Get Rich By Investing in Litigation Financing

Changing Risk Profile and Asset Allocation

I recently found a crowd-sourced lawsuit funding platform called LexShares. This platform gives individual accredited investors the opportunity to invest in a wide variety of commercial litigation, such as contracts, international arbitration, intellectual property, and portfolio financing.

Litigation finance provides very attractive yields at a lower risk. It is uncorrelated with market cycles, and returns can easily outstrip other investment classes. I saw enormous growth opportunities within the asset class and decided to weigh up the potential returns against the risk.

Attractive Yields

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 IRR
100% $26,000 $16,000 80%
90% $23,400 $13,400 67%
80% $20,800 $10,800 54%
70% $18,200 $8,200 41%
60% $15,600 $5,600 28%
50% $13,000 $3,000 15%
40% $10,400 $400 2%
30% $7,800 ($2,200) (11%)
  • Case resolution time is 2 years.
  • The expected net return is 80%.

Forecast Litigation Finance Investments Returns

I plan to deploy $1 million capital over the next 3 years. The following table depicts projected annual 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 Investment LTCG (After Tax) Reinvestment Total Investment
2017 $400,000 $0 $0 $400,000
2018 $400,000 $0 $0 $800,000
2019 $400,000 $345,600 $745,600 $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 investment 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

This asset class is still new, and it attracts only early investors. IRR may drop over the next few years as the platform loosen case underwriting standards to meet the demand from investors seeking diversification and long-term capital appreciation. I will take full advantage of risk/reward arbitrage before litigation funding moves into the mainstream.