United States: Litigation Funding – Opportunities Abound For Private Equity Firms Looking to Diversify

Most of us have a general understanding of what "litigation financing" means. Maybe we see an ethically hazy framework in which countless investors are able to inject themselves into valuable, fast-paced litigations as an investment vehicle. Or perhaps we see the overwhelming legal costs faced by a small start-up trying to seek justice for theft of its patents and other intellectual property. Regardless of context, it is clear that litigation financing (aka litigation funding) has emerged from its class action roots and is here to stay. This has caused and will continue to cause significant disruption in the legal arena for the foreseeable future – disruption from which private equity firms are well placed to benefit.

Under a traditional litigation funding arrangement, an outside investor provides a plaintiff with funds to pay legal costs and fees, in return for that investor's right to a set portion of any recovery (typically around 50%). The benefit of this arrangement for the litigant is that there is no downside risk to pursuing litigation (an investor is footing the bill), and the benefit to the investor is the incredible potential upside of the investment, which is not necessarily dependent on typical market conditions. For example, in one case (commonly known as Tienver v. Argentina), the litigation funding company invested $12.8 million in an action seeking compensation from the Argentine government for its expropriation of two airlines. Following a positive arbitration award of $324 million in plaintiffs' favor, the funder sold its interest in the litigation for $107 million. This represents a 736% return on invested capital, demonstrating that these investments can provide firms with significant monetary windfalls.

According to Buford Capital, one of the three largest litigation financing companies in the world, only 7% of U.S. law firms used litigation funding to prosecute litigations in 2013. That number grew dramatically to 36% in 2017, an increase of 414% in four years.

As additional creative uses of litigation funding are developed and the strategic advantages of funding become more well known, this number is likely to grow even further. How can private equity firms take advantage of this rapidly changing environment and obtain value from litigation?

Private equity firms can benefit from litigation funding in four ways. First, firms may invest in litigation financing companies such as Buford Capital, IMF Bentham, and Longford (currently the three largest participants), or make direct investments in specific litigations through one of these companies, as in the Tienver v. Argentina case noted above. Second, a PE firm can use litigation funding to help a company in its portfolio prosecute a claim. Third, firms can purchase interests in individual litigations or "shares" of a litigation through secondary markets. Fourth, and finally, firms can use litigation funding when acquiring a target, to reduce the cash purchase price and obtain investment without giving up valuable voting and governance rights. This creative use of litigation funding, designed specifically for private equity firms and hedge funds, takes advantage of the value underlying a target company's portfolio of litigation.

Here is a brief example of how this type of transaction works: PE Capital wants to buy XYZ Co. for a total price of $150 million but wants to front only $130 million of that cost. Traditionally, a firm would seek an additional investor, who would then have some voting rights associated with that investment. Rather than seeking a direct investor, litigation finance allows PE Capital to offer ABC Co. a percentage interest of any recovery from XYZ Co.'s litigations, for a fixed sum—here, the $20 million gap between the $150 million price of XYZ and the $130 million that PE Capital is willing to invest. In return for that $20 million investment, ABC Co. obtains a portion (typically around 50%) of any recovery from actions in XYZ Co.'s litigation portfolio, which is valued at $200 million.

While these creative investments offer plenty of upside potential, lingering ethical considerations unique to litigation merit additional scrutiny. These tend to focus on three key considerations: (1) issues relating to attorney-client privilege; (2) control of the litigation and settlement strategy decisions; and (3) ethical rules forbidding non-lawyer investments in law firms and fee-sharing arrangements with non-lawyers.

The first two issues are easily addressed. The benefit to the litigant from litigation funding is directly tied to the fact that funders ultimately have no say in directing or controlling the litigation, and have no right to obtain privileged communications or otherwise actively participate in the litigation. And while the third concern exists for some litigation funding arrangements (primarily those relating to direct investments in law firms), they do not currently implicate other "litigation portfolio" funding scenarios where the private equity firm invests in a target company's pending litigation rather than in a particular firm's litigation portfolio.

For example, in Formal Opinion 2018-5, the New York City Bar Association recently opined that Rule 5.4 of the New York Rules of Professional Conduct (which prohibits fee-sharing agreements between lawyers and non-lawyers) prohibits a financing agreement between a lawyer (or law firm) and a litigation funder "under which the lawyer's future payments to the funder are contingent on receipt of legal fees or on the amount of legal fees received in one or more matters." Although this rule is implicated only where there is a fee-sharing agreement between a firm (rather than the client) and a funder, it nonetheless demonstrates that the various state bar ethical authorities are keeping a close eye on funding issues and any potential impact on the attorney-client relationship.

Ultimately, while this quickly changing landscape can make it difficult to assess all potential risks related to litigation funding, it is apparent that PE firms can take advantage of the numerous benefits of litigation funding and can now tap into new and diversified investment vehicles that leverage litigation as an asset rather than a contingent liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions