Abstract
Litigation finance is a rapidly growing niche asset class focused on debt and equity investments in litigation claims and law firms. We find that in-sample returns in the space have been in excess of 20% annually, with limited correlation to other investment areas. This apparent excess return may be due to information asymmetry and barriers to entry in the space. Our findings highlight the opportunities and risks for investors in this nascent asset class, and suggest the excess returns are due in part to limits to the speed with which efficient markets take hold.
Key Findings
▪ The market for litigation finance has developed largely since 2008, and as with many types of private funds, data on investments and performance are not generally available to the public.
▪ The returns and risk in the litigation finance space vary across the three major sub-sectors of investments (commercial, personal injury, and mass tort) and between debt and equity investments in the space.
▪ Barriers to greater acceptance of this asset class (including institutional conservatism and a lack of understanding) are falling slowly, resulting in continuing opportunities for excess returns.
Litigation finance is a rapidly growing alternative asset class that has attracted significant interest in recent years. This highly specialized niche is still under the radar of many investors, and its high returns in both absolute and relative terms present a unique window into the limitations of efficient markets in the presence of information asymmetry. The lack of tradable interests, transparent pricing, and standardized structure create opacity for participants, as does the fact that each investment opportunity is tied to unique litigation, and therefore highly idiosyncratic compared to any investment tied to other litigation.
The litigation finance industry began in the late 1990s and picked up considerable momentum following the 2008 financial crisis. According to Westfleet Advisors, an industry consultancy, as of 2020, there were 46 dedicated fund managers in the litigation finance area, up from 41 in 2019. Most are comparatively small; the total dedicated industry AUM was $11.3B at the end of 2020, up 18% vs. 2019 (Westfleet Advisors n.d.). These figures are only for dedicated litigation funders and exclude broader asset managers that are entering the space. Dedicated litigation funders executed $2.47B in 312 new commercial litigation funding deals in 2020, according to Westfleet.
Yet this is only part of the industry picture. In the past five years, larger and better known private funds in the hedge fund and private equity fund world have started to enter the market.1 The emergence of litigation financing is largely due to industry rules that prevent law firms from raising traditional equity and from the complex and opaque nature of the assets—contingent interests in the outcome of litigation or other disputes—that reduce the attractiveness of debt to investors. At the same time, limited public investment opportunities and publicly available data prevent investors from being able to effectively compare returns in the space. The market therefore presents a window into the persistence of excess returns in the face of information asymmetry and barriers to investment. Figures on IRRs for funding transactions available from publicly traded firms suggest the possibility that they can exceed 20%.2 To examine their occurrence and character, we use anonymized return data from an alternative investments consulting firm and valuation agent for the period 2015 to 2019.
This article will (1) provide an overview of litigation finance: what it is, how it works, and the key players; (2) discuss investment performance characteristics and key risk factors; and (3) describe the process of sourcing and structuring litigation finance investments. While some past research has examined the legal aspects of litigation finance (see Steinitz 2012 and Popp 2019), this article is among the first to examine the financial returns in the market.
OVERVIEW OF LITIGATION FINANCE
Litigation finance—variously called legal funding, third-party litigation finance (TPLF), or alternative litigation financing (ALF)—refers to transactions in which a third party provides capital to one of the parties to a legal claim (a plaintiff or law firm, for example) in exchange for a financial interest derived in part from the outcome of the claim.
Advocates of litigation finance typically tout “equal access to justice” when describing its merits, as it permits plaintiffs to pursue litigation and retain legal representation they otherwise could not afford. Counterarguments claim it puts investor interests ahead of those of plaintiffs and provides an incentive for frivolous litigation. Past studies such as Richmond (2004), Steinitz (2010), and Shannon (2014) discussed the arguments for and against litigation finance from legal and ethical points of view. The ethical merits (or lack thereof) are beyond the scope of our study, however; we focus instead on the financial returns.
