Get Rich By Investing in Litigation Financing

Third-Party Litigation Finance

I recently found a crowd-sourced litigation funding platform called LexShares. This platform gives individual accredited investors the opportunity to invest in a wide variety of pre-settlement business disputes, such as contracts, fraud, international arbitration, intellectual property, whistleblower, and portfolio financing. Pre-settlement funding is different from post-settlement loans. Investors of pre-settlement funding can obtain a higher equity upside (and thus, the profit is a capital gain) if they invest in early stage litigation. Post-settlement investment is a type of fixed-income product especially known in the mass tort space. Investors give loans to lawsuit plaintiffs for settled claims that have not paid out yet.

Attractive Yields

Litigation finance is a new asset class that is not correlated with market cycles, and each claim is not even correlated with each other. It brings the investor money into the incredibly lucrative business model known as contingency. Under the contingency fee model, lawyers accept the case in exchange for a significant portion of settlement or award on successful completion. If they lose a case for their client, they usually receive nothing. This monopolistic business model is highly inefficient and only available to lawyers. This is the reason why the rate of return on this asset class can easily outstrip other asset classes. Litigation finance is looking more and more appealing to many investors who are working to improve risk-adjusted returns through recession-proof investments.

Expected Return

The LexShares team maintains a strong track record in commercial cases with a success rate of little over 90%. The platform has posted 32 cases as of April 2017 (102 cases for the underwriting group), and 7 cases reached a finality. The following table shows the investment returns for different success rates.

Success Rate Gross Proceeds Net Proceeds MOIC IRR
100% $26,000 $16,000 2.60x 80%
90% $23,400 $13,400 2.34x 67%
80% $20,800 $10,800 2.08x 54%
70% $18,200 $8,200 1.82x 41%
60% $15,600 $5,600 1.56x 28%
50% $13,000 $3,000 1.30x 15%
40% $10,400 $400 1.04x 2%
30% $7,800 ($2,200) 0.78x (11%)
  • Case resolution time is 2 years.
  • The expected net return is 80%.

Predict Return on Investment

I plan to deploy $1 million capital over the next 3 years. The following table depicts projected annual asset growth based on a 54% target IRR at an 80% success rate with 2-year case resolution time. All profits will be taxed at a long-term capital gain rate, and all after-tax returns will be reinvested.

Year New Capital LTCG (After Tax) Deployments Total Assets
2017 $400,000 $0 $400,000 $400,000
2018 $400,000 $0 $400,000 $800,000
2019 $400,000 $345,600 $1,145,600 $1,545,600
2020 $0 $345,600 $745,600 $1,891,200
2021 $0 $989,798 $2,135,398 $2,880,998
2022 $0 $644,198 $1,389,798 $3,525,197
2023 $0 $1,844,984 $3,980,383 $5,370,181
2024 $0 $1,200,786 $2,590,584 $6,570,967
2025 $0 $3,439,051 $7,419,433 $10,010,017
2026 $0 $2,238,265 $4,828,849 $12,248,282
  • $400,000 additional capital per year for 3 years.
  • Case resolution time is 2 years.
  • The expected net return is 80%.
  • A target IRR is 54% at an 80% success rate.
  • Effective tax rate is 20%
  • All after tax fund will be reinvested.

Final Thoughts

Litigation finance is still new, and it attracts only early investors. There is enormous growth potential with this asset class. I will take full advantage of arbitrage opportunities before it moves into the mainstream.