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F.A.Q.

Frequently Asked Questions

Litigation Finance also known as third-party funding or litigation funding, is a practice where a third-party funder (= the litigation funder) provides financial support to a party or law firm involved in a legal dispute. This highly specialized niche asset class involves funding legal claims and lawsuits. The funder or financier provides the funds to cover the costs of legal fees & disbursements in exchange for a share of the potential financial recovery (awarded by a court, arbitration tribunal or awarded through mutually agreed settlement). An investment into Arios would provide exposure to several of the leading litigation funders in the world.

Legal disputes can be expensive, often involving attorney fees, court costs, expert witnesses, and other expenses. Many individuals and (small) businesses might not have the financial resources to pursue their claims or defend themselves effectively. Litigation finance provides a way for these parties to access the legal system by covering the upfront costs of litigation, levelling the playing field between parties with unequal financial resources. With access to funding, plaintiffs (i.e. the suing party) may also be in a better position to negotiate settlements early in the litigation process. This can lead to quicker resolutions and avoid protracted legal battles that can be financially and emotionally draining.

In most cases, litigation funders conduct a thorough evaluation of the strength/merits of a legal claim before deciding whether to provide funding. If the funder determines the case has strong prospects for success, they may offer financial support. The funder typically receives a return on their investment if the case is successful, often in the form of a predetermined share of the proceeds.

Yes, there are various types of litigation funding arrangements. The most common types include single-case funding, where the funder supports a specific lawsuit, and portfolio funding, where a funder provides financing for multiple cases. In this case, financing is often provided to claimants (i.e. the suing party) on a non-recourse basis, meaning that the funder receives a return only if the case is successfully settled or results in a monetary award (i.e. if a case is unsuccessful, the funder typically does not receive any repayment but if it is successful, the funder receives a strong return on investment before the claimant participates in the award).

Litigation finance can also take the form of law firm lending, a specialized form of private debt that focuses on financing law firms working on a contingency fee structure (no win, no fee) to support their operations and business development. These loans are senior secured, full recourse, and benefit from liens over all current and future revenues of the law firm, and often a personal guarantee from the firm’s founder(s). The repayment of the loan is not just dependent on favorable case settlement.

Litigation funding can level the playing field by providing financial resources to parties with valid legal claims who might otherwise struggle to pursue litigation. It allows plaintiffs to cover their legal expenses, manage cash flow, and mitigate the financial risks associated with litigation (shifting the financial burden from the party involved in the case to the funding company). 

Additionally, litigation funding can help promote access to justice and discourage settlement pressure caused by financial constraints. This applies to commercial plaintiffs but also to individual plaintiffs. For example funding can be used to pay for (urgent) medical procedures while awaiting (not always guaranteed) financial compensation from the defendant or insurer. With the financial backing of litigation finance, parties can also invest in stronger legal strategies, hire experienced attorneys, increasing the likelihood of maximizing their recovery. Furthermore litigation funders bring professionalism and expertise to the table, especially in cases where lawyers work on an hourly basis and have no incentive to mitigate fees or case duration. With respect to law firm lending, it helps law firms to take on more cases and invest in the resources needed to build stronger cases, while maintaining stability during periods of uneven cash flow, such as when waiting for contingency fee cases to settle. It can also be used to boost their expansion plan. Additionally, clients are more likely to trust firms that are well-financed and equipped to handle their cases effectively.

Litigation funding is mainly developed/used in Anglo-Saxon countries such as the USA, UK and Australia, however, since a few years it started gaining traction in several European countries as well. Regulations and laws regarding litigation funding can vary from one jurisdiction to another. 

Litigation funding can be provided by specialized litigation finance companies, hedge funds, private investors, or even law firms. These entities have the capital to invest in lawsuits and typically have expertise in evaluating legal claims. However, experienced litigation finance managers are rare. The industry’s youth, the absence of banks and high barriers to entry have provided a distinct advantage to veteran litigation finance investors. Experience and successful track records are very important criteria for the Arios Fund.

Litigation finance exists in the context of both commercial and consumer claims. Commercial litigation funders typically fund high-value, complex commercial litigation cases. The most common disputes are related to breach of contract, antitrust, bankruptcy, IP, patents, etc. Consumer funding is primarily used for “harmed” individuals or consumers that are not able or willing to advance claim costs for their personal injury, class action or mass tort litigation.

Litigation funders assess the merits of a case by considering factors such as the strength of legal arguments, the credibility of witnesses, the potential damages or settlement amount, the complexity of the case, the jurisdiction, the litigation strategy and the track record and expertise of the legal team handling the litigation.

When litigation funders are evaluating the merits of a loan in the context of law firm lending, their primary focus is on assessing the creditworthiness and financial stability of the law firm seeking the loan. Unlike evaluating the merits of a specific legal case, this process centers on the financial health and ability of the law firm to repay the loan. In this context, the main collateral are the (future) fees generated by the portfolio and pipeline of cases handled by the law firm. Additionally, funders typically require personal guarantees from the law firm’s partners. This provides additional assurance of repayment and alignment of interest.

  • Duration risk – It is not unlikely that a minority of cases will not be fully resolved before end of fund life (due to appeals or complexity). Arios Litigation Finance Fund targets funders that try to avoid very complex and long cases. There is also a potential for secondary deals at end of fund life (for the unresolved cases) or to get insurance against duration risk (e.g. if not resolved by Y5 then receive pay-out of x).

  • Concentration Risk – Especially in law firm lending many law firms’ future revenues are linked to high-prolife but overlapping cases. The Fund will aim to achieve maximum diversification across instruments, funders, type of cases (mass tort, class action, commercial, consumer,…), geographies,…

  • Post settlement risk – Even after losing trial a defendant may refuse to pay at first or decide to appeal (collection risk, enforcement challenge, solvency). Arios Litigation Finance Fund will aim to work only with funders conducting thorough due diligence on the opposing party’s financial resources and ability to fulfil judgment obligations and collaborating with experienced legal professionals to navigate the collection and enforcement process effectively.

  • Competition Risk – More participants entering the market could put pressure on the pricing and the of available cases. To limit these risks, the Fund will aim to only invest with a diversified pool of litigation funders with demonstrated expertise, track record and reputation. It will also favour established niches within the asset class, with a solid competitive edge and higher barrier to entry.

  • Valuation risk – Cases/damages or collateral (in the case of law firm lending) are assets that inherently are difficult to value, sometimes also due to confidentiality. Arios Litigation Finance Fund will favour funders applying large discounts to recovery projections or overcollateralizing (i.e. LTVs of 20-40%) the loans (for law firm lending). Also, the investments/ collateral pool should be as diversified as possible (many different cases). There may be (additional) third party assessment where needed.

  • Binary risk – Lawsuit can result in either a significant financial gain (success) or a complete loss (failure) with little to no middle ground. Fund will allocate a significant part of its AUM to law firm lending strategies: senior secured, full recourse loans that are not solely dependent on the case outcome.

Yes, there are ethical considerations associated with litigation funding. These considerations include ensuring the funder does not unduly influence the litigation strategy, maintaining client confidentiality, avoiding conflicts of interest, and adhering to professional responsibility rules and ethical guidelines set forth by legal governing bodies. It is important for both litigants and their legal representatives to carefully assess and address any ethical concerns that may arise when using litigation funding.

Litigation finance is more common in Anglo-Saxon countries because they have legal systems that allow for it, high litigation costs that necessitate third-party financial support, and a culture of accepting this practice. Additionally, these countries often deal with large and complex commercial disputes, which attract litigation funders seeking potential returns. Overall, the combination of these factors has led to a more established and widely accepted market for litigation funding in Anglo-Saxon jurisdictions. But litigation finance is expanding beyond its traditional markets of the USA, Australia and the UK, with the industry starting to take off in Europe and Asia.