Litigation finance arrangements mirror the types of bilateral investments arranged by investment banks (e.g., swaps and forwards) in that they are individually negotiated among the parties. Brokers and some of the investment banks appear to play a role in the market, but principal negotiations are between the parties on each side of the transaction. Repayment of the financing is generally contingent upon the successful outcome of the underlying claim, whether by way of a judgment or, more frequently, an out-of-court settlement between the parties. While litigation finance appears to be quite new as a major asset class, Velchik and Zhang (2019) argued that its use is somewhat more widespread than commonly thought.
The litigation finance market is made up of three segments: commercial litigation finance, mass tort litigation finance, and personal litigation finance. Each has a variety of investment structures resembling traditional debt financing, equity financing, and a hybrid of the two. Each segment also has a combination of institutional and accredited investors deploying capital into the space. The commercial market generally comprises any litigation involving two corporate entities. It can include disputes such as breach of contract, intellectual property infringement, business torts, trade secrets, domestic and international arbitration, antitrust, securities, fraud, employment, bankruptcy and creditor’s rights, and partnership disputes. The mass tort market is generally focused on lending against portfolios of mass tort claims, either settled or non-settled. It is akin to the factoring market in traditional corporate finance and often involves large insurance companies in the area known as subrogation claims (Spurr 2019).3 Litigation funding for such claims has emerged in high-profile cases such as the bankruptcy of California utility company PG&E.4 The personal litigation market includes (but is not limited to) personal injury, tort claims, family law, and class actions.
The legal mechanics behind the different types of cases in which litigation finance is used vary markedly. However, from an investment perspective, each of these three areas of litigation finance has distinctly different returns, duration, and risk, which appear to be tied to the underlying characteristics of the case type.
Commercial claims investments are non-recourse investment interests generally backed by an interest in the plaintiff’s single lawsuit between commercial entities or a portfolio of such lawsuits. These investment interests often have priority access to cash proceeds from the portfolio. The commercial claims category might involve an intellectual property infringement case, for example, or a breach of contract suit. As one might imagine, these cases carry significant risk: if the case is lost, the investment has close to zero value (though sometimes a very small settlement may be reached to avoid ongoing appeals). The returns in these cases are typically driven by a payout that scales in some fashion to the size of the verdict or settlement and the amount of financing actually provided. In other words, a $100 million victory is more valuable to the investor than a $1 million victory. It is important to note that, because of statutory considerations regarding third-party control of litigation, actual control—including the decision to settle—of a case remains in the hands of the plaintiff and not the funder.
Investments in personal injury cases are non-recourse loans backed by individual cases, but unlike commercial claims where the backing loan can often be $5 million or more, personal injury loans often range from $2,500 to $25,000 per case. As a result, personal injury portfolios typically are made up of hundreds or even thousands of individual idiosyncratic cases, resulting in greater diversification and less portfolio risk compared to commercial claims. The returns in these cases are generally dependent on the magnitude of the verdict or settlement and are generally capped by some sort of interest rate.
Finally, mass tort investments typically are investments made in law firms that hold large groups of mass tort cases, which typically center on high-profile cases such as California wildfire or RoundUp litigation. These large blocks of cases can be either settled cases or unsettled ongoing litigation. These types of investment interests often have priority access to cash proceeds from the portfolio in the form of a direct cash sweep of the underlying firm’s bank accounts. This cash sweep typically ranges from 50% to 90%, with the remaining cash proceeds set aside for the support of firm operations
The returns on these investments are typically a set fixed interest rate, with the loan amount limited by the value of the underlying collateral cases. Valuation of the collateral is a critical element in determining the safety of the loan. Of course, settled case loans typically carry lower interest rates than unsettled case loans, given the difference in risk. In some cases these are recourse loans, where the borrowing law firm’s partners directly guarantee the loans themselves. That additional security serves to lower risk and the associated interest rate. Since mass tort loans are universally backed by large pools of claims, often in multiple different torts, idiosyncratic case risk is reduced.
