Litigation finance has emerged as a distinctive and niche asset class, offering family offices the opportunity to attain outsized returns while mitigating risk through non-correlation with traditional financial markets.
Outsized, Asymmetric Returns
Litigation finance is the process whereby investors provide capital to fund legal cases in exchange for a portion of the settlement or judgment. It allows plaintiffs to pursue legal claims without bearing the upfront costs, which can be substantial. In return, investors access an asset class uncorrelated with other markets.
One of the most compelling aspects of litigation finance is its asymmetric risk-reward profile. This describes investments where the possibility of loss is limited relative to the potential for gain. Investors seek out asymmetric risk-reward opportunities to maximize returns while minimizing potential losses.
The returns of litigation finance are driven by the merits of individual cases rather than broader market fluctuations. Since legal claims can sometimes result in substantial awards or settlements, the returns on successful investments can be several times the initial capital outlay.
Non-Correlation With Traditional Markets
Another advantage of litigation finance is its non-correlation with traditional financial markets. Returns from litigation finance are contingent solely upon the success of the legal case funded, not on the ebb and flow of market sentiment, interest rate changes, or economic cycles. Because the performance of litigation funding is independent of stock and bond market volatility, family offices can use it as a strategic tool for diversification.
The conclusion of a legal case typically hinges on legal decisions, evidentiary support, and judicial reviews, which operate outside the realm of the capital markets. This lack of correlation imparts insulation from market downturns, making litigation funding an attractive option for family offices seeking stability amid market turbulence.
Accessing the Market with Emerging Managers
Family offices interested in tapping into the litigation finance market often partner with specialized firms with robust legal expertise and underwriting capabilities. These firms conduct extensive due diligence, applying sophisticated analytical tools to estimate the likelihood of success and potential return profiles of various legal disputes. By leveraging this expertise, family offices can gain exposure to carefully vetted opportunities that align with their return objectives and risk tolerance.
Investing in litigation finance does involve a significant amount of risk. However, family offices equipped to manage this risk—by engaging with reputable litigation finance firms and building a diversified portfolio of litigation investments—can potentially realize considerable returns. A carefully curated portfolio mitigates the idiosyncratic risk of any legal case while still targeting the high-return opportunities for which the asset class is known.
Working with Ashton Global
Emerging managers in the litigation finance space offer an intriguing and potentially lucrative option for sophisticated investors. By leveraging their specialized knowledge, agility, and innovative approaches, they can unlock value in a complex and underserved market for institutional investors and family offices.
Ashton Global is actively seeking litigation finance emerging managers to present to our family offices and capital providers. Managers with strategies in defaulted judgments and bankruptcy claims are also encouraged to apply.
