Key risks in litigation funding

Understanding the risk factors in investing in lawsuits

Litigation funding is inherently incredibly risky. The majority of funders provide non-recourse funding, meaning that they lose their investment if there is no recovery from the underlying lawsuit.

The funders must therefore focus on several issues. a) The underlying lawsuit must have a high likelihood of success, so as to mitigate the chance of an unsuccessful outcome. b) The underlying lawsuit must have the potential for a high recovery amount. Even if the lawsuit is successful, the recovery must be sufficiently high, otherwise the recovery will not be enough to satisfy the investment amount. c) The funder must have some priority on the recovery from the lawsuit. If the funder is not able to gain seniority over other investors or lien-holders, then the funder may be unsuccessful in recovering from the lawsuit even in the event of a success for the other investors. This is particularly true in the personal injury space, as there are frequently numerous medical liens that may have seniority over the funder's investment. d) the ability of the defendant to pay any judgment that has been rendered. This can usually be achieved via an asset search on the defendant. e) the ability or desire of the plaintiff to pay the funder back in the event of a successful recovery.