INVESTMENT PERFORMANCE AND RISK
Exhibit 1 shows mean returns for a sample of 214 transactions made by litigation finance funds in the areas of mass tort, personal injury, and commercial claims. These transactions cover hundreds of thousands of individual cases in personal injury and mass tort, and dozens of transactions in the commercial claims space. All transactions shown are based on realized cash flows for claims finalized in the year in question.
Average IRRs across Types of Litigation Finance
NOTE: aIn the event of in-court losses, investment returns range from −85.3% to −96.2%, depending on the type of monies invested.
SOURCE: Morning Investments Data.
As Exhibit 1 shows, equity-type deals that involve a performance- or outcome-based kicker for the litigation finance fund have a higher return than debt-based deals in the mass tort space. On the personal injury and commercial claims sides, “equity” style deals also have higher returns than debt-type deals. We speculate that this may be a function of a selection effect—stronger investment opportunities are able to attract debt-style investments, while weaker ones attract equity investments that feature fewer investor controls over the investment, and debt deals may involve quasi-covenants to give investors some control over the putative borrower.
The overall returns in both areas are considerably higher than the average for equities in most years. However, they come with considerable risks; in the event of a case loss, investment losses are generally greater than 85%. Essentially, the recovery in a default situation is in the range of $0.04 to $0.15 on the dollar. This compares unfavorably with bonds, which have an average recovery rate of $0.24 to $0.37 on the dollar, according to Moody’s.5 In our data, the absolute rates of return on litigation finance remain considerably higher than most estimates for conventional investments, suggesting liquidity premiums and relative lack of familiarity by investors may play a role in litigation finance.
As with any investment class that offers an expected return to investors, litigation finance entails risks that need to be thoroughly understood and addressed. Examples of these risks include:
▪ Significant downside potential in the event of case loss. Given the non-recourse nature of litigation finance investments, an adverse outcome can result in the loss of the entire investment. Exhibit 1 shows that in resolved cases from 2018 to 2019, legal losses resulted in 85%–95% losses in investments. This risk is clearly greater in a single-case investment than in a portfolio of uncorrelated claims. Approximately 34% of cases in commercial litigation finance portfolios result in negative returns on invested capital, based on a review of publicly available data from Burford Funds, with a quantitatively similar figure reported in proprietary data we obtained from Morning Investments, a research and valuation firm in the litigation finance space.
Yet the risks are significantly different across litigation finance categories. The only substantial data available when considering outside risk are personal injury cases. An evaluation of more than 100,000 actual litigation finance investments in the personal injury space between 2009 and 2018 revealed that approximately 3% of cases involved a partial loss or full write-off for the funder.6 Exhibit 2 illustrates these results. Losses were statistically more common in cases where damages claimed were in excess of $1 million; roughly 7% of such cases experienced losses. This may be because cases with higher damage claims are less likely to be settled prior to or pre-judgment during trial and, as a result, losses are greater than in a settlement where, by definition, neither side has a loss. These loss levels are comparable to default rates for consumer finance companies but are not subject to the same broad systemic risks (recession-induced defaults).
▪ Legal, regulatory, and ethical considerations. Historically, third-party financing of lawsuits was prohibited in the United States and most other common law countries as a result of the medieval English doctrine of champerty, which is defined as helping another prosecute a suit in return for a financial interest in the outcome. Champerty was often used by feudal lords as a means of settling scores. Litigation financing may seem to be similar to champerty based on this broad definition. However, modern courts have applied champerty more narrowly, limiting it to situations in which frivolous litigation is instigated by a third party and/or where the third party is heavily involved in the management of the case. To operate well within the bounds of the law and regulations, it is generally advised that lawyers involved with litigation financing cases ensure that they maintain the independence of professional judgment, exercise reasonable caution to protect their client’s confidentiality, and avoid (or adequately disclose) any conflicts of interest.
