What opportunity lies in these murky waters

Exclusive Webinar Invite *Together with Happy weekend, Folks!  I’m happy to be passing this Deep Dive along from our friends at Alts.co. I really cannot think of anything better to do than read about litigation finance, can you? I can only imagine how many people this keeps awake all night! But anyways back to it – so for this beautiful Saturday morning here’s an invitation to sit back, grab your coffee ☕ (or drink of choice this AM) and see why there could be a significant investing opportunity in this murky underworld! To YOUR success, --------------------------------------------------------------- *A message from alts.co, please see disclosures below to Deep Dives (by [Stefan Von Imhof](), where we explore interesting companies in the alt investment space.Litigation finance is an exciting market, but it's still full of risk. Viable cases can be hard to find and very risky. If you lose the case, you can lose all your money, period. [Fenchurch]( is two steps ahead. They solve these problems by taking a totally different approach than everyone else. They work directly with law firms to provide funding for their expenses associated with specific cases. This is known as disbursement funding. These are high-volume, low-cost consumer cases that are backed by strong legal precedent, which provides better security and diversification than traditional litigation finance. Before funding disbursements, Fenchurch takes out an “ATE (after-the-event” insurance policy. It costs a bit upfront, but get this: If the law firm loses the case, the insurance policy repays Fenchurch in full. That means unlike traditional litigation finance companies, Fenchurch earns the same return on every case - win or lose. --------------------------------------------------------------- Interested in learning more? [Join our live webinar]( next Friday, Nov 3 at 2pm EST. Litigation finance doesn’t have to be risky. Hear directly from [Matt Haycox](, litigation finance expert and founder of [Fenchurch Legal]( about the smarter way to invest in this space. You'll learn: - The pros & cons of "normal" litigation finance. - A smarter way to invest in this space (that nobody is talking about) - How to get simple, fixed-income returns. [REGISTER HERE]( --------------------------------------------------------------- What is litigation finance? Pretend you run a small manufacturing company, and you just signed a contract to sell your specialty tools to a big corporation. This should be a huge moment for you. The customer is a Fortune 500 company, and the anticipated revenue from this deal will allow you to expand your manufacturing capacity. What could possibly go wrong? Well, one day the company check rolls in, but it’s for an amount significantly lower than you agreed upon. You call the company, furiously demanding to know why they violated their contract. The company disagrees, and instead offering a good explanation, they basically say, “sue me.” Of course, the company is betting you won’t sue them, for one frustrating but obvious reason: going to court is incredibly expensive. Legal fees alone average more than [$300 an hour]( — and far higher when specialized attorneys need to be brought in. For small businesses and individuals bringing cases against opponents with deep pockets, these costs can be prohibitive. Many companies would just eat the loss and move on. But hang on a minute. Here you have a situation here that a) requires capital upfront (legal fees) in return for b) a potential big payoff (the payment plus damages). Could this be an investment opportunity? You bet. The financialization of legal claims The recognition that legal claims can be financial assets is the basis of litigation finance. Much like how an investor can bankroll a company in exchange for a slice of the profits, an investor can bankroll a lawsuit in exchange for a slice of the winnings. Source:[US GAO]( And like any other investment, investing in a lawsuit can be risky! If the lawsuit fails, the plaintiff (the one suing) typically doesn’t have to repay the investor. (“Thanks for paying my lawyer’s fees. Sorry we lost. Tough stuff.”) This dynamic creates an incentive for investors to only fund claims that have a pretty good chance of winning. Over the past decade, the litigation finance industry has taken off: Source:[Westfleet Advisors 2022 Litigation Finance Market Report]( Compared with other alternative asset classes, litigation finance is still relatively small. But as the market has grown, it has evolved to meet the diverse needs of plaintiffs, lawyers, and financiers. Today, there are three main forms of litigation finance. The Different Types of Litigation Finance To understand the different forms of litigation finance, we have to start with a fundamental question: Why is litigation finance necessary in the first place? Yes, we just spent the previous section outlining how the practice can help plaintiffs with legitimate claims but limited resources. But historically, that need has been met through something called contingent compensation. When a lawyer takes a case “on contingency,” they agree not to charge anything upfront, and only get paid if they win. This structure is also referred to as “no-win, no-fee.” On the surface, this would seem to make litigation finance redundant. Why does the industry exist if lawyers are already doing this? But contingent compensation isn’t a perfect system. So three types of litigation finance popped up as better options for plaintiffs: Commercial plaintiff financing, consumer plaintiff financing, and law firm financing. Commercial plaintiff financing In commercial plaintiff financing, funders (i.e. investors) provide capital to businesses to pursue financial disputes in court. An example would be the initial situation we outlined, where a small business was suing a much larger company for contract violation. In fact, breach of contract