For many investors, being able to invest in a potential legal settlement without being party to the suit seems like a dream come true.
Different types of investors are tapping into a quickly growing industry called “litigation finance,” which allows them to provide plaintiffs involved in legal claims with a cash infusion in return for a portion (if any) of the capital they took out, which is ultimately paid from the settlement proceeds or award when the case is won.
How big is the litigation finance market?
Third-party litigation funding is generally not correlated to stock market returns, and many experts on Wall Street and beyond have highlighted this rapidly growing industry because of its high returns. Fundamentally, investors invest over $2 billion in lawsuits over 12 months. That said, the industry had an approximate value of $12.2 billion as of 2021, and according to the Litigation Funding Investment Market, it will reach the $25 billion mark by 2030.
Moreover, LexShares, a reputable legal finance company, said that back in 2009, just six litigation financiers were dedicated solely to legal finance. Today, there are well over 60. This further accentuates the rapid growth in the industry and the growing demand of plaintiffs and law firms for investment capital.
How does litigation funding work?
Most litigation funding companies have an experienced team of attorneys who have a swarth of experience representing plaintiffs in all types of litigation. These attorneys act as underwriters to review legal cases and choose which cases have the most merit to help value the claims as investments.
Once the underwriting team signs off on a litigation funding deal, funders will then have their investment professionals structure each deal individually based on numerous metrics.
What is litigation funding used for?
Generally, litigation finance capital is used for three main things:
- The first is to cover the plaintiff’s personal expenses, such as rent or mortgage payments and medical treatment. Typically, when a litigation funder invests in a personal injury case, the claimant cannot work and needs cash flow coming in until the case settles.
- The second most typical use of funds is working capital. Corporate plaintiffs in litigation matters such as breach of contract claims or patent litigation usually sue because they have suffered crippling business losses as a result of the defendant’s action. This puts them in a position where they will require some cash infusion if they want to continue operating their business.
- The third and most common thing that funds are used for is case-related expenses. Hiring experts to generate reports, give depositions, and investigate the defendant can be enormously expensive, and sometimes attorneys will reach out to litigation funders to help finance these expenses. In this situation, the funds are normally paid back from the law firm’s fees once all liens are taken out of the settlement or award.
Who can invest in litigation finance?
While investing in legal claims seems like a great idea, it is not for everyone. To invest in litigation finance as an individual, you must be an accredited investor, which means you have a net worth of $1,000,000, excluding your primary home or historical and expected income of over $200,000 (per individual) per year.
Litigation funding companies set these requirements because while the returns are high, investing in lawsuits carries a great amount of risk, including losing your entire investment in a case if it does not resolve favorably for the plaintiff.
Most litigation funders require investors to commit capital for a minimum amount of time. While this is standard for most private equity firms, having your money tied up and unavailable is not something every investor can stomach.
As mentioned above, there is a principal risk when investing in litigation finance and the risk of having your money tied up long-term.
Litigation finance investments carry a high amount of risk for investors. Most financial advisors recommend allocating no more than 10% of your portfolio’s value to alternative assets such as litigation funding.
Baker Street Funding is privately held and has invested over $50 million in cases. Interested in investing with Baker Street Funding? Contact us today.