▪ Headline risk. Some investors, particularly institutions, may have concerns over political or reputational risks associated with investing in lawsuits, owing to some of the objections outlined earlier in this article. A corporate pension fund, for example, may want to avoid investing in claims within its own industry as a way of mitigating headline risk. With the proliferation of investment vehicles designed around a multitude of parameters, including types of claims and industries, this is an increasingly achievable objective.
Industry Returns and Risk Analysis—Personal Injury Cases
SOURCE: Morning Investments.
LITIGATION AND FINANCE MARKET OVERVIEW
The global market for litigation finance is estimated at more than $400 billion in annual legal expenditures on cases (Haitong 2018). The practice has its roots in the United Kingdom and Australia, dating back to the late 1990s, and is deeper and more developed in those regions than in the United States, though it has ample room to grow globally. According to Haitong, the United States is the largest market, at about $3B in annual funded investment, followed by the United Kingdom. While large, less than 5% of the US litigation market is funded by external investors.
The litigation funding market is characterized by fragmentation and opacity. While a handful of firms are well known in the marketplace, many providers maintain low profiles. There is a limited publication of pricing by a handful of private research firms and no centralized exchange. Terms can vary significantly from provider to provider, including duration, pricing, and deal structure. Litigation finance is still emerging as an investment platform for larger and more established alternative asset managers. This might be because the industry is still in its early stages and/or because of the highly specialized expertise these investments require. Few industry players are publicly traded, and obtaining information on returns for those that are not is difficult.
Most investors with at least some knowledge of the litigation finance market are familiar with Burford Capital. Founded in 2009, Burford’s businesses include litigation finance and risk management, asset recovery, and a range of other legal finance and advisory activities. The company is publicly traded on the London Stock Exchange and New York Stock Exchange (ticker: BUR) and works with law firms and clients around the world from offices in New York, London, and Chicago. Burford has experienced significant growth and returns on capital, and is currently the largest direct investor and the largest investment fund manager in the legal finance sector. Burford is a good illustration of the rapid growth of this market segment: from 2009 to 2018, it grew from a £80 million (~$112 million) start-up to a firm with a market capitalization of over $4.6 billion that made more than $1.3 billion in new investment commitments in the fiscal year 2018.
As shown in Exhibit 3, Burford’s track record of ROIC and IRR performance in litigation finance over a meaningful time frame and on material amounts of capital can provide a historical frame of reference for potential and expected returns in litigation finance.
Concluded Investment Performance – Cumulative IRRs and ROICs, Burford Capital, 2014–2018
NOTES: Core balance sheet litigation finance concluded investments. IRR = internal rate of return; ROIC = return on invested capital. These data show the core balance sheet litigation finance investments that have been concluded. Note that a substantial portion of capital deployed by Burford is still attached to outstanding cases. Based on calculations from publicly available data provided by Burford, as of 2019H1, only 43% of all deployed litigation finance capital since inception had been associated with a full or partial conclusion of cases.
SOURCE: Burford Capital 2019 Annual Report.
Market Penetration of Litigation Finance in Legal Services
SOURCE: Morning Investments, Annual Litigation Finance Report for 2020. Exhibit 4 shows estimates for the fraction of cases in the United States that receive litigation financing as measured by the raw number of cases and dollar value of legal fees in cases.
It should be noted that in 2019 Burford came under attack by US–based short seller Muddy Waters for misrepresenting its ROIC and IRR figures by allegedly including unrealized gains on its balance sheet, among other accusations surrounding governance. Burford lost 40% of its market capitalization in a single day in the wake of the attack and quickly issued a lengthy press release rebutting each aspect of the 25-page report, emphasizing its consistency and transparency in accounting methods and reporting. Moreover, Burford subsequently provided additional information and transparency to investors on quarterly earnings calls. As of February 2021, however, Burford’s stock remained depressed by more than 70% from its all-time high in 2018. Although damaging to Burford’s stock price, the controversy has not triggered regulatory action against Burford or other funds in the space. The FCA has declined to find against Muddy Waters in actions pursued against it by Burford.