disputes are some of the most common cases funded in this category. (Intellectual property cases are also common). These cases are expensive, and funding requirements can easily be in millions of dollars. Investors must do extremely thorough due diligence to ensure a claim is viable, and has a good chance of winning. (In fact, that’s one of the reasons why the contingency structure isn’t suitable for many commercial cases.) Investors in commercial plaintiff financing cases are very hands-on. They devote a huge amount of time to figuring out which cases have merit and which don’t — it’s practically their entire job! In contrast, lawyers might struggle to justify devoting the time needed to evaluate a case on contingency (for which they won’t be paid) when they could be working on non-contingent cases (for which they will be paid). Further, businesses may want to use funding from litigation investors for expenses other than legal bills (so long as doing so is allowed under the agreement). Since contingency agreements only cover legal bills, they’re not suited for firms that may need help covering operating expenses while waiting for the suit to end. Consumer plaintiff financing In consumer financing, the plaintiffs are individuals rather than businesses. Compared with the commercial cases, funding amounts in consumer cases are significantly lower; usually between $1k-$10k. The most common case types here are personal injury and consumer harm. Many lawyers can and do work on contingency for these types of cases. Since consumer issues tend to be quite uniform and procedural, due diligence is less of a barrier. Still, many consumer plaintiffs decide to turn to litigation funding to cover non-legal bills. In personal injury cases, for instance, plaintiffs may need to pay for medical or living expenses, especially if the injury has left them unable to work.  Law firm financing (disbursement funding) But just because a consumer hasn’t used litigation funding for their case doesn’t mean they aren’t benefiting from it. The last type of litigation finance occurs when lawyers themselves turn to investors to get funding for their own cases. See, most lawyers don’t actually run their own firms. Instead, they’re hired as employees at a larger firm. This creates a sticky issue for law firms that takes on contingent cases — they only get paid if a case is successful, but in the meantime they still need to pay their lawyers! You may think all lawyers are all rich, and law firms are always flush with cash. But that’s not quite how it works. Just like consumers have ongoing bills to pay while they’re suing a company, so do law firms! Sound familiar? This right here is the exact problem litigation finance is designed to solve. Contingent compensation doesn’t address the fundamental cash flow mismatch between needing to pay lawyers now and only receiving winnings from the lawsuit in the future. It just changes who experiences that mismatch. In a nutshell, individuals who can’t go out of pocket for legal expenses basically have two options: - Find a lawyer to work on contingency or - Turn to a litigation funder. But lawyers working on contingency also have their own decision to make – whether to eat the cost of litigation upfront, or work with a litigation financier to help pay the bills. In law firm financing, investors fund law firms directly, based either on specific cases or a portfolio of similar cases. Funds are used to pay normal operating expenses while the case is ongoing. If the law firm wins on behalf of the plaintiff and earns their contingent fee, investors get repaid their initial outlay, plus an agreed-upon return. Unique traits of litigation finance As you can see, the basics of litigation finance aren’t really that complicated. Investors pay for the legal expenses in exchange for a cut of the winnings. But this simple explanation hides a world of complexity. Litigation finance has its roots in courtrooms, not markets. As such, some of the features of this asset class [can be quite unique](. To fully understand this asset class, you need to understand the traits that set it apart. Trait #1: It’s both equity and debt (sort of) It’s usually easy to tell whether a financial asset is equity or debt. Investing in, say, [tequila]( is owning an asset, whereas investing in something like [private credit]( is owning debt. Legal investments, though, tend to combine features of both. It’s sort of in-between. Litigation funding agreements are often styled as “loans,” because investors are providing capital upfront that needs to be repaid. But unlike normal loans, litigation loans have no fixed interest rate or maturity date. Oh, and the loans are often non-recourse, meaning the lender (investor) can’t pursue the borrower (plaintiff) for repayment if the lawsuit fails (which it often does). This all makes litigation funding look an awful lot like equity. But these agreements also tend to contain provisions associated with debt, such as financial covenants or the posting of collateral. If the funding agreement comes under scrutiny from the court during the lawsuit, it can really matter whether the investment is characterized as debt or equity. As we’ve discussed, there are a lot of regulations surrounding this stuff, including state laws, usury statutes, and rules governing legal ethics. That’s not to mention the tax implications resulting from the characterization of the agreement. Due to this hybrid nature, direct investors in legal claims run the risk of seeing their investment[“recharacterized.”]