Back the suits who are bankrolling disputes
Lawsuits are a trillion-dollar business and litigation funders play a key role in funding legal disputes. The accounting can be complex, but there are opportunities for investors to profit, according to Bruce Packard.
The size of the Western legal market is huge. The top 30 law firms have $2trn of pending arbitration claims. Annual law firm fees are $860bn globally, of which just over half in the US. According to Ernst & Young, both corporations and law firms expect the market to grow further as disputes rise following the pandemic. High stakes disputes are inevitable, and it is better to find a way to profit from resolving them as fairly as possible than seek a return to medieval times.
This is where litigation funders step in. Litigation funders provide funding for some or all of the legal costs of a dispute in exchange for a share of the proceeds recovered from the resolution. These transactions are typically non-recourse, meaning the capital has to be repaid only if the case is successful.
Funding or buying legal disputes is inherently risky. However, one established funder, for example, has only lost 9% of its cases over the last decade. It wins 29% in court, but the majority of cases (62%) tend to settle before trial. They report an average return on invested capital (ROIC) for a case that settles before trial of 48% versus 244% for a case that goes all the way to trial and wins. Other litigation funders are expected to report similar statistics.
Litigation funding might be particularly appealing because it is not correlated with traditional asset classes such as bonds or equities which all respond to economic cycles. Legal disputes are unique in nature and tend to be completely unrelated to one another. Litigation is an attractive sector, but investors need to exercise judgement, since lawyers are experts at marshalling convincing evidence and overlooking information that does not suit their case.
This article has been originally published on 13th of May 2022 at: https://moneyweek.com/investments/stocks-and-shares/share-tips/604842/how-to-invest-in-litigation-finance
Capital at risk. Returns not guaranteed. AxiaFunder do not provide investment or financial advice.
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