Invest in Litigation Finance

Litigation Finance - a growing alternative investment class

Litigation finance is an alternative investment class that has risen in prominence in the past few years, attracting capital from institutions and high net-worth individuals seeking uncorrelated returns. Major players like Fortress Investment Group recently raised a $1 billion litigation finance fund, and the size of the global market is expected to grow by double-digits annually over the next decade, reaching $67.2 billion by 2038. Despite this growth, and the steady returns it can deliver, the asset class remains unfamiliar to many investors.

What is Litigation Finance?

Litigation finance is the process where a third party, unrelated to a legal case, provides capital to claimants or law firms to cover legal fees and disbursements. In return, the funder receives either a portion of the proceeds from a successful claim or a pre-agreed return on the capital invested. With the rising number of legal claims worldwide, this market is only growing, both from law firms seeking funding, and from investors wanting to provide capital.

The cost of litigation has continued to rise, with leading law firms increasing billing rates, and the expense of experts and fees growing, This presents a barrier to entry for many plaintiffs who can’t afford to pay the upfront costs. Law firms, particularly in the UK, often operate on a no-win, no-fee (contingency) basis. This means they may carry the upfront costs of litigation, which can be significant. As such, even for strong cases, many law firms seek funding to cover the costs, and often cannot access traditional funding with banks. That’s when specialized litigation finance lenders, such as Fenchurch Legal, step in, bridging the capital gap and enabling law firms to pursue strong claims that might otherwise go unpursued.

Law firms take out litigation funding for everything from small consumer claims to major class action lawsuits. It is used by firms to manage the risk of litigation outcomes, and frees up capital to grow their business, and take on more cases. It also manages the pressure of settling cases early, and allows them to pursue the best financial outcome. Well-known major cases against Volkswagen, Uber, and Facebook (now Meta) have been funded with litigation financing.

For the funders, they either receive a percentage of a successful case’s proceeds or a fixed payment depending on the size of the loan, or some combination of both. It often depends on the size of the case, whether it is “small-ticket” or “large-ticket”.

Why invest in Litigation Finance?

Because investment returns in litigation finance are based on the case, not on any type of market performance, it is a truly uncorrelated asset uninfluenced by economic instability or market volatility. This makes it a unique investment option that is ideal for diversifying portfolios while still providing significant returns.

“After-the-event” (ATE) insurance, a specialized insurance product, is commonly used in small ticket funding, where it typically provides comprehensive cover for legal fees, disbursements, and adverse costs in the event of an unsuccessful claim. In contrast, large ticket funders may not always rely on ATE, and when they do, the cover is usually focused on disbursements and occasionally some legal fees, rather than full cost protection.

When a law firm loses a case, they can then make a claim on the ATE policy and recover the full costs incurred on the case. For larger, riskier cases, the premiums are higher, and represent a higher portion of the overall funding cost. ATE insurance is a key part of litigation finance, as it protects the investor if the case is unsuccessful.

Small-ticket litigation financing can generate steady double-digit returns, and by spreading capital across many different cases, and with ATE insurance, the downside risk is lower. The returns come from interest payments on the loans, essentially making it a fixed income option. For investors looking for steady returns uncorrelated to the market, litigation finance can be a good option, but it can be a difficult asset class to access for everyday investors who cannot meet the often high minimum investment required.

Who is Fenchurch Legal?

Fenchurch Legal is a UK-based litigation funder that was founded in 2020 by Louisa Klouda, after she identified a growing demand for funding for volume-based smaller ATE claims. They provide funding to small and medium-sized UK regulated law firms, and exclusively fund cases covered by ATE insurance. Since its founding, the company has seen consistent growing demand for their services and have funded more than 15,000 cases and lent over £43 million ($56 million). 

Louisa, along with the senior leadership team, Nathan Patterson and Jerry Yanover, have long backgrounds in both corporate lending and financial management, and have decades of combined experience in litigation finance. Louisa was recently named one of Private Fund CFO’s New Faces of Finance, and has been featured in the Legal Funding Journal.

Why invest with Fenchurch Legal?

Fenchurch Legal offers investors the opportunity to invest through its Loan Note products, available in 2-year and 3-year terms, with average returns of 12% per annum. It is a company with a proven track record of success, with more than 6,000 loans repaid and more than £22 million returned to investors. They have had a 100% repayment rate with no defaults, and double-digit average annual returns for investors. This success is derived from a robust screening process and a strong risk management strategy. At every stage of the process, Fenchurch ensures that investor capital is in good hands and that their partnerships with law firms remain stable and secure.

Before lending any capital, the company does extensive due diligence on potential borrowers, and only works with established law firms, and only picks cases with clear legal precedents and a strong likelihood of success. They will only fund cases with active ATE insurance that covers all legal expenses and disbursements if a case is unsuccessful, which manages the downside risk. Fenchurch always advances the cost of the ATE premium directly to the insurer, which ensures that the policy is funded, and they always have an assignment on the insurance proceeds so they get paid out first. It also has full assignment rights over all case proceeds, present and future.

In addition to the case and insurance proceeds, the company takes a debenture that grants a legal charge over the law firm’s assets, creating additional collateral and reducing risk. Finally, it requires personal guarantees from the law firm’s shareholders, which not only adds another level of security, but shows the firm’s confidence in the cases.

This process is repeated over thousands of cases spread over many law firms and many case types, further minimizing risk and diversifying the portfolio of claims. For investors, this adds up to a stable, secured lending product that can deliver strong returns over timeframes as short as two years. The minimum investment of £10,000 (~$13,300) also is low enough that individual investors can access the asset class, but Fenchurch also offers bespoke investment structures for larger investors.

Generate steady, uncorrelated returns with small-ticket litigation funding

Litigation financing is a fast growing alternative asset class that offers the type of uncorrelated returns that all investors should pursue to round out a diversified portfolio. Fenchurch Legal's model focusing on small-ticket claims backed by ATE insurance and a number of additional safeguards to lower risk makes it an appealing choice for any investor looking for exposure to litigation finance.

_{Disclaimer:
The information contained in this article is for general informational purposes only and does not constitute investment advice, a recommendation, or an offer or solicitation to buy or sell any financial product or security. Fenchurch Legal does not provide investment, legal, or tax advice, and nothing in this article should be construed as such.}

_{This content is intended for professional advisers and qualified investors who are familiar with the risks associated with investing in unregulated products. Investments of this nature carry a degree of risk and may result in the loss of all capital invested. You are strongly advised to seek independent professional advice, including legal and financial advice, before making any investment.}