Litigation Finance

Litigation finance is not “credit” in the traditional sense. It is underwriting legal outcomes and timing, often with asymmetric payoff structures and long duration. The allocator’s focus is on manager discipline: case selection, portfolio construction, legal process expertise, and enforceability.

From an allocator perspective, litigation finance affects:

• duration uncertainty (case timelines),
• outcome risk (win/lose and settlement dynamics),
• illiquidity, and
• process and enforceability risk across jurisdictions.

How allocators define litigation finance risk drivers

Allocators segment exposure by:

• Structure: single-case finance vs portfolio finance vs law firm finance
• Counterparty: plaintiff, law firm, corporate claimant, arbitration forum
• Jurisdiction and enforceability: venue risk, appeals, collectability of judgments
• Duration: time-to-resolution, extension probability, cashflow timing
• Underwriting quality: merits analysis, damages realism, settlement probabilities
• Portfolio construction: diversification, exposure limits, vintage pacing
• Adverse selection: why the claimant needs capital and quality of claim pipeline
• Evidence phrases: “legal finance,” “arbitration funding,” “case-backed financing,” “portfolio of claims”

Allocator framing:
“Is this manager underwriting cases with disciplined selection and diversified portfolios—or taking concentrated, long-duration legal risk with fragile enforceability?”

Where litigation finance sits in allocator portfolios

• niche alternatives sleeve seeking idiosyncratic return streams
• sometimes paired with specialty finance and other alternative risk premia
• typically sized conservatively due to illiquidity and outcome uncertainty

How litigation finance impacts outcomes

• can produce low-correlation returns when underwriting is strong
• can face long duration and delayed realizations (cashflow uncertainty)
• can be exposed to jurisdictional shifts and appeals risk
• can experience concentration risk if portfolios are not diversified properly

How allocators evaluate litigation finance managers

Conviction increases when managers:

• show historical outcomes: win rates, settlement patterns, duration distribution
• demonstrate a credible legal underwriting process and external counsel networks
• maintain strict concentration limits and portfolio pacing
• disclose enforceability and collection risk management
• report transparently on case status without overstating marks

What slows allocator decision-making

• opaque case pipelines and weak evidence of underwriting discipline
• unclear diversification (too few cases or correlated exposures)
• optimistic duration assumptions and limited cashflow visibility
• governance or conflict risks with law firm counterparties

Common misconceptions

• “Cases are binary” → outcomes are path-dependent; settlements and appeals shape payoffs.
• “Low correlation means low risk” → legal and enforceability risks can be severe.
• “Portfolio finance removes risk” → it reduces single-case risk but can hide correlated exposure.

Key allocator questions

• What is the historical duration distribution (median, tails) and why?
• What is your win rate and how do you underwrite damages/collectability?
• How diversified is the portfolio across jurisdiction, counterparty, and claim type?
• What is the adverse selection risk and sourcing advantage?
• How do you report valuations and avoid narrative marks?