Major banks and private banks do not offer litigation funding as an investment option to their customers because of, legal and regulatory complexities, lack of expertise, and limited market size . Instead, some banks may indirectly participate in the industry by providing financing to litigation funders (leverage) or law firms.

We are an established investment company with a decade of experience in the financial sector. What sets us apart in the Benelux region is our unique blend of expertise in law and finance, with one of our partners holding qualifications in both domains. Unlike traditional banks, we recognize the value of this innovative investment approach. While banks may shy away from such recent investment styles, we believe in staying ahead of the curve. Our team includes individuals with a deep understanding of the legal landscape, empowering us to navigate and capitalize on opportunities that combine finance and legal aspects seamlessly. With our specialized knowledge and experience, we stand out as the go-to investment company for those seeking a comprehensive understanding of the intersection between law and finance. Additionally, The Fund through our background as investor in the asset class for 6+ years, we strive to provide easy access to a handful of highly experienced litigation funders (fund allocations) & legal claims (coinvest) not readily available to most EU investors. Our philosophy remains to work and source with experienced funders and niche experts.

  • Decorrelation: Litigation finance is one of the very few asset classes which are truly uncorrelated to macroeconomic factors. What drives returns is the aggregate outcome of many specific & unrelated legal cases, not economic parameters.

  • High success rate: The success/win rate of many established litigation funders is very high, ranging from 70% to 90+%. Therefore, the chances of losing principal on a diversified pool of cherry-picked claims are low. Some investments will benefit from insurance loss coverage as well.

  • Settlements: Roughly two thirds of meritorious cases are settled before trial, typically in favour of the claimant (and its funders). This greatly reduces the sometimes-binary risk associated with trials and shortens the investment period (and improves returns).

  • Limited competition among funders: Litigation finance is not as mature as for example private equity or real estate, this often means (much) fewer competing bidders and better terms. For private equity it is not uncommon to have 25+ competing bidders, in commercial LF often only 2-5 funders are engaged.

  • High growth asset class: Litigation funders finance only a small, but fast-growing portion of the total litigation spend, with a penetration of only ca. 5% in the US. Estimated annual growth rate (CAGR) of the industry stands at ca. 25% between 2013 and 2021.

  • Risk mitigation: As the industry is maturing there are funders providing principal protection (through insurance) or they are moving from single case funding to portfolio financing to further reduce downside risk.

  • Capital efficiency: In the early stages of a lawsuit, the outcome is uncertain, but the investment is also limited. Most of the expenses only occur close to or during the trial (“drip funding”). This is highly beneficial for returns (IRR) as much of the capital is deployed efficiently.

  • ESG & Democratization of access to justice: Funders typically support plaintiffs with limited financial resources (SMEs or consumers) going up against very large corporations and governments. Litigation finance allows claimants to pursue cases which they deserve to win but could not afford (or risk) to lose.

