Funding law firms or the claims themselves?
These might sound similar, but in essence they are two very different activities. They differ, amongst others, in terms of the due diligence process that is carried out and in terms of the risk-return associated with the strategy.
Due Diligence Process
When a funder decides to directly invest in claims, the key focus will be on the claim itself. As part of its due diligence process, a funder will first and foremost look at the merits of the case, or in other words, whether the case will succeed in court. A funder will also analyze the likelihood of enforcing the claim (i.e., whether the amount of damages awarded will be paid) and will look at the economics of the case (i.e., the required investment considering the potential damages to be recovered).
On the other hand, in law firm lending, the primary focus is on the law firm and its financial health. A strong focus will therefore be placed on the structuring of the loan.
That is not to say that a single-case funder will not evaluate the strength of the law firm (that is of course an important factor to consider when evaluating the chances of success of the claim), nor that a law firm lender will not evaluate the strength of the firm’s cases (which will be decisive in the law firm performing well), but the key focus is not the same.
Single-case funding is inherently riskier than law firm lending as it is binary in nature. Furthermore, it is in principle non-recourse, meaning that if a case is lost, a funder cannot reclaim its investment. The funder therefore bears the financial risk of losing the case. However, in exchange, the potential returns in single-case funding are often substantial.
Law firm lending, on the other hand, is a more conservative approach to funding. Law firm lenders charge interest when providing loans, which is due irrespective of whether cases are won or lost. Furthermore, law firm lending is full recourse. This changes the risk profile of the strategy immensely as the funder (or lender) is entitled to be paid for the funding provided in any event. Consequently, law firm lending returns are in principle lower than in traditional single-case funding.
These different forms of funding present investors with alternatives in terms of the risk-return profile they wish to pursue, thus offering a variety of options to invest in this very attractive asset class.
Interested in litigation funds? Do not hesitate to contact us at Blue Lakes Advisors