Litigation Funding

Also called litigation finance or third-party funding, it is an alternative asset class in which a funder pays legal fees and expenses for a commercial claim, arbitration or portfolio of cases. If the case is lost, the funder typically receives nothing; if it succeeds, the funder receives a return defined as a multiple of capital deployed, a percentage of proceeds, or the greater of the two. Structures include single-case funding, portfolio funding for law firms, monetization of judgments and awards, and secondary purchases of existing funding positions.

Returns are largely uncorrelated with public markets but highly binary and long-dated, with uncertain timing driven by court schedules, appeals and enforcement. Commitments are usually drawn over time as the case progresses, so funds track committed, deployed and unfunded amounts separately, much as in private credit.

How funds account for litigation assets. Investment companies generally carry these assets at fair value, which is almost always Level 3 in the fair value hierarchy. Valuation approaches include cost-based methods adjusted at defined case milestones (for example surviving a motion to dismiss, a favorable judgment, or a settlement offer) and probability-weighted discounted cash flow models. Documentation of milestone evidence and legal-counsel input is critical for audit.

Pitfalls. Key challenges are subjective valuations, limited information flow due to legal privilege and confidentiality, recognizing gains too early, and tracking unfunded commitments. Regulatory treatment and disclosure rules for funding arrangements differ by jurisdiction and continue to change, so check current requirements with counsel.