Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Litigation Finance
Transcript
- Lucas: Luna, I want to talk about an asset class that most people have never heard of, but that ultra-high-net-worth families are increasingly allocating to: litigation finance. Luna: You mean third-party funding of lawsuits? I've seen a few headlines but never quite understood how it works or why a wealthy family would invest in it. Lucas: Exactly. Third-party litigation funding — it's when an outside investor provides capital to a plaintiff or law firm to pursue a legal claim. In return, the investor gets a share of the settlement or judgment. It's a several billion dollar industry globally, and it's been growing fast over the last decade. Luna: So you're essentially betting on the outcome of a lawsuit. That sounds extremely risky. Lucas: It can be, but the key is that the funding is typically non-recourse. If the case loses, the investor loses their entire investment — the plaintiff doesn't have to pay back the funder. That's the core risk. But if the case wins, returns can be substantial. Luna: What kind of returns are we talking about? Lucas: For individual cases, investors often target internal rates of return between 20 and 40 percent. But the real money is in diversified funds. Burford Capital, one of the largest publicly traded litigation finance firms, has historically reported net returns in the low teens to mid-twenties after fees. That's comparable to, or better than, many private equity funds. Luna: And the capital is locked up for years, right? I imagine these cases don't resolve quickly. Lucas: That's the illiquidity premium. A typical commercial case might take two to four years from funding to resolution. So it's not something you can exit on a whim. But for ultra-wealthy families with long time horizons and stable cash flows, that illiquidity is often acceptable. They're looking for returns that are uncorrelated with the stock market. Luna: And litigation outcomes are essentially driven by legal merits, not macroeconomic factors. So it's a genuine diversifier. Lucas: Right. The correlation to equities and fixed income is near zero. That's a huge draw for family offices that already have heavy exposure to public markets and real estate. Litigation finance offers a return stream that depends on case quality, court rulings, and settlement dynamics — not on interest rates or GDP growth. Luna: How do families actually access this? Are they investing directly in individual cases, or through funds? Lucas: Most go through specialized funds. There are a handful of dedicated litigation finance firms — Burford, Longford Capital, Validity Finance — that raise pools of capital from institutional investors and high-net-worth individuals. Some larger family offices with in-house legal expertise do direct investments in specific cases, but that's rare. The funds provide diversification across dozens of cases. Luna: Let's talk about a concrete example. What does a typical case look like? Lucas: Take a commercial contract dispute. Imagine a software company that licensed its technology to a larger enterprise for $50 million. The enterprise allegedly breached the contract and refused to pay. The software company has strong legal claims but doesn't have the cash flow to fund a multi-year litigation. A litigation funder steps in, covering legal fees, expert witnesses, and court costs — say, $5 million over three years. Luna: And in return, the funder gets what? Lucas: Typically a percentage of the recovery. If the case settles for $30 million, the funder might get two to three times their investment, maybe $10 to $15 million. The plaintiff keeps the rest. That's a very attractive outcome for both sides. Luna: So the funder is effectively acting as a financier, taking on the risk in exchange for a share of the upside. But how do they evaluate which cases to fund? Lucas: It's rigorous. Funders have teams of experienced litigators and analysts who review the merits of the case, the credibility of the plaintiff, the defendant's resources, the jurisdiction, and the potential damages. They also assess the likelihood of settlement rather than trial, because most cases settle. Only a small fraction of cases — maybe 5 to 10 percent of those pitched — actually get funded. Luna: That selectivity suggests the funds should perform well, but how transparent are they? I remember some controversy around Burford a few years ago. Lucas: You're referring to the short-seller attacks around 2019. Burford's stock took a hit after questions about how they valued their portfolio. The firm has since improved disclosure, but it's a valid concern. Litigation finance is inherently opaque — you can't mark cases to market until they're resolved. Fund-level returns rely on the fund manager's judgment of case valuations. Luna: So it's not for someone who needs quarterly liquidity or perfect transparency. But for a high-net-worth family comfortable with illiquid, opaque investments, it could be a compelling portfolio addition. Lucas: Absolutely. And we're seeing more interest from endowments and pension funds too. Yale, Harvard, and several European pension funds have allocated to litigation finance. That institutional validation matters. Plus, the market is growing — global litigation finance was estimated at around $15 billion a few years ago, and it's only gotten larger. Luna: Before we dive deeper, I want to mention something. If you've been getting value from our conversations — whether it's about litigation finance or any of the other strategies we cover — we just want you to know that listener support is what keeps this podcast ad-free and independent. If you'd like to help, you can buy us a coffee at buy me a coffee dot com slash fexingo. No pressure, just if you find this useful. Lucas: Yeah, we really appreciate that. And it genuinely helps us continue doing deep dives like this one. So thank you to anyone who's supported us. Luna: Now, back to litigation finance — what about ethical concerns? Some critics argue that third-party funding encourages frivolous lawsuits or gives funders too much control over litigation strategy. Lucas: Those are real concerns. Most funders do have some say in settlement decisions, though the plaintiff retains ultimate control. And because funders only take strong cases, they actually discourage frivolous litigation — they won't waste money on a case that's unlikely to win. Still, there are calls for more regulation, especially around disclosure of funding arrangements to courts and opposing parties. Luna: It's a fascinating space. For a family office, what's the typical allocation? 5 percent? Lucas: Often smaller. Most family offices that invest in litigation finance allocate between 2 and 5 percent of their portfolio. It's a niche allocation, not a core holding. But given the low correlation and potential returns, even a 3 percent allocation can meaningfully improve portfolio efficiency. Luna: And we're likely to see this space continue to grow, especially as more investors look for uncorrelated returns. Lucas: I think so. With interest rates stabilizing and traditional fixed income offering less yield, alternative assets like litigation finance are drawing more attention. It's not for everyone, but for the ultra-wealthy, it's becoming a standard tool in the alternative toolbox. Luna: Great overview, Lucas. Thanks for breaking that down. Lucas: Anytime. Next week, we'll look at another niche alternative: how wealthy families use precious metals storage and lending for yield. See you then.