Litigation Finance Investing: Third-Party Funding as an Alternative Asset Class

Third-party litigation funding (TPLF) — sometimes called litigation finance or legal finance — involves investors providing capital to fund legal claims in exchange for a share of any damages or settlement proceeds. It is one of the more genuinely uncorrelated alternative asset classes available, with returns determined by the outcome of legal proceedings rather than macroeconomic conditions. For sophisticated investors seeking diversification beyond traditional and conventional alternative asset classes, it merits serious examination.

Capital is at risk. Litigation finance can result in total loss of the invested capital. This guide is for information only and does not constitute regulated investment advice. Seek qualified professional advice before investing.

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How Third-Party Litigation Funding Works

A claimant — an individual, company or class of claimants — has a legal claim that they believe has merit but lacks the resources to pursue, or does not wish to bear the financial risk of doing so. A litigation funder provides the capital to cover legal costs (solicitors' fees, counsel fees, expert witness costs, court fees and potentially adverse costs insurance) in exchange for an agreed share of any recovery.

The typical economic structure awards the funder:

• A multiple of invested capital (commonly 2x–4x depending on risk and duration), or
• A percentage of the gross recovery (commonly 20–40%), or
• Whichever of the two produces a higher return (a "greater of" provision)

If the claim fails — whether at trial, on appeal or through a settlement the claimant declines — the funder typically loses its entire invested capital. This is a binary risk at the individual claim level, which makes diversification across many claims essential.

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The Return Profile

Industry participants and academic studies suggest that diversified litigation finance portfolios have targeted gross IRRs of 20–30%, with realised portfolios at established managers historically delivering in the 15–25% net IRR range across completed investments. These figures are, however, difficult to verify independently because:

1. The market has limited publicly available performance data
2. Hold periods are extended (three to seven years is typical, with some claims running longer)
3. Managers report on a cash realisation basis, which can obscure the development of unfunded positions and write-downs on claims progressing through litigation

The return drivers are entirely independent of equity markets, credit cycles or interest rates. A successful antitrust class action will pay out regardless of whether equity markets are rising or falling. This genuine uncorrelation is the asset class's primary portfolio construction benefit.

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Types of Claims Funded

Commercial arbitration and international arbitration — including investor-state disputes under bilateral investment treaties — have historically been the most popular targets for litigation funders. These proceedings typically involve large damages claims, sophisticated counterparties and highly specialised legal teams. Enforcement of arbitration awards across jurisdictions is well established.

Competition damages (antitrust follow-on claims) are a major growth area in England, Wales and Europe, following the collective proceedings regime introduced by the Consumer Rights Act 2015 (in force from 1 October 2015). The UK Competition Appeal Tribunal has seen a wave of collective actions against technology companies and financial institutions.

Intellectual property disputes, including patent infringement and trade secret theft, are extensively funded, particularly in the US market.

Insolvency claims — claims brought by administrators, liquidators or trustees — represent a significant share of UK litigation funding activity. Officeholders with legitimate claims and no assets to fund them are natural counterparties.

Portfolio financing — rather than funding individual claims, funders increasingly provide capital against portfolios of claims held by law firms or corporate claimants, allowing more diversified exposure and more predictable capital deployment.

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Leading Managers

Burford Capital (listed on London Stock Exchange and NYSE: BUR) is the largest publicly traded litigation funder, with deployments exceeding several billion dollars. Burford provides some of the most transparent publicly available data on the asset class, including detailed case studies in its annual reports. Its balance sheet model means it retains risk, unlike pure fund managers.

Litigation Capital Management (LSE: LIT) is a London-listed manager focused on Australia, UK and international arbitration. Its smaller scale relative to Burford and its listed structure offer some portfolio transparency.

Omni Bridgeway (ASX: OBL) is an Australian-listed global manager with particular expertise in international arbitration and Asia-Pacific markets.

