Litigation Finance as an Uncorrelated Asset Class

Litigation finance means investing in lawsuits. A funder pays some or all of the legal costs of a case in exchange for a share of any money recovered. If the case loses, the funder typically gets nothing. If it wins or settles, the funder can earn a substantial return.

Because court outcomes have little to do with stock markets or interest rates, litigation finance is often promoted as an uncorrelated asset class. It has grown into a significant industry, led by specialist firms such as Burford Capital, which is publicly listed. This guide explains how it works, where returns come from and the risks investors should understand.

1. How Litigation Finance Works

• Non-recourse funding. The funder is repaid only from a successful outcome, not by the claimant personally.
• What is funded: legal fees, expert costs and sometimes working capital for the claimant.
• How funders are paid: typically a multiple of the capital invested, a percentage of the recovery, or a combination.
• Common case types: commercial disputes, international arbitration, patent infringement and antitrust claims.
• Portfolio deals, where funders finance multiple cases for a law firm or company, reducing single-case risk.

2. Why Investors Are Interested

• Low correlation with public markets and economic cycles.
• Potentially high returns on successful cases.
• Diversification for portfolios heavy in equities and credit.
• Growing demand from companies and law firms seeking to share litigation costs and risk.

3. How Investors Access It

• Specialist litigation finance funds managed by dedicated firms.
• Listed companies such as Burford Capital.
• Direct case investments, usually for experienced and well-resourced investors.
• Multi-strategy or private credit funds with litigation exposure.

4. Risks to Understand

• Binary outcomes. Individual cases can be lost entirely.
• Duration risk. Cases can take many years, reducing annualised returns and tying up capital.
• Collection risk. Winning a judgment does not guarantee payment. Burford's financing of claims against Argentina, which led to a US court judgment of about $16 billion in 2023, shows both the scale of potential awards and the challenge of enforcing them.
• Valuation difficulty. Unrealised case values rely heavily on judgement.
• Regulatory and ethical scrutiny, including debates over disclosure of funding and funder influence on cases.
• Concentration in a few large cases.

5. What to Diligence in a Litigation Finance Fund

1. The team's legal expertise and underwriting process.
2. Track record across realised cases, including losses and duration.
3. Diversification by case type, jurisdiction and counterparty.
4. How the fund values unrealised cases.
5. Fee structure and alignment.
6. Regulatory and ethical safeguards.

6. Relevance for Startups

Startups with valuable intellectual property sometimes use litigation finance to pursue patent infringement claims against larger companies without draining their own capital. Investors in such companies should understand any funding arrangements, since funders may have a claim on recoveries.

For other alternative assets, see royalty and revenue-share investing and private credit.

Frequently Asked Questions

Is litigation finance truly uncorrelated?

Case outcomes are largely independent of markets, though fundraising, valuations and a defendant's ability to pay can be affected by economic conditions.

What returns can litigation finance produce?

Successful cases can produce high multiples, but losses, delays and collection problems mean portfolio-level returns vary widely.

Is litigation finance legal everywhere?

It is permitted in many jurisdictions, but rules differ, and some restrict or regulate it.

Who should consider litigation finance?

Typically institutional or sophisticated investors seeking diversification who can accept illiquidity and binary risks.

The Bottom Line

Litigation finance offers returns driven by legal outcomes rather than markets, making it a genuine diversifier. But binary results, long durations, collection risk and valuation uncertainty make manager selection and diversification essential.

Global Capital Network connects investors with alternative asset opportunities through our events and investor network. Get in touch to learn more.

This article is general information, not legal or investment advice.