Litigation funding, also known as third-party funding or litigation finance, is a practice where a third-party funder provides financial support to a party involved in a legal dispute. The funder pays for some or all of the litigation costs in exchange for a portion of the potential financial recovery.
Litigation can be expensive, and not everyone has the financial resources to pursue a legal claim. Litigation funding allows individuals or businesses to access the necessary funds to cover legal costs, such as attorney fees, expert witnesses, court fees, and other expenses related to the litigation process.
In most cases, litigation funders conduct a thorough evaluation of the merits of a legal claim before deciding whether to provide funding. If the funder determines the case has strong prospects for success, they may offer financial support. The funder typically receives a return on their investment if the case is successful, often in the form of a predetermined share of the proceeds.
Yes, there are various types of litigation funding arrangements. The most common types include single-case funding, where the funder supports a specific lawsuit, and portfolio funding, where a funder provides financing for multiple cases. Additionally, there are different funding structures such as non-recourse funding (where the funder is only repaid if the case is successful) and recourse funding (where the funder can seek repayment even if the case is unsuccessful).
Litigation funding can level the playing field by providing financial resources to parties with valid legal claims who might otherwise struggle to pursue litigation. It allows plaintiffs to cover their legal expenses, manage cash flow, and mitigate the financial risks associated with litigation. Additionally, litigation funding can help promote access to justice and discourage settlement pressure caused by financial constraints.
While litigation funding offers many advantages, there are also potential considerations. Some critics argue that it may increase the volume of lawsuits and prolong litigation, as funders seek higher returns. The terms and conditions of the funding agreement, such as the funder’s share of the recovery, should be carefully evaluated. It’s essential to work with reputable funders and understand the potential impact on attorney-client privilege, control over the litigation, and the potential for conflicts of interest.
Litigation funding has gained traction in many jurisdictions, including the United States, the United Kingdom, Australia, and several countries in Europe. However, regulations and laws regarding litigation funding can vary from one jurisdiction to another. It is advisable to consult with legal professionals or litigation funders with expertise in the relevant jurisdiction to understand the specific rules and regulations that apply.
Litigation funding can be provided by specialized litigation finance companies, hedge funds, private investors, or even law firms. These entities have the capital to invest in lawsuits and typically have expertise in evaluating legal claims.
Litigation funding can be used for a wide range of legal cases, including commercial disputes, personal injury claims, intellectual property litigation, class actions, and other types of civil litigation. Eligibility may vary among funding providers, but typically, the case should have a reasonable chance of success and a potential for significant financial recovery.
Litigation funders assess the merits of a case by considering factors such as the strength of legal arguments, the credibility of witnesses, the potential damages or settlement amount, the complexity of the case, and the track record and expertise of the legal team handling the litigation.
In litigation funding, a third-party funder provides funds to the litigant in exchange for a portion of the potential financial recovery from the case. The funder assesses the merits and potential value of the case before deciding whether to provide funding. If the case is successful, the funder receives a predetermined share of the recovered amount. If the case is unsuccessful, the funder typically does not receive any repayment.

  • Access to justice: It allows individuals or businesses with limited financial resources to pursue their legal claims without bearing the full financial burden.

  • Mitigation of financial risk: Litigation funding shifts the financial risk from the litigant to the funder, who only receives repayment if the case is successful.

  • Enhanced negotiation power: With funding, litigants may have more leverage in settlement negotiations, as they are not as financially constrained.

  • Flexibility in legal strategy: Litigation funding can provide the necessary resources to pursue complex or lengthy litigation, including hiring expert witnesses or conducting extensive investigations.

  • –  Repayment obligations: If the case is successful, a portion of the recovered amount goes to the funder, reducing the overall financial benefit to the litigant.

  • –  Potential conflicts of interest: Depending on the terms of the funding agreement, the funder may have a say in case strategy or settlement decisions, which could lead to conflicts with the litigant’s interests.

  • –  Cost of funding: Litigation funding may involve high fees or interest rates, which can reduce the ultimate financial gain for the litigant.

  • –  Disclosure requirements: In some jurisdictions, litigants may be required to disclose the existence of litigation funding to opposing parties, which could impact settlement negotiations.

