Investors can get a share in a legal settlement without being part of one by helping payout lawsuits in a process called litigation funding (also known as litigation financing or legal financing). But what is litigation funding?
It’s a practice wherein a third party provides money or capital in a lawsuit in exchange for a pre-agreed share of the damages or legal settlement if the case wins. The third-party is generally not related to the case.
The funder does not control the litigation and generally remains completely passive throughout the dispute. The plaintiff has autonomy over the case.
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How Does It Work?
The litigation funding process is straightforward. Like any other application, you’ll need to submit your application to a litigation financier. The review process will then take place, which may require you to submit additional documents for further information. In some cases, you may need to go through an interview so that the funding party can assess whether or not your case is a potential fit.
It’s important to know that one of the considerations in approving your case for funding depends on how much is amount you need for funding and how much potential recovery. Your case’s probability of success can also be a factor in the approval.
Due diligence on the part of the funding party may occur in thorough evaluation to determine if the funding proposal is viable. Once done, however, both parties will finalize an agreement. If the terms and conditions are satisfactory to both, signing of the litigation finance agreement will commence, and the funding party will pay all legal fees costs.
Why Should You Invest in Litigation Funding?
In the US alone, the litigation market funding expects to rise to $20 Million by 2026. Over the years, it has shown tremendous growth in the US and countries like the UK, Australia, Spain, Germany, China, Japan, Brazil, and France. Typically, this is being practiced in business cases and has benefited both the big and small commercial cases.
Growth for litigation funding is growing bigger and bigger as more investors realize its potential. We’ve narrowed down the benefits and risks if you should ever be interested in becoming an investor.
When investing, the main concern is the return of investment. The rewards are high and promising for investors in litigation financing, especially large entities like investment banks. While a funding party may only have to put down a small amount of money to the case, courts often ask for the guilty party to pay heavy damages. This means that if the case wins, the investor can more likely bring home an ROI of up to three to four times higher than the initial investment.
A Sizeable market: the need for legal funding due to legal costs
Everyone knows how expensive it is to get into a commercial lawsuit. Aside from the legal costs, it may take months or years to get a resolution, including a considerable outflow of cash. Some plaintiffs don’t have the budget for it. While some may have money to go through the entire duration, they may not be willing to spend more. With the thousands of lawsuits going on on a consecutive basis, it’s not surprising to know a sizable market for litigation financing.
Volatility is a character expected in a traditional market. Too often, we’ve seen highs and lows that affected our investments. Take the year 2008, for example, or today’s pandemic where the economic cycles have been significant. Litigation financing, on the other hand, is independent of the movement of the traditional market. This means that while you may experience losses from the stock market or plunge into a recession, your investment in litigation is unaffected.
There is a power structure evident in the legal system, and this affects legal disputes. While you may be in litigation funding for the ROI initially, you may also find yourself being a part of driving a social change. For years, this type of funding has provided a handful of groups and individuals access to justice who may otherwise have none due to financial constraints or limitations. This means that even a poor person with a good claim may have a chance, and lawyers or firms may help with the case without worrying about empty pockets. For corporations and individuals alike, having a large working capital enables them to work on valuable claims.
Putting your eggs in different baskets may be a cliche, but it has always been a golden rule in investing. As mentioned earlier, while traditional markets like stocks or real estate may be the standard way to go, there is security in venturing into legal financing. Aside from generating more income, you can also reduce your risk and improve returns.
Win or Lose
As always, the risk is a given in any investment, excluding litigation funding. If the case is lost, you may lose 100% of your financing and get no return whatsoever. While this may happen, you can avoid the risks through due diligence in assessing the case at the application phase. All the more that you’ll need to choose only those cases with good claims to be funded. Investment firms also partner with reputable law firms or a network of legal practitioners, which is an advantage for the plaintiff.
Money is tied up over a more extended period, depending on the case.
Depending on the case’s proceedings, the duration of the business dispute at hand may take shorter or longer than expected. This means that your money may be sitting for an indefinite period, and you may have to wait for a while to get any return possible. This may not need to cause worry because time may become an advantage in legal funding. The longer there is a resolution, the higher is the probable damages or legal settlement, which means a higher return for a litigation investor.
Government Regulations and Restrictions
It’s not all rose-colored glass, and these may be because of government rules and regulations that litigation financing will have to follow. Some countries view the sharing of legal earnings with non-legal entities or non-lawyer individuals as illegal. Other countries (like Australia) require litigation funders to hold certain financial licenses. As with any investment route, knowledge is an advantage, such that knowing the ins and outs of the regulations that bind legal financing may give you an upper hand rather than stump in the road.
However, rules and regulations change frequently and they generally affect the platforms more than the individual investor.
While there may be a lot of platforms available, you’ll want to settle in with one that is trusted and thoroughly reviewed, like AxiaFunder:
AxiaFunder is a commercial litigation funding platform that aims to connect investors such as an institution or individual investors to those who have cases that need funding. This means that if you are a private investor, you can participate in the litigation financing market, which has been an almost exclusive game for investment firms and hedge funds. The platform launched in 2019 and with its headquarters in the UK. As of July 2021, it has funded 12 cases, with five positively resolved cases. With that said, AxiaFunder has a generated return of 40-94% with no losses recorded as of date.
For more information, click here to check on their website.
Commercial litigation funding is a practice that allows investors to receive a share of a legal settlement without being directly involved in the lawsuit. It works by a third party providing funding for a lawsuit in exchange for a pre-agreed share of the damages or settlement if the case is won.
The market for litigation funding is expected to rise to $20 million by 2026 and offers investors high returns, a sizable market, non-correlated investments, and potential social impact.
If you’re interested in becoming an investor in litigation funding, it is important to consider the benefits and risks before making a decision. Consider reaching out to a litigation financier to learn more and submit an application.