Litigation Finance Can Be Part of an Effective Strategy for Diversifying Investment
When capital markets lagged in 2018, after a ten-year run of steady increases, many investors became concerned. That concern was heightened by the expanding trade disputes and tariff wars, and it was manifested in increasing market volatility. Investment prospects only looked worse when indicia like the inverted yield curve seemed to presage a recession in the not-too-distant future.
One way to hedge investments against a continuing downturn in capital markets is to find enterprises whose success is not tied to economic activity. If there is a recession or even just continued volatility in capital markets, it will make sense to invest in something that does not rise or fall with the prevailing economic tide. Litigation finance is just such an investment.
In many respects, litigation finance is the epitome of a counter-cyclical investment. It first began to appear during the depths of the most recent recession. When banks stopped lending, law firms looked for new sources of funding to support their litigation efforts. Litigation financing firms emerged to serve that demand.
Financing litigation can be a remarkably lucrative use of capital. The best litigation finance firms make their investments in cases where a recovery is highly likely and where such a recovery promises to be ten times the amount invested. For prominent litigation finance firms, this general strategy has led to annual returns on equity in excess of 30%.
This is precisely the kind of return that can be an effective hedge when capital markets are not performing. A litigant’s ability to obtain a recovery does not depend upon the vitality of the economy, so the profitability of litigation finance can go up even when everything else is going down. This is just another reason why litigation finance is here to stay; it just makes economic sense.
Keywords: litigation finance, third-party litigation funding, investment, hedge funds
Work Cited: Brian Baker, In Low-Yield Environment, Litigation Finance Booms, Market Watch (Aug. 21, 2018) available at https://www.marketwatch.com/story/in-low-yield-environment-litigation-finance-booms-2018-08-17