Yes, individuals, small businesses, or even larger corporations can apply for litigation funding. The availability of funding may depend on the strength of the case, the potential financial recovery, and the funder’s evaluation criteria.
Yes, litigation funding is available for both plaintiffs (those bringing the lawsuit) and defendants (those defending against the lawsuit). Defendants may seek funding to cover their legal costs or to fund a counterclaim
The repayment terms of litigation funding vary depending on the agreement between the litigant and the funder. Generally, if the case is successful, the litigant will repay the funder from the proceeds of the settlement or judgment. The repayment usually includes the initial funding amount plus an agreed-upon return or percentage of the recovered amount. If the case is unsuccessful, the litigant may not be required to repay the funder, as most litigation funders assume the risk of losing their investment.
The terms and conditions of a litigation funding agreement can differ, but some common provisions include the amount of funding provided, the agreed-upon repayment terms, the funder’s share of the recovery, confidentiality provisions, and any provisions relating to the funder’s involvement in case strategy or settlement decisions. The agreement may also address termination clauses, assignment of rights, and any potential conflicts of interest.
The time required to secure litigation funding can vary depending on factors such as the complexity of the case, the funding provider’s evaluation process, and the negotiations between the parties. It may range from a few weeks to several months. It’s advisable to contact potential funders early in the process to allow for sufficient time for evaluation and approval.
Litigation funding can be used for both ongoing and new cases. While new cases may be evaluated based on their potential merits, ongoing cases may be assessed based on their progress, chances of success, and the stage of litigation reached. Funders typically consider the remaining duration and potential costs of the case when deciding on funding for ongoing litigation.
The use of litigation funds is generally flexible, as they are primarily intended to cover legal expenses. Litigants can use the funds to pay for attorney fees, expert witness fees, court filing fees, document production costs, and other litigation-related expenses. However, it’s essential to review the terms of the funding agreement to ensure compliance with any specific restrictions or guidelines imposed by the funder.
Yes, there are ethical considerations associated with litigation funding. These considerations include ensuring the funder does not unduly influence the litigation strategy, maintaining client confidentiality, avoiding conflicts of interest, and adhering to professional responsibility rules and ethical guidelines set forth by legal governing bodies. It is important for both litigants and their legal representatives to carefully assess and address any ethical concerns that may arise when using litigation funding.
Litigation funding itself does not directly affect the outcome of a case. However, it can provide litigants with the financial resources needed to pursue their claims effectively, which may enhance their ability to obtain a favorable outcome. Additionally, the involvement of a funder may bring additional expertise or strategic insights to the litigation process, potentially influencing the overall case strategy and increasing the chances of success.
If a funded case is unsuccessful and does not result in a financial recovery, the typical arrangement with litigation funding is that the litigant is not required to repay the funder. Litigation funders generally bear the risk of losing their investment if the case does not succeed. However, it’s important to review the specific terms and conditions of the funding agreement, as some agreements may include provisions for the litigant to repay certain costs or expenses incurred by the funder.
The extent to which litigation funders can influence the strategy or settlement negotiations in a case can vary depending on the terms of the funding agreement. In some cases, funders may have the right to be involved in case strategy discussions, receive regular updates on the litigation, and participate in settlement negotiations. However, funders typically do not have direct control over the decisions made by the litigant or their legal counsel. It’s crucial for the litigant and their legal team to maintain their independence and exercise professional judgment in the best interests of the case.
Litigation funding is more common in Anglo-Saxon countries because they have legal systems that allow for it, high litigation costs that necessitate third-party financial support, and a culture of accepting this practice. The availability of funding helps level the playing field for litigants, especially individuals and small businesses, and allows them to pursue their legal claims without incurring upfront expenses. Additionally, these countries often deal with large and complex commercial disputes, which attract litigation funders seeking potential returns. Overall, the combination of these factors has led to a more established and widely accepted market for litigation funding in Anglo-Saxon jurisdictions.
Major banks and private banks do not offer litigation funding as an investment option to their customers due to the high risk and uncertainty involved in investing in lawsuits. They prioritize stable and predictable investment opportunities to safeguard their clients’ funds and avoid potential conflicts of interest. Additionally, legal and regulatory complexities, lack of expertise, and limited market size further contribute to their decision to steer clear of offering litigation funding directly. Instead, some banks may indirectly participate in the industry by providing financing to litigation funding companies or law firms.
