The Choices for Investing in Litigation Finance
Investors looking at the litigation finance market these days face an embarrassment of riches when compared to just a few years ago. In the past, the options for investing in litigation finance were limited to just a few funds with portfolios that were generally similar in type and composition. Today the world looks different.
Investors in litigation finance today have at least four broad options to invest in the space.
Invest in a litigation finance related stock:
Thanks to firms like Burford which are publicly listed, investors today have the ability to get exposure to litigation finance through the stock market. Investing in a stock in a large liquid market is a great option especially for investors who value liquidity and the transparency that comes with being publicly traded.
That said, the problem is that the best-known litigation finance stocks are not listed in the US markets. Executives at those companies are quick to highlight that many of their stockholders are US investors operating through the pink sheets or through their broker and buying in the foreign market. While that may be true, investing outside the US still creates a broad set of challenges for US investors including FX risk, a different regulatory structure than in the US, and the uncertainty associated with country risk from investing abroad. As Brexit illustrated, even in a market like London, there are still substantial risks that a US investor may not be as aware of.
In addition to this, of course, investors who are one stockholder out of thousands or millions, have little to no ability to interact with the firm or get any sort of preferential treatment regarding fees.
None of this is to say that investing in litigation finance stocks is not a good option – it can be, but like all of the methods of investing mentioned here, there are costs and benefits.
Invest in a litigation finance fund:
This is the typical approach that many litigation finance investors take, but it can be deceptively difficult to find a litigation finance fund that meets the needs of the investor. There are dozens of litigation finance funds ranging from mainstream broad firms to specialized boutiques, and established funds to start-ups.
Picking the right fund can be challenging to say the least. Different fund structures will have different levels of risk and return depending on the type of case they target, and while it is generally safer to go with a more established fund, investors can often get more favorable terms from a start-up fund. Adding to the difficulty, not all funds are looking for money at any given point in time – in fact, many funds are only raising money at select points in time, so an investor that focuses too much on a single fund could find their cash sitting idle for years waiting for an opportunity to invest.
The moral of the story is that much like the early days of hedge funds or venture capital, it pays to be careful and selective in finding the right fund to invest your money with.
Again, as with investing in litigation finance stocks, there are drawbacks and benefits to investing through a fund.
Invest via a litigation finance platform:
There are several litigation finance platforms out there for investors to take advantage of – one of the best known is YieldStreet for example. Other firms are expanding into space- Town Center Partners is in the process of developing a new investment platform for instance. These platforms provide investors with an easy online interface to deploy cash. But there are several practical problems.
First, the platforms are usually set up for the mass affluent, so you can invest as little as $20K in a portfolio of notes. That’s not a very attractive proposition for high net worth individuals looking to invest $1MM or more. In my experience working with high net worth investors, it can be difficult to get a meaningful amount of money placed through a platform. The litigation finance offerings that come along tend to fill very quickly, and it’s difficult to get any sort of preferential or advance access.
Second, and perhaps even more frustrating is that the returns on this area of litigation finance are not always much more compelling than what’s available in the stock market or commercial real estate. Typical deal returns might be around 13% these days – while that’s not bad, it’s not much of a premium given the risk, the challenges of investing, and the illiquidity associated with such investments. Given all that, litigation finance platforms in many respects are better suited to people who are well-off rather than being truly high net worth individuals trying to deploy $1 million or more.
Invest in litigation finance matters directly:
Finally, for investors with large amounts of cash to deploy – family offices, high net worth individuals, etc – investing in litigation finance directly can offer a degree of control and opportunity that is unavailable in other investing mechanisms. But it also creates substantially more work for the investor.
Investors with a minimum of $1M to invest in the space can potentially invest their money on their own directly into the cases that they choose. Doing this lets the investor eliminate middlemen and the fees associated with funds, platforms, or public stocks. But it also means that the investor has to be prepared to source potential cases on their own, evaluate those cases, and monitor the cases after the investment is made. All of that takes work. In my experience, the reality is that most investors need help with all of these aspects of investing, and as a result, the investor ends up hiring someone to help them.
The end result can still be more lucrative than the more hands-off investment methods mentioned above, and it offers more control to the investor. Yet all of that benefit still means the investor has to put in more of their own time and energy than if they had simply bought a stock for instance.
In general, investors today have many more choices and options than they once did for investing in litigation finance. That’s great news as it helps drive further growth in the space. There are new funds opening all the time and new institutions putting money to work regularly – I get a call or email multiple times a week from someone looking to get into the area. But with the growth in the industry comes a bewildering array of choices that can make it more confusing than ever for novices. The solution for the new investor is careful research and due diligence before deciding to move forward.