Litigation Finance Returns for Investors | Audley Capital

Introduction: Litigation Finance as an Investment

For institutional investors — pension funds, endowments, family offices, and sovereign wealth funds — litigation finance offers a source of returns whose performance has historically shown low correlation to public markets — an observation about the past, not a promise. This guide examines how returns are structured, what performance looks like in practice, and the risk factors investors must consider.

How Are Litigation Finance Returns Structured?

Returns in litigation finance are typically structured in one of two ways:

• Multiple of Invested Capital (MOIC): The funder receives a fixed multiple of their deployed capital upon successful resolution — e.g., 2.5x or 3x the amount invested. This is now the dominant structure following the PACCAR ruling.
• Percentage of Recovery: The funder receives a pre-agreed percentage (typically 20-40%) of the total damages recovered. This structure carries DBA compliance requirements in the UK.

In practice, many Litigation Funding Agreements (LFAs) use a hybrid model — the funder receives the greater of a multiple of capital or a percentage of recovery, subject to a cap to ensure fairness to the claimant.

What Are Typical Litigation Finance Returns?

Publicly reported data from listed funders and fund managers suggests the following return benchmarks:

• Net IRR: Target net IRR figures are illustrative only, are not guaranteed, and capital is at risk. Single-case investments may show higher variance than diversified portfolios.
• MOIC: Publicly reported figures for mature portfolios have ranged roughly from 1.5x to 3.5x. These are historical, vary widely by manager and vintage, are not guaranteed, and are not a reliable indicator of future returns.
• Duration: Average resolution periods of 2-4 years, though complex cases (particularly international arbitration and class actions) can extend to 5-7 years.
• Loss rates: Well-managed portfolios have reported loss rates of around 10-20% on a case-count basis. Individual cases can be lost outright, returning nothing on the capital deployed; capital can be lost in full.

Why Are Litigation Finance Returns Uncorrelated?

The defining investment thesis for litigation finance is its near-zero correlation to traditional asset classes. Historical correlation to the S&P 500 is approximately 0.05 — effectively zero.

This independence exists because litigation outcomes depend on:

• Legal merits and strength of evidence
• Quality of legal representation
• Judicial interpretation and precedent
• Defendant behaviour and settlement appetite

None of these factors are influenced by interest rates, GDP growth, inflation, or equity market performance. A global recession does not make a breach of contract claim weaker or stronger — the legal merits are constant.

What Are the Key Risk Factors?

Investors should understand several risk categories:

• Binary risk: Individual cases have binary outcomes — win or lose. Portfolio diversification is the primary mitigation.
• Duration risk: Cases can take longer than anticipated, reducing IRR even if the eventual MOIC is attractive.
• Regulatory risk: Changes in law (e.g., PACCAR) can affect existing agreements and market dynamics.
• Defendant insolvency: A successful judgment is worthless if the defendant cannot pay. Funders conduct solvency analysis as part of due diligence.
• Enforcement risk: Cross-border cases may face challenges in enforcing judgments or awards in certain jurisdictions.
• Illiquidity: Litigation finance investments are typically locked up for the duration of the case, with limited secondary market options.

Why Does the Portfolio Approach Matter?

Single-case investing carries significant binary risk. The portfolio approach — investing across 15-30+ cases with diversification by case type, jurisdiction, value, and duration — dramatically reduces volatility and improves risk-adjusted returns.

Leading funders report that portfolios of 20+ cases have historically never produced a negative overall return, even when individual cases within the portfolio were lost. This "law of large numbers" effect is the foundation of institutional-grade litigation finance.

For law firms interested in portfolio-level arrangements, see our guide to portfolio funding for law firms.

Conclusion

Litigation finance offers institutional investors target returns (which are not guaranteed and carry the risk of losing capital), performance that has historically shown low correlation to public markets, and a growing addressable market. As the asset class matures, some sophisticated investors are allocating a portion of their alternative portfolios to legal claims — a decision that should always follow independent advice and their own due diligence.

To explore investment opportunities with Audley Capital, visit our investor relations page or contact our team.