The modern legal landscape presents a well-documented paradox: the pursuit of justice is, more often than not, contingent upon access to capital. Plaintiffs with meritorious claims may be forced to abandon them or accept deeply discounted settlements simply because they lack the financial resources to sustain protracted litigation against well-capitalized adversaries. Third-party litigation finance has emerged as a powerful mechanism to address this imbalance, redistributing legal risk, equalizing bargaining power, and, in the process, creating a compelling alternative investment opportunity. Over the past two decades, this once-niche practice has grown into a global industry projected to reach over forty billion dollars1 in assets under management by the end of the decade, drawing the attention of sophisticated investors and transforming the economics of dispute resolution worldwide.

At its core, litigation finance involves a third party, unrelated to the underlying dispute, providing capital to a claimant to fund the costs of judicial or arbitral proceedings. In exchange, the funder receives a share of any proceeds recovered through settlement or judgment. The arrangement is typically structured on a non-recourse basis, meaning that the funded party has no obligation to repay the investment if the case is un-successful. This distinguishes litigation funding from traditional lending: it is not a loan, no interest is charged in the conventional sense, and the funded party bears no personal liability in the event of an adverse outcome. The funder's return depends entirely on the success of the claim and may take the form of a multiple of the capital deployed, a flat fee, a percentage of the recovery, or some combination of these structures.

The funding process begins with rigorous due diligence. Before committing capital, funders conduct a thorough assessment of the claim's legal merits, the potential recovery value, the procedural posture of the case, the quality and track record of the legal team, and, more importantly, the solvency of the defendant, since even the most compelling claim will produce no re-turn if the adverse party is unable to pay a damages award. This evaluation can take anywhere from thirty to ninety days and may involve sophisticated risk analysis tools and the judgment of legal profession-als. Funders are, in effect, economic rationalists: they finance only claims that they believe have a strong probability of success. This selectivity serves as a built-in filter against frivolous litigation. In other words, there is simply no financial incentive to invest in meritless claims.

The product landscape within litigation fi-nance initially developed with non-recourse single-case funding for commercial disputes (litigation or arbitration) to law firms or claimants, and with advances tied to the claim as collateral, providing working capital facilities for those receiving the funding. Breach of contract claims, intellectual property enforcement, antitrust matters, insurance disputes, shareholder litigation, insolvency and asset recovery actions, and commercial arbitration proceedings are all well-established categories of litigation finance investments. Over time, funders have expanded their offerings to include portfolio financing, in which capital is collateralized by a basket of cases typically litigated by a single firm, providing greater diversification and capital flexibility. Monetization of court judgments, arbitration awards, and intellectual property rights have also gained traction, allowing claimants who have already obtained favorable outcomes but have not yet received payment to access liquidity in the interim.

A central feature of the litigation finance model, and one that fundamentally shapes the funder's role, is the principle that the funder does not control the prosecution of the claim. Standard funding agreements determine the amount and cost of capital without transferring authority over litigation strategy or settlement decisions to the investor. The plaintiff and counsel retain autonomy over key tactical and strategic decisions, and the funder typically maintains a passive role, receiving periodic case updates and attending to investment monitoring responsibilities. This separation of investment and litigation management is essential both from an ethical standpoint and, in many jurisdictions, as a legal requirement designed to preserve the integrity of the attorney-client relationship.

The regulatory environment for litigation finance remains fragmented. The practice originated in Australia and the United Kingdom in the late twentieth century, where the gradual relaxation of medieval doctrines of maintenance, champerty, and barratry, which are prohibitions against third parties supporting or profiting from another's litigation, opened the door to commercial funding. In the United States, regulation occurs mainly at the state level, which has resulted in a patchwork of legislation, court rules, and case law. Hong Kong and Singapore legalized third-party funding for arbitration in 2017, establishing regulatory frameworks that require funders to maintain adequate capital reserves and demonstrate financial sufficiency. In Brazil, the sector operates without specific legislation, relying on contractual freedom and general principles of civil law, although the São Paulo Court of Appeals has recognized the validity of funding agreements and several arbitration chambers have issued resolutions requiring disclosure of funder participation.

For investors, litigation finance presents a uniquely attractive proposition. Legal claims represent an asset class whose value is largely uncorrelated with activity in public capital markets: the outcome of a lawsuit depends on the merits of the case, the applicable law, and the skill of the legal team, not on interest rates, commodity prices, or macroeconomic cycles. This feature allows investors to achieve meaningful portfolio diversification, particularly in periods of economic turbulence. Indeed, legal claims may even be countercyclical, as financial crises tend to generate waves of litigation, a dynamic vividly illustrated by the flood of investor lawsuits that followed the 2008 global financial crisis. Returns in the industry have historically been substantial: one major platform reported a median annualized net return of fifty-six percent on resolved investments through December 31, 2019, while broader market estimates point to potential annual returns in the range of twenty to forty percent.

The investor base in litigation finance has evolved and diversified considerably. In its early years, the sector was largely populated by entrepreneurial individuals, but as the industry matured, it attracted institutional capital on a significant scale. Hedge funds and other entities have become increasingly prominent. Listed vehicles such as Burford Capital and Omni Bridgeway have provided the public markets with direct exposure to litigation assets. In Brazil, a growing ecosystem of over forty specialized fund managers focused on distressed and special-situations assets has begun to turn its eyes to litigation-related opportunities.

Traditional private equity fund managers have not, as a general rule, been natural allocators of capital to litigation assets. A common private equity investment model involves obtaining a controlling interest in an operating company and actively contributing to its strategic and operational development in order to maximize enterprise value. Although this type of investment and litigation finance products share a couple of resemblances (e.g., illiquidity and long-term duration), the two products diverge in important respects. Private equity investors typically acquire control over a portfolio company and drive its operational and strategic development to build value. Litigation funders, by contrast, do not control the prosecution of the claims they finance; the plaintiff and counsel retain full decision-making authority over strategy and settlement. Returns in private equity are generated through incremental value creation in an ongoing business, whereas litigation finance returns are binary: the funder either recovers a multiple of its investment upon a successful outcome or suffers a total loss. The asset class also requires specialized legal expertise that most financial sponsors lack, and even hedge funds may struggle with the operational demands of supporting claims through to resolution. The absence of clear regulatory frameworks in many jurisdictions may act as a further barrier to large institutional funds from entering the litigation finance market.

Despite its rapid expansion, the litigation finance industry is not without challenges. The prolonged duration of legal proceedings, the inherent unpredictability of judicial or arbitral outcomes, and the risk that a successful judgment may prove unenforceable against an insolvent defendant all contribute to a complex risk profile.

Looking ahead, the trajectory of litigation finance appears firmly upward. The global market continues to expand as awareness grows among corporate legal departments, law firms, and in-house counsel. New products and structures are emerging to address a broader range of legal and geographic markets, and technology is playing an increasingly significant role in case origination and risk assessment. As regulatory frameworks mature, driven by voluntary codes of conduct, arbitral institution guidelines, and evolving case law, the industry is likely to attract an even wider array of institutional capital. For practitioners and investors alike, litigation finance represents a transformative development: one that promises to enhance access to justice while delivering compelling risk-adjusted returns in an asset class that stands apart from the traditional financial markets.

Reprinted with permission from the Fall 2026 issue of the Preferred Returns Newsletter of the ABA Business Law Section Private Equity and Venture Capital Committee. Further duplication without permission is prohibited. All rights reserved.