Longford Capital, Fortress Investment Group and Bentham IMF (now part of Omni Bridgeway) operate substantial private fund strategies for institutional investors.

Accessing the asset class through private funds requires institutional relationships, but listed vehicles (Burford, LIT) offer retail and HNW access, albeit with the equity risk characteristics of a listed company overlaid on underlying litigation risk.

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Risk Factors

Adverse costs risk. Under the English "loser pays" rule, a funded claimant who loses at trial may be ordered to pay the defendant's legal costs. Funders typically mitigate this through adverse costs insurance (ATE — after the event insurance). The cost and availability of ATE cover materially affects the economics of individual claims, and premiums have risen in some jurisdictions.

Duration risk. Commercial litigation is inherently unpredictable in timing. Claims modelled to resolve in three to four years can extend to seven or ten through appeals, jurisdictional challenges or procedural delays. Investors must be comfortable with illiquidity and uncertain hold periods.

Concentration risk. A portfolio of ten claims may appear diversified, but if two or three very large claims fail, the portfolio return is severely impaired. Scale of deployment matters.

Impairment and write-down risk. Claims that progress unfavourably but have not yet concluded must be assessed for impairment. The timing and consistency of such write-downs varies across managers and affects reported IRRs.

Regulatory risk. The regulatory environment for TPLF continues to evolve. The UK Civil Justice Council and the EU have both reviewed the sector. Mandatory disclosure requirements, fee caps or requirements for funders to be regulated entities could affect the economics of the market.

Conflict of interest and professional ethics. In some jurisdictions, bar rules restrict or heavily qualify the extent to which funders can direct litigation strategy. Investors should understand whether their funder's involvement respects attorney-client privilege and professional independence requirements.

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Regulatory and Legal Landscape

In England and Wales, litigation funding is not regulated by the Financial Conduct Authority as a financial activity per se, though the investment funds through which retail and HNW investors access it will typically be regulated. Following the 2023 Supreme Court decision in PACCAR Inc v Road Haulage Association, certain litigation funding agreements were characterised as damages-based agreements under the Courts and Legal Services Act 1990, creating regulatory uncertainty. Subsequent legislative debate and proposed reforms have not yet fully resolved the position. Investors should confirm that their manager has legal advice on compliance with current rules.

The EU's 2023 report on TPLF recommended regulatory harmonisation across member states. Some EU jurisdictions already impose restrictions (Belgium, Ireland); others have permissive frameworks.

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Portfolio Construction Considerations

Given the binary nature of individual claim outcomes, diversification across:

• Number of claims (a minimum of 15–20 for meaningful diversification)
• Claim type (commercial arbitration, competition damages, IP, insolvency)
• Geography (UK, US, Australia, international arbitration)
• Stage (pre-litigation, litigation, enforcement)

is essential. Manager-level diversification across two or three funds further reduces idiosyncratic risk.

Investors should expect the J-curve: capital is deployed over several years, losses on failing claims may come through before large recoveries, and the full return profile only emerges as the oldest claims in the portfolio resolve.

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Minimum Investments and Access

Private litigation finance funds typically require minimum commitments of $1 million to $5 million and are restricted to qualified professional or sophisticated investors. Listed vehicles (Burford, LIT) can be accessed through standard brokerage accounts with no minimum beyond share price.

Some specialist platforms have begun offering co-investment or fund structures at lower thresholds (£100,000 or above) but investors should conduct thorough due diligence on any such platform's regulatory status and track record.

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How Global Investments Can Help

Litigation finance sits at the intersection of legal, financial and operational due diligence — a specialist area requiring careful manager assessment and portfolio sizing. Our alternatives advisory team can help you evaluate manager track records, assess fee structures and economic terms, and construct an appropriate allocation within a broader alternatives portfolio. We can also introduce you to fund managers operating in this space and support the due diligence process with independent analysis.

Speak to our team to explore whether litigation finance is appropriate for your investment objectives and risk profile.