Third-Party Litigation Finance
I recently found a crowd-sourced litigation funding platform called LexShares. This platform gives individual accredited investors the opportunity to invest in a wide variety of pre-settlement business disputes, such as contracts, fraud, international arbitration, intellectual property, whistleblower, and portfolio financing. Pre-settlement funding is different from post-settlement loans. Investors of pre-settlement funding can obtain a higher equity upside (and thus, the profit is a capital gain) if they invest in early stage litigation. Post-settlement investment is a type of fixed-income product especially known in the mass tort space. Investors give loans to lawsuit plaintiffs for settled claims that have not paid out yet.
Attractive Yields
Litigation finance is a new asset class that is not correlated with market cycles, and each claim is not even correlated with each other. It brings the investor money into the incredibly lucrative business model known as contingency. Under the contingency fee model, lawyers accept the case in exchange for a significant portion of settlement or award on successful completion. If they lose a case for their client, they usually receive nothing. This monopolistic business model is highly inefficient and only available to lawyers. This is the reason why the rate of return on this asset class can easily outstrip other asset classes. Litigation finance is looking more and more appealing to many investors who are working to improve risk-adjusted returns through recession-proof investments.
LexShares Track Record
The LexShares team maintains a strong track record in commercial cases with a success rate of little over 90%. The platform has posted 32 cases as of April 2017 (102 cases for the underwriting group), and 7 cases reached a finality. The following table shows the investment returns for different success rates.
| Success Rate | Gross Proceeds | Net Proceeds | MOIC | IRR |
|---|---|---|---|---|
| 100% | $24,805 | $14,805 | 2.48x | 74% |
| 90% | $22,324 | $12,324 | 2.23x | 62% |
| 80% | $19,844 | $9,844 | 1.98x | 49% |
| 70% | $17,363 | $7,363 | 1.74x | 37% |
| 60% | $14,883 | $4,883 | 1.49x | 24% |
| 50% | $12,402 | $2,402 | 1.24x | 12% |
| 40% | $9,922 | ($78) | 0.99x | 0% |
| 30% | $7,441 | ($2,559) | 0.74x | (13%) |
- Case resolution time is 2 years.
- The average IRR on the 20 cases outstanding for 18-24 months is 74%.
- The lowest success rate that the platform estimates is 70%.
Final Thoughts
Litigation finance has grown by leaps and bounds over the past year, and it is fast gaining adoption in the US market amongst large law firms and corporations. There is enormous growth potential with this asset class. I will take full advantage of arbitrage opportunities before it moves into the mainstream.