( Trait #2: Outcomes are black & white A binary bet is one in which you either win or lose. It’s black & white, like flipping a coin. There is a clear winner and loser. Litigation finance isn’t purely binary – but it’s much closer to it than other investments are. Take stock investing, for example. When you buy & sell stocks, it’s not always easy to tell whether you “won” or “lost.” If you bought a stock and sold it when the price soared 20% in several days, that might feel like a victory. But if the stock continued to climb much higher, you lost out on a lot more money (your investment had a high opportunity cost of selling too early) The potential outcome of most investments looks like a distribution of returns, some of which are better, and others which are worse. But it’s all relative, it’s all on a scale. In contrast, litigation finance comes with one winning outcome and one losing outcome. Either your side wins the case, or they don’t. Yes, within victory, there could be a range of returns — especially if the funding agreement specifies that an investor receives a portion of the awarded recovery. But losing the lawsuit usually means an investor gets nothing back. Even venture capital isn’t as black & white as litigation finance. People think an “exit” is a black & white sign of success, but there are plenty of cases where a company exists and VCs lose money! A win is not necessarily a win. In this sense litigation finance is probably most similar to something like the [event contracts]( offered by prediction markets like Kalshi. Trait 3: Collection risk When investors consider funding a case, they have to think carefully about the facts involved, the merits of all the arguments, and the potential winnings the plaintiff could be entitled to. But there’s something else they need to consider: whether the defendant will actually pay! Even if a court has awarded the plaintiff a sizable amount of money, investors could end up not seeing a penny. This isn’t just a matter of solvency – companies will frequently engage in legal trickery to avoid paying large lawsuits. Consider the “[Texas two-step](,” in which a firm allocates legal liabilities to a separate, spinoff company, only for the new company to declare bankruptcy. Fun stuff! This type of risk is exceedingly rare in other markets. Imagine executing a successful stock trade, only for your brokerage to refuse to wire you the money when you asked for it. Pros and cons of litigation finance While still limited in size compared to mainstream asset classes, litigation finance is growing rapidly. Forecasts indicate a[market growth rate of around 9%]( for the next 5 years, resulting from increased demand for litigation funding services and an increased supply of investor funds to provide those services. For investors, litigation finance comes with a distinct combination of attractive features. But navigating any emerging asset class isn’t easy. Let’s take a look at the pros and cons of investing in litigation finance. The Pros - High returns. Data is a bit sparse since this asset class has no centralized market. But most research indicates very high returns for litigation finance investors, often[in excess of 20% annually](. - Uncorrelated to broader markets. Huge diversification benefits are one of the biggest draws to litigation finance. This asset class is fundamentally uncorrelated to almost any other market. Deciding the merits of a legal case has essentially nothing to do with the broader economy or other markets. - Room for alpha. As investment markets get more and more competitive, it becomes exceedingly difficult to find an edge by studying fundamental or statistical information. It’s early days for litigation finance, which means legal expertise can still add a tremendous amount of value by deciding which cases to fund and which to ignore.  The Cons - Complex. Litigation finance comes with a number of features not seen in other asset classes. For average investors, it might be difficult to understand the true risks associated with their assets. - Illiquid. While the liquidity of a specific litigation finance investment will vary, in general, it’s difficult to sell these assets prior to maturity. This has some benefits (namely, an illiquidity premium), but can limit investor options to cash out early. - Regulatory risk. The laws surrounding litigation finance continue to evolve. While the broad trend has been to loosen restrictions over time, that may reverse, particularly if there’s public blowback to perceived “predatory” funding practices.  Investing in Litigation Finance As an emerging asset class, avenues to invest in litigation finance are still a bit limited. With that being said, there are several high-quality options currently on the market. Fenchurch Legal Fenchurch is a specialist litigation funder based in the UK – but they’re open to investors from around the world.with law firms to fund cases, specifically consumer cases with strong precedent backing them. Law firms take these cases on a contingency basis and then remit returns to Fenchurch when they win or settle. But here’s what’s special about Fenchurch – they only take cases that are backed by an insurance policy as well. This is a huge deal. It means even if the law firm loses the case, the insurance policy will still pay out, ensuring Fenchurch earns a return regardless of what happens. Fenchurch is also focused on simplifying the litigation finance process for investors. To that end, they’re currently offering two fixed-income products: a 2-year note yielding 11%, and a 3-year note yielding 12%. Because these products are essentially guaranteed, it’s basically a secured fixed-income play. It’s a way to invest in the litigation finance space. To learn more… [Register for webinar with Fenchurch Legal here →]( --------------------------------------------------------------- --------------------------------------------------------------- RagingBull, LLC 62 Calef Hwy. #233, Lee, NH 03861 [Manage your email subscriptions.]( DISCLAIMER: To more fully understand any Ragingbull.com, LLC ("RagingBull") subscription, website, application or other service ("Services"), please review our full disclaimer located at [(. FOR EDUCATIONAL AND INFORMATION PURPOSES ONLY; NOT INVESTMENT ADVICE. 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