Ascot is an established investment company with a decade of experience in the financial sector. What sets us apart in the Benelux region is our unique blend of expertise in law and finance, with one of our partners holding qualifications in both domains. As pioneers in the European market, we offer a distinctive type of fund that isn’t widely recognized in the region. Unlike traditional banks, Ascot recognizes the value of this innovative investment approach. While banks may shy away from such recent investment styles, we believe in staying ahead of the curve. Our team includes individuals with a deep understanding of the legal landscape, empowering us to navigate and capitalize on opportunities that combine finance and legal aspects seamlessly. With our specialized knowledge and experience, Ascot stands out as the go-to investment company for those seeking a comprehensive understanding of the intersection between law and finance.
Litigation funds are a good idea because they provide access to justice for individuals and small businesses, spread the risk among multiple cases, and offer professional expertise in assessing potential cases. They increase the efficiency of pursuing legal claims, have long-term investment potential, and promote social benefit by holding wrongdoers accountable. Additionally, litigation funds act as a deterrent against harmful practices, contribute to market efficiency, and usually offer non-recourse funding, protecting litigants from personal liability in case of unsuccessful outcomes. However, careful evaluation and understanding of risks are essential for both litigants and investors before participating in a litigation fund.
Litigation funding is seen as an alternative because it provides a different approach to financing legal disputes compared to traditional methods. It involves obtaining financial support from a third-party funder, sharing the risk with them, and accessing professional expertise to assess the merits of a case. Litigation funding offers access to justice, particularly for those with limited financial resources, and diversifies investment portfolios for investors. It eliminates upfront costs for litigants and can promote social benefit by encouraging meritorious claims and deterring wrongful conduct. However, it’s important to carefully consider the terms and reputation of the litigation funder and be aware of regulatory considerations before engaging in such arrangements.
The risks of litigation funding include uncertain case outcomes, potential financial losses for both litigants and investors, conflicts of interest, regulatory uncertainties, reputation risks, procedural delays, lack of control for litigants, concentration risk for investors, and confidentiality concerns. To mitigate these risks, thorough due diligence, transparent communication, and seeking legal and financial advice are crucial for all parties involved in the litigation funding arrangement.
Investing in litigation funding can be attractive due to its potential for high returns, non-correlation with traditional financial markets, risk diversification across multiple cases, and access to professional expertise in legal and financial evaluation. It offers investors an opportunity to support access to justice for underfunded litigants while promoting social benefit and accountability. Additionally, investors benefit from no upfront costs, contingency-based returns, and access to exclusive opportunities. However, investors should be aware of the associated risks and conduct thorough due diligence before participating in litigation funding to make informed investment decisions.
Litigation funding exists to address the financial challenges of pursuing legal claims, providing access to justice for individuals and small businesses. It allows litigants to share the risk with a third-party funder, reducing their exposure to potential losses. For investors, litigation funding offers a non-correlated asset class and the opportunity to diversify their portfolios. Additionally, litigation funding promotes accountability, encourages the pursuit of meritorious claims, and enhances the efficient allocation of resources within the legal system. Overall, it serves as a valuable mechanism for improving the accessibility and effectiveness of the legal process.
Litigation funding is interesting as an investment because it offers the potential for high returns, non-correlation with traditional financial markets, risk diversification across multiple cases, and access to professional expertise in legal and financial evaluation. Investors can benefit from supporting access to justice for underfunded litigants, promoting social impact, and achieving attractive profits. Additionally, litigation funding provides limited capital commitment, contingency-based returns, and access to exclusive investment opportunities. Investors should be mindful of the risks and conduct due diligence to make informed investment decisions in this alternative asset class.
Litigation funding is unique as an investment because it combines legal and financial expertise, offers non-correlation with financial markets, supports access to justice, and promotes social impact. It allows risk sharing with litigants, provides contingency-based returns, and offers exclusive investment opportunities. This alternative asset class stands out as an innovative and diversified option for investors seeking attractive returns beyond traditional financial instruments.
A traditional bank loan is recourse-based, meaning the borrower is obligated to repay the principal and interest regardless of the dispute’s outcome. However, litigation funders provide non-recourse investments, eliminating the need for collateral and personal guarantees. This enables claimants to pursue litigation without the financial burden and risk involved.
Certains funders offer non-recourse funding for claimants and law firms. Claimant-side funding supports related legal actions against one or more respondents. In contrast, law firm funding covers operational expenses and relies on revenue from a portfolio of contingency fee cases. By diversifying risk across multiple cases, law firm funding typically has lower pricing compared to single case funding for claimants. While this guide focuses on claimant-side funding arrangements, there are plans to release a similar edition for law firm funding facilities in the future.

Funding access to justice with strategic capital