Litigation finance
Alternative Investments

Litigation finance, with Hedonova

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No one likes to be involved in a lawsuit, particularly if you’re the one being sued. But there is a way you can get involved in a lawsuit for a good cause that’s also a good investment: litigation finance. When you invest in litigation finance, you lend money to the person bringing the lawsuit in exchange for a share of the financial recovery they get. It gives people the funding to take legal action which they wouldn’t be able to do otherwise.

1. Types of litigation finance

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There are two main case types where you can invest in litigation finance:

Consumer lawsuits

These involve people who often have no previous experience with the legal system. Finance gives them access to up-front cash loans to cover their legal, living, and medical costs. These types of cases include personal injury claims, consumer fraud, and employment discrimination.

Commercial legal cases

These are complicated business-to-business disputes  that often have much higher payouts. Companies usually have some previous experience of the legal system and negotiating contracts. Cases could include breach of contract, trade secret theft, and antitrust.

2. How investing in litigation finance works

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This kind of finance is good for individuals because it’s much easier than getting a loan from a bank that might ask for collateral in return. And it’s good for companies as they can keep their money to spend on business activities instead of legal disputes.

Investing in litigation finance is kind of like lending someone money – but it’s not the same as a loan so you don’t get any interest payments. It’s more similar to investing in a business, or buying an asset.

You only get your money back if the person you’ve funded wins the lawsuit. If they do win, you get a share of the payout relative to what you loaned them. If they don’t win, they get nothing and you get nothing – that’s why it’s called “no win no fee”.

There are a range of different ways you can invest in litigation finance. Some examples are: conditional fee agreements (CFAs), damages-based agreements (DBAs), before or after-the-event insurance and third-party funding.

3. Benefits of investing in litigation finance

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Lawsuit outcomes generally have very little in common with the stock markets. So investing in litigation finance is a good way to mix up your investments and help reduce the impact if stocks go down.

Aside from that, litigation finance has also been proven to perform better long-term than many other alternative assets like commodities or real estate. Generally, most lawsuits are resolved within two years, so your money is tied up for a shorter time period – in comparison, it can take up to five years to get your investment back from wine, art or private equity.

4. Risks and limitations of investing

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If you’re backing a lawsuit that fails, you’ll get nothing and lose your initial investment.  But a simple solution is to invest in a range of legal claims so that any losses can be offset by wins. Some regulations limit how much you can make from payouts – especially in consumer lawsuits where there’s more protection for the individual.

5. How you can invest

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For starters, you could invest in companies who specialize in financing litigation like Burford Capital. However, these types of companies are usually small and are few and far between.

Investing in insurance companies is another option, but they’ll only offer you a very tiny exposure to this sector. You can also invest in specialized litigation finance funds. These funds have experts who evaluate cases based on their legal merit, amount of damages and the financial viability of the defendant. But they usually require a hefty minimum investment amount. A simple and easy option is to invest in alternative asset funds that contain a range of different assets, including litigation finance.

6. Case study: How Hedonova invests in litigation finance

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Our litigation finance interests are focused in commonwealth countries – Australia, India, and the UK. In these jurisdictions, we focus on litigations between startups and those in the healthcare, energy, and oil and gas space. These sectors have higher settlement ratios and the time for cases to get settled is usually shorter.

We’ve also invested in a litigation funding startup in India called LegalPay which is the only one of its type serving the fast-growing Indian investor community. Via LegalPay, we have invested in litigation in both Indian healthcare and the manufacturing space.

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