What Do Litigation Finance Investors Want?

The litigation finance industry is potentially compelling, but the product being presented to investors needs work.

money question mark value valuationRecently, my firm Morning Investments teamed up with the Litigation Finance Journal to do a study on what investors are looking for in litigation finance investments. The full white paper will be available for interested parties through the LFJ soon. The survey results are based on responses from more than 5,000 investors – both institutional investors and high-net-worth individuals, and provide insight into where the litigation finance industry needs to go in order to grow effectively in the future.

Almost half of investors surveyed are aware of the litigation finance industry and are familiar with it. The results parallel the recent survey that Lake Whillans and Above the Law ran showing that many law firms and corporate counsels are aware of litigation funding opportunities.

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However, despite their familiarity with the space, the vast majority of investors – more than 90% of those surveyed – do not invest in litigation finance at all at this point. Bear in mind of course that from a survey bias perspective, the people most likely to respond to my survey are those who are actually investing in litigation finance, so the fact that the pool of respondents still showed less than 10% participation is remarkable. It means that litigation finance still has a very long way to go in attracting investors and giving them the kind of investment opportunity they desire.

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The response to this data from many folks in the industry today would likely be a collective yawn. So what? Who cares if most investors do not want to invest in litigation finance?

The answer is that fund managers should care deeply. A deeper pool of demand means higher fees can be charged (or the litigation fund can grow assets under management). Many of the most successful hedge fund close themselves off to new money, in part because they say they don’t have enough attractive investment opportunities. But just as importantly, closing a fund to new money means being able to charge higher fees on existing funds – investors who decide to yank their investment in response to higher fees can be replaced with other investors.

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The point being that even the most successful of lit. fin. funds should care about the level of investor demand for their product.

Indeed, most investors are not looking for exceptionally high returns from the alternative investments they invest in, as the graph below shows. Most are happy with an uncorrelated investment that has a return similar to the broader stock market.

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While investors may not be looking for exceptionally high rates of return by most standards, they are looking for accurate and effective portfolio management and risk mitigation tools. Low correlation to traditional equities is cited as the number one desired characteristic by 34.78% of surveyed investors.

A further 22.51% of investors also cite effective risk management processes as their top concern in alternatives like litigation finance. In other words, people are looking for an investment that zigs when the market zags, and an investment that will hold its value in most environments. Litigation finance is well positioned to fill this niche.

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But investment managers need to use the right tools in their portfolio. Investors expect far more in the way of risk management reporting than many fund managers currently have available.

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While I will undoubtedly write more about this survey in the future, on the whole the theme that is emerging from many investors is that the litigation finance industry is interesting and potentially compelling, but the current product being presented to investors needs work.

Anecdotally, I’ve observed the same thing.

I recently completed an engagement with a hedge fund that was interested in investing in the litigation finance space. The fund – a $2B entity – was looking to put roughly $20M to work in litigation finance as a trial run. On the funds behalf, I interviewed and spoke to dozens of smaller fund managers, as well as plaintiffs looking for direct investments in the space. After that, the litigation fund managers that made the cut did site visits with the hedge fund. Unfortunately, the majority of litigation funds managers were deemed unacceptable from the investors standpoint somewhere along the way – they lacked appropriate valuation methodologies, couldn’t defend their past investments when pressed, or simply lacked the financial acumen to satisfy the hedge fund managers.

Ultimately, what was intended to be a $20M investment turned into a $10M investment spread across two small funds and one direct plaintiff investment. The litigation finance industry simply did not have the processes and marketing in place to appeal to a hungry institutional investor.

Where the story goes from here is in question. Those fund managers who look at what investors want and provide high-quality investor education that demonstrates the value of litigation finance in a broader investment portfolio will be the ones who succeed. Those managers who rest on their laurels are likely doomed to remain small fish in the sea.


Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively with organizations ranging from Fortune 500 companies to start-up businesses on financial matters through Morning Investments Consulting. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at M.McDonald@MorningInvestmentsCT.com.