Litigation financing is a service in which a third party offers capital backing to a claimant so that they can prosecute their claims in court or through arbitration. Unless the case is compelling and the claimant receives a share, the funder covers all litigation expenses and receives no compensation or refund.
The funder is entitled to a portion of the earnings if the case is successful. The funder loses its investment if the action fails, and the claimant owes nothing. In some jurisdictions, a funder may also provide litigation funding solutions and support services in addition to lawsuit finance, subject to regulatory constraints.
Why is Litigation Funding Important?
Investors in litigation financing have a reputation for receiving extraordinarily high yields. This is why institutional investors, such as investment banks, have been drawn to this industry. Hedge funds, for example, have recently expressed interest in litigation funding.
The little investment needed relative to the significant returns is the primary reason for the high profits. If a company is found guilty, the courts frequently require it to pay hefty fines. A portion of the ultimate settlement is distributed to investors.
As a result, investors frequently finish up with multiples of their initial investment. The rewards are only lower when the litigation duration is short and inevitable. Furthermore, when opposed to other investment types, litigation funding carries a lesser risk.
Other Investments Have No Bearing on This
Litigation financing is a favorable investment from an investor’s standpoint since it is unaffected by business fluctuations. As a result, litigation financing appears to be immune to a downturn in the economy, whereas the value of other investments drops.
Indeed, the number of bankruptcies rises amid a downturn in the economy. Consequently, more lawsuits are filed, resulting in increased profits for investors. This is why savvy investors have begun using litigation financing to hedge their portfolios.
Judicial System Access
From the buyers ’ perspective, litigation finance is also excellent news. Litigation funding guarantees that everyone has accessibility to justice. As a result, even if a poor individual has a strong case, lawyers with the support of a funder can take it on. The threat of legal action encourages businesses to develop robust processes, ultimately minimizing consumer discomfort.
The market for Used Goods
Finally, litigation financing is not an illiquid asset class. It is feasible to sell such assets because many investors purchase them. This implies that financier A can sell their stake to financier B. This is good news for investors. It’s comforting to know that if the case drags on too long, investors can get their money back by seeking a new buyer.
The enormous expenses and unpredictability of litigation support the growth of a new litigation funding business. A claimant’s case should be submitted to a litigation financier for assessment if the costing system is favorable.
There is no out-of-pocket expense because financiers do not demand a filing fee to consider a funding possibility. There can be numerous material advantages to both the claimant and its attorneys, as stated above.
This Manual should assist claimants and their lawyers in determining if their case meets the funder’s eligibility standards, as well as understanding and preparing for the underwriting and transactional procedures associated with receiving funder aid.