Indeed, growth in litigation funding continues to be robust on both the supply and demand sides. Results from Burford’s 2018 Litigation Finance Survey underscore this growth:
▪ Reported use among survey respondents increased from just under 10% in 2012 to 70% in 2018—a more than 600% increase.
▪ Fifty-three percent of lawyers in the United States and 65% of lawyers in the United Kingdom said they were “very aware” of litigation finance.
▪ The vast majority of lawyers (77%) said litigation finance is increasingly important to the business of law. Of those who have not used it yet, most (70%) expected to use it in the next two years.
While litigation finance is a new and less well-known investment area, in the past two years multiple new funds have been announced that collectively raised hundreds of millions of dollars and were oversubscribed. The challenge for the industry is to prudently deploy that capital to cases with the best odds of a successful outcome. Market penetration in the broader litigation finance space remains in the mid-single digits, according to an analysis in Morning Investments’ 2020 annual report.
As with many evolving markets, litigation finance also is witnessing the development of different types of products and transaction structures. A general trend is toward more diversified products of multi-claim portfolios and fewer single-case investments. In March 2017, Balmoral Wood Litigation Finance, a division of Bridgeport Asset Management, Inc., opened a litigation finance fund of funds—a structure common in the alternative investment space and seen by some industry observers as another sign that litigation finance is trending toward more mainstream financial practices (Strickler 2017).
Another trend is for litigation funders to specialize in distinct sub-sectors of the market. Therium, for example, is focusing more heavily on financial services cases, and Woodsford increasingly on patent cases. Many firms also are diversifying geographically. More generally, there appears to be a movement away from litigation funding, as narrowly defined, to investments in a broader range of transactions whose returns are tied in some way to the outcomes of litigation, arbitration, or regulation. One interpretation of this trend is that while the potential market for traditional litigation funding is large, the demand for such funding from the market is not large. To that end, funders are engineering products with different risk/return profiles as well—for example, lower-risk, lower-return credit-focused funds—to satisfy a wider range of investor appetites.
Much of this variation in investment structure owes to the predictable average differences in returns, duration, and risk across different segments of the litigation finance space. For example, as Exhibit 5 shows, case durations can vary markedly, depending on various characteristics. The cases in this graphic receive litigation funding in some form and are weighted by capital deployed, which means that a small number of commercial claims that require large amounts of capital have a similar weighting to much larger numbers of mass tort and personal injury claims that require less capital.
Mean Case Duration in Years
SOURCE: Morning Investments, 2020 Annual Report.
STRUCTURING INVESTMENTS IN LITIGATION FINANCE
While still in its early stages, the market for litigation finance is diverse and varied in the characteristics of its underlying investments. Some areas where investment options may differ include:
▪ Type of litigation. The diverse categories of underlying cases include intellectual property, antitrust, breach of contract, tax disputes, commercial class action, fraud, employment, and domestic and international arbitration. Some firms tend to focus on key areas of expertise of their in-house legal professionals, such as IP and patents.
▪ Size of claims. Litigation funders also tend to have different “sweet spots” for the size of cases they choose to fund. There is generally a direct correlation between target claim size and the minimum investment amounts for these vehicles.
▪ Stage of process. Investments can be made at various stages of a case, from pre-filing and discovery to trial, and even to the appeal phase.
▪ Single case vs. portfolio. Some funds consist of a collection of investments in individual cases. Others invest in “portfolio deals,” where capital is provided to a law firm for a collection of contingency cases in return for some portion of the settlement or judgment won.
▪ Geographic scope. Funds may invest solely in US litigation, or they may take a more global approach, typically investing in cases from other common law countries such as Canada, the United Kingdom, and Australia. For example, United Kingdom–based Harbour Litigation Funding invests in virtually no US cases despite having a strong US investor base.
Typical litigation finance funds are designed around a private equity–like structure involving committed capital that is drawn down as it is deployed, along with a fixed investment term, typically three to four years. Some funds offer the option to co-invest in individual cases alongside a broader fund investment. Investment minimums range from $5,000 in a single case through LexShares’ online investment platform, for example, to a more typical $1–$5 million or even as much as $10 million for larger, established funds.
