Funding access to justice with strategic capital
Arios is an investment fund that provides unique access to litigation finance. The
strategy targets potential annual net returns in excess of +15% (see disclaimer), uncorrelated to financial
markets. The fund offers access to a carefully sourced and diligently vetted
network of litigation finance specialists and claim opportunities.
What is Litigation Finance?
Litigation finance is a highly complex and specialized niche asset class which involves funding legal fees to pursue legal claims and lawsuits in exchange for financial compensation.
• The asset class is truly uncorrelated to macro-economic factors. What drives returns is the aggregate outcome of hundreds of independent legal claims and law firms, not economic parameters.
• Litigation funders generally finance either claimants (“accusers”) or law firm(s) directly. The former is referred to as “Single Case Funding,” the latter “Law Firm Lending.” Both vary in terms of return, duration and level of risk. The defendants are almost always large corporates, insurers or governments.
What makes this litigation fund different from other investments?
Litigation Finance (“Lit Fin”), also known as third-party funding or litigation funding, is a unique form of investment that differs from traditional investments in several key ways:
Nature of the Investment: Litigation Finance involves funding legal fees to pursue legal claims rather than investing in traditional assets like stocks, bonds, or real estate. Investors provide capital to either the claimants (“Single Case Funding”) or the law firm(s) directly (“law firm lending”).
Risk and Return: In Lit Fin the potential return on investment is mainly tied to the future outcome of many uncorrelated legal cases, hence returns are in not impacted by the general economy (recessions etc). Financing to claimants is often provided on a non-recourse basis, meaning that the funder receives a return only if the case is won or successfully settled. In the case of law firm lending, the capital is collateralized by the underlying cases + the firm + (personal) guarantees. Data shows majority of cases funded by leading funds are settled or won (some historically winning >90% of funded cases).
Time Horizon and Liquidity: Like private equity, Litigation Finance can often have an uncertain time horizon, as legal cases can take months and years to resolve. Law firm lending is similar to a private debt investment with more regular cash flows and a shorter time horizon (usually 3/4 years).
Alignment of Interests: In many cases, the interests of the litigation funder, the claimant, and the law firm are well aligned: all want to maximize the outcome of the lawsuit. This alignment can foster cooperation and a shared goal of winning the case. Lit Fin levels the playing field for (smaller) claimants, who are unable to pursue all valid lawsuits (i.e. with strong merits) because of the high cost burden and risk for P&L losses.
In summary, litigation finance is a specialized and unique form of investment that involves providing capital for a high number of legal cases, with returns contingent on the lawsuits’ outcome and therefore uncorrelated to the financial markets or the general economy. It differs totally from traditional investments in terms of risk, return structure, time horizon, expertise required, and regulatory considerations and as such provides a perfect diversification for any type of investor.
Key Strengths
Making Lit Fin accessible
Uncorrelated risk & return
Profits similar to private equity
Many risk mitigating features
Experienced investment team
What are the Benefits?
High uncorrelated
returns
Due to shortage of capital and strong growth, Lit Fin offers potential for outsized returns, with no correlation to other assets. The Arios Fund will invest with experienced funders and target a net IRR of 15% per annum (USD).
Loss and
risk mitigation
In Lit Fin capital is typically deployed in tranches. At any point in time the funder has the option to stop future funding, limiting losses of cases for which probability of success declines. Case win rates vary by funder between 75-95%.
Access to a unique
asset class
Arios provides exposure to a handful of highly experienced litigation funders (funds) & legal claims (co-invest), not readily available to most EU investors. Funders focus mainly on Anglo-Saxon countries (USA, UK & Australia) but EU-Asia growing strongly.
Funder-friendly terms
and conditions
Due to complexity, difficulty in sourcing deals and limited transparency, there are few renowned players in the space (almost no banks). Hence investors can often cherry pick cases increasing the likelihood of excess returns.
Strong diversification
Arios will target very broad diversification across products (single case and law firm lending), case types (contract disputes, arbitrage, antitrust, class action/mass tort, IP, ...), funders, geography and instruments (fund & co-investments).
Experienced
investment team
Our team has been investing and conducting due diligence in the industry since 2014 and combines decades of investment experience in various private asset classes. Our philosophy remains to work with experienced funders and niche experts.
Outlook
The overall outlook for the Litigation Finance business is strong, the market is growing, and regulations are being implemented to support the industry:
- High growth asset class : The Litigation Finance industry had been experiencing significant growth in the recent years. In 2022, $13 billion was invested in litigation finance activities, and this figure is expected to rise to $45.2 billion by 2033, with North America accounting for 40% of the market. This growth was attributed to several factors, including increased awareness of litigation finance as an option, a higher number of lawsuits, and the demand for alternative investments with potentially high returns.
- Legal and Regulatory Changes: Historically, law firms in the US have only been allowed to be owned by lawyers. However, in 2020 and 2022, two US states (Utah and Arizona) relaxed this rule and allowed non-lawyers to take equity stakes in law firms, making it easier for law firms to raise capital. This may create new opportunities for both litigants and investors and, in addition, provide a more cost-effective service to claimants.
- Market expansion: Litigation Finance was no longer limited to large corporate disputes. It had expanded into financing smaller cases and class actions, making it accessible to a broader range of claimants.
- Global expansion: The availability and acceptance of litigation are expanding to new jurisdictions (Europe, Asia, the Middle East, etc.) as legal systems and regulations evolve. In Europe, the UK and Germany are the main players, while in the Asian market, China dominates with 40% of investments.
These features provide confidence that Lit Fin is set to deliver sustainable, attractive and uncorrelated returns to investors.