Since its inception, litigation finance has been cornered by hedge fund heavyweights, highly illiquid litigation funding firms, venture capitalists, and elite investors. To participate in litigation funding as an individual, you not only had to be an accredited investor, but you also had to make at least $200,000 a year and have a net worth above $1 million (and still do if you’re based in the United States). Suffice it to say, the barriers to entry have been traditionally steep and the industry as a whole has been largely an exclusive one.
While Liti Capital is opening the door for investors of all levels to participate in the market, it still begs the question— what gives the 1% such an appetite for litigation finance?
The potential of making millions off of someone else’s legal disputes aside, the litigation funding market has a lot to offer those looking to get in on the action. Litigation financing, or the practice of investing in lawsuits for a profit, has made significant strides in its twenty-five-year history. The market is well-established while remaining relatively small and unexplored, it’s predicted to more than double in under a decade, it boasts enticing global opportunities, and the average returns are nothing short of impressive.
Let’s take a more in-depth look at some of the reasons why third-party funding is quickly becoming a fixture of upper-class investment portfolios.
When you participate in litigation financing, your investment isn’t structured like a loan, but rather like an asset purchase or a venture capital. This means that any assets you acquire are independent of the capital market. So if the stock market were to crash, for instance, or interest rates were to explode, the performance of your litigation purchases would remain virtually unaffected.
This is extremely attractive to anyone looking for investment portfolio diversification, because not only does the litigation finance market operate separately from all economic cycles, but it could also be regarded as countercyclical. Put simply, it’s crisis-friendly.
Take COVID-19, for example. While economic fallout was felt globally, the demand for third-party funding shot up in response to the pandemic. According to The Financial Times, the COVID-19 crisis could potentially provoke a meteoric rise in claims, and the ramifications are projected to linger far beyond 2021. In this sense, having litigation assets can serve as a helpful means of mitigating unwanted losses in unstable financial markets.
The ROIs Don’t Lie
In terms of return on investment (ROI) appeal, litigation funding blows all other alternative asset markets out of the water. According to Steven Friel’s The Law and Business of Litigation Finance, litigation funders are seeing on average a 50%-100% return range on their initial investments at the portfolio level and are typically banking three to five times their original capital.
While it’s true that most litigation funding arrangements are non-recourse— meaning that the funder could lose their investment if the plaintiff doesn’t receive a settlement or a recovery— the high return rates make it so that when cases do win they are by and large home runs. When those home runs add up, they help to offset or more than make up for the cases that don’t make it to a favorable court decision. Doing thorough due diligence in the case selection process also aids in lessening the associated risk.
As a relatively new industry, the litigation finance world offers a very limited formal structure. Currently, bar a handful of states putting laws forward surrounding extending cash advances for plaintiffs waiting on settlement payments and a code of conduct sanctioned by the ministry of justice in the United Kingdom, litigation finance is a predominantly unregulated market.
That means that funders are obligated to upholding the agreements they’ve consented to in contracts with their clients— and not much else, though self-regulation measures have been implemented by associations in the United States and elsewhere.
This paves the way for freedom and flexibility in how you invest, when you invest, how much you invest, and whether or not you disclose that you invested. Some believe that strict regulations and disclosures are inevitable as the demand for third-party funding grows, but all related legislation put forward has failed to take thus far. This is alluring for those looking for scope and leeway in claim investments.
Care to Join the 1%?
Thanks to Liti Capital, you no longer need a million dollars in the bank to participate in litigation financing. At a 20,000% discount, a $50 investment allows you too to reap the aforementioned benefits. Want to learn more? Click here.