Pricing for litigation finance transactions may be based on a multiple of the amount of capital provided, a percentage of the recovery in the underlying claim, or some combination. In a typical example, pricing increases the longer a case is expected to last (Westfleet Advisors n.d.).
The investment process for a litigation finance transaction is as distinct and specialized as the asset class itself. While slightly variable across firms, it typically includes the key steps shown in Exhibit 6 (Volsky 2013).
Structuring Litigation Finance
Case origination leverages numerous channels, including inbound inquiry, attorney referrals, and outbound marketing efforts such as press releases and paid advertising in legal trade publications (particularly for well-known, reputable firms). It appears that many cases seeking funding do not engage in any sort of bidding process with funders, but instead simply accept funding from the first broker who makes an offer they deem reasonable. The other major factor that seems to play a role in funder selection is any existing relationship between the attorney and the funder. In this regard, litigation funding shares some similarities to traditional investment banking in terms of how investment banks are selected to participate in deals. Brokers also play an important role here, in many cases expanding the opportunity for law firms to include cases from outside their own attorney network and to connect with investors they might otherwise not reach.
Some firms also employ artificial intelligence (AI) tools that use algorithms to mine databases as a first pass at identifying potential cases. LexShares created a proprietary software program to identify and score cases based on the firm’s algorithm; according to a marketing document for the LexShares’ Marketplace Fund I offering, the software uncovers approximately 1,000 cases a day.
A screening process also takes place before a potential case goes to full underwriting. Generally, funders look for such case characteristics as:
▪ Strong legal merits
▪ Defendants who are financially capable of paying the claim
▪ A case that will result in an enforceable judgment
▪ A highly reputable counsel/legal team
▪ A case where a successful outcome will have a meaningful financial upside
▪ An attractive damages-to-investment ratio
▪ Time to expected settlement or case judgment
The underwriting process involves an in-depth analysis of a case, including extrinsic factors that could impact a favorable recovery, such as regulatory changes or the personal situations of the investment recipient’s senior leadership (e.g., key man risk). It also looks to mitigate counterparty risks that might arise from clients and/or their attorneys. Many firms have internal underwriting teams consisting of seasoned law professionals, some with specific areas of expertise. These teams examine documentation surrounding a case and consider such factors as pricing, return, collectability risk, jurisdictional risk, and procedural considerations that might impact it. Firms also may engage external legal experts with specialized expertise to perform a review of a case in addition to their own in-house work.
Once approved, a case moves to the structuring phase. A key component of this stage is drafting the investment agreement, which clearly outlines the rights and obligations of all parties involved in the litigation financing. This document covers such features as pricing and payment terms, including the order of payment in the event of a successful claim and a budget for the case, including key milestones. Most investment agreements also include an attorney’s undertaking or acknowledgment, which is a series of covenants compelling the plaintiff’s attorney to comply with the terms of the investment agreement and to engage in (or refrain from) certain actions (Volsky 2013).
Litigation finance firms often assign case managers from their staff to negotiate the investment management agreement, continue to monitor the case after it is consummated, and manage its budget as it moves forward. As discussed earlier, the funder’s “control” of the case does not extend to any decision-making with regard to the legal management of the case.
This takes us to the compliance stage of the process. As events unfold and circumstances evolve, funders must remain ready to intervene if necessary to preserve the value of their claim. A typical provision of the investment agreement is the funder’s ability to drop a case (ceasing payments) should certain circumstances arise or should other parties to the agreement not fulfill their duties as outlined in the agreement. Funders should communicate periodically with the plaintiff’s legal team regarding the progress of the case and checking publicly available records to verify the procedural status as it unfolds (Volsky 2013). An important component of this phase is harvesting a return on the case investment when the claim ultimately reaches resolution.
