The Justice Capital: Litigation Finance (Third-Party Funding)
The Justice Capital: Litigation Finance (Third-Party Funding)
Investing in lawsuits implies zero correlation to the S&P 500. How to fund commercial litigation in exchange for a share of the settlement.
Executive Summary
- The Concept: A small company sues a giant corporation (e.g., Patent Infringement) but can’t afford $5M in legal fees. You (the Investor) pay the legal fees. In exchange, you get a portion of the settlement if they win.
- Non-Recourse Debt: This is the key. The funding is “Non-Recourse.” If the plaintiff loses the case, **you get nothing ($0)**. You don’t get your principal back. But if they win, you often get **3x-5x your invested capital**.
- Zero Correlation: A judge’s ruling has nothing to do with the Fed’s interest rate or Apple’s earnings. Litigation Finance is statistically the most uncorrelated asset class in existence, making it the perfect portfolio diversifier.
The Binary Risk
Litigation is often binary. Win or Lose. While portfolio funds diversify across 20+ cases to mitigate this, a single case loss means a 100% loss of capital for that specific deal. Due diligence on the Legal Merits is far more important than financial analysis.
Mechanic: The Waterfall payout
Non-Recourse
Structure
0.00 Corr
Market Beta
30%+ IRR
Target Return
3-5 Years
Duration
Simulation: Patent Lawsuit ($2M Investment)
Outcome Scenario: Settlement of $50M
| Feature | Private Credit (Lending) | Litigation Finance |
|---|---|---|
| Collateral | Company Assets / Cash Flow | The Legal Claim Itself |
| Upside Cap | Capped at Interest Rate (10%) | Uncapped (Equity-like Upside) |
| Downside Protection | High (Senior Secured) | Low (Loss = $0) |
“In a recession, people don’t stop suing each other. In fact, they sue more. Litigation Finance is the ultimate counter-cyclical asset.”
Essential Resources
INTERNAL
BMT Playbooks