What does litigation finance cost?
In assessing costs of litigation finance, cases are dependent on a variety of factors and the needs of the plaintiff. Investment transactions are individually negotiated and often entitle the funder to the return of its invested capital, a minimum return on that capital, and a portion of the total proceeds of the litigation. Funders use other structures, too, especially for investments where the litigation is well advanced. For example, funders will make investments based on existing judgements where they seek a fixed return on their capital as opposed to a portion of the ultimate recovery. For law firms, funders can also provide financing on a fixed return basis, more typical in a portfolio financing. Typically, the litigation finance firm will have priority in the distribution of the proceeds from the lawsuit (i.e. they are “first money out”).
Given the level of risk assumed by litigation funders and the inherent loss rates, the overall financial return expectations are more consistent with private equity and venture capital funds, not commercial banks.