When it comes to structuring fees for investors, many firms have adopted the traditional “2 and 20” (2% management fee and 20% of gains over a hurdle rate) typical of private equity funds. Different structures are emerging, however, such as fulcrum fees, some of which exclude the fixed management fee altogether. In many cases, fees can be somewhat negotiable with large investors.
CONCLUSION
Clearly, a solid foundation has been laid for litigation finance investment. Evidence presented in this article highlights these points:
▪ Given the lack of meaningful and transparent data on return and risk in this space, underwriting continues to be a challenge. This is compounded by controversy over accounting practices (e.g., Burford Litigation).
▪ Multi-billion-dollar firms have made litigation finance their sole business, and are experiencing strong growth.
▪ Investment structures in the industry continue to evolve both in number and structure, in response to changing fund demand.
▪ Several dynamics support continued growth in this space, including under-penetration and the proven ability of litigation finance firms to reach capacity or be oversubscribed on new fund launches.
▪ Technology, specifically AI, increasingly is enhancing the efficiency and productivity of the litigation funding process.
Barriers to greater acceptance of this asset class have included institutional conservatism about its “newness,” a lack of understanding about the industry, and negative perceptions and criticism from some prominent vocal groups. These barriers are external and vary in persistence. A key issue for litigation finance in the future will be how it is perceived from an ESG standpoint. If litigation finance is perceived as a form of alternative lending, similar to payday loans, it may struggle to attract greater acceptance. But if it is perceived as providing access to capital in an underserved market, similar to online funding portals, it may gain much greater traction. The marketing element of the industry remains ambiguous at this point.
Marketing issues aside, some barriers may be receding as key industry players are reaching the 10-year milestone, and both awareness and understanding of the industry are growing. As for institutional investors, endowments and foundations already are investing, and even traditionally risk-averse public pensions are starting to explore allocations to litigation finance. Acceptance by investment consultants also will play a role in how rapidly litigation finance as an asset class grows.7 So far, the consultant community appears divided in its desire to recommend the strategy (Baert 2017). There are certainly marketing elements at play behind this allocation reluctance, but part of the institutional concern may also stem from the difficulty of applying traditional risk and portfolio metrics to collections of legal claims, and some from the amount of education it will require.
As our data show, the litigation finance space has experienced strong returns in recent years. Part of these returns may be driven by information barriers in the space, and as the area becomes more familiar to investors, these returns may decline. The key question that remains is whether the extant returns are driven by information asymmetry and represent alpha for early investors as a return to human capital investment, or whether they are a form of compensation for idiosyncratic risks being taken in the space. At this stage, the data are too sparse and too limited to answer the question conclusively, and so having provided an introduction to the field and the data that is available today, we leave a more definitive answer on the source of returns to future researchers.
ACKNOWLEDGMENTS
We thank Morning Investments for the use of anonymized data related to litigation finance cases and investments. The authors acknowledge financial support from Morning Investments.
ENDNOTES
↵1 See for instance: https://vannin.com/news-expertise/news/article.php?id=359 and https://www.thetrustedinsight.com/investment-news/de-shaw-going-to-trial-over-litigation-finance-subsidiary-20190910593/.
↵2 See https://burfordcapital.com/media/1687/20200203-burford-capital-update-on-2019-trading-performance.pdf.
↵3 A subrogation claim is the right of an insurer to recover against a third party that may be responsible for causing a covered harm to its insured.
↵4 See https://www.insurancejournal.com/news/national/2019/01/14/514769.htm.
↵5 See: https://www.moodys.com/sites/products/defaultresearch/2006600000428092.pdf.
↵6 The exhibit shows that roughly half of cases remained outstanding as of 2018, resulting from large growth in the number of cases being funded in 2016, 2017, and 2018. This fits with the industry narrative that litigation finance is growing in prominence. The funded case characteristics are similar across the entire sample period.
↵7 The authors acknowledge that litigation finance can be considered a distinct asset class or a subset of the specialty lending asset class, similar to other areas such as syndicated loans or subsets such as tax lien investing.
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