similar funders
• Private Funds: Institutional funds typically require $250K+ minimums

Portfolio Allocation

Given the illiquidity and binary risk, most advisors suggest limiting litigation finance to 1 to 5% of an overall portfolio. The allocation should be diversified across multiple cases or funds rather than concentrated in single matters.