Litigation Funding: A Good Bet for Long-Term Investors & Businesses?

Introduction    

In a world of huge financial disparities, where justice increasingly depends on one’s financial resources, litigation finance enables claimants who otherwise could not access justice to do so. A litigation financing arrangement is a non-recourse form of funding where the claimant gets paid back only if the claim succeeds. A claimant does not pay anything back to funders or funding companies if the claim is unsuccessful. Due to the non-recourse nature of the funding, most businesses see it as an alternative to high-cost litigation.  

Benefits to Investors

There are no external market players that control or affect the returns. Therefore, litigation financing ROI is not affected by market fluctuations or inflation. The merits of the case are the only factor to consider. 

As a result, it can also be a good alternative to investments during economic slumps since it remains insensitive to market turbulence. Moreover, litigation financing has a higher return than FDs, mutual funds, gold, land, or even stocks. 

Benefits to the plaintiff

Litigation and legal proceedings can negatively impact the company’s profit and loss statement and other operations. Using litigation financing can maximize a business’s capitalization of assets. Corporations can utilize their capital for operations and other business activities regardless of litigation challenges. 

This type of arrangement is therefore generally a win-win for all parties involved: claimants receive funding for their cases; law firms are able to pursue cases diligently while getting paid for their services regardless of the outcome, and investors are more likely to receive enhanced returns while minimizing a loss’s downside risk. Litigation financing serves a wide variety of basic yet critical problems, which will remain essential for many years to come

Legitimacy    

It is important to ensure the legitimacy of litigation financing in the country when looking for a long-term investment avenue. In 2018, the Supreme Court of India confirmed that “there appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.” 

The Indian Association for Litigation Financing (IALF), incorporated on February 11, 2021, by practitioners, law firms, and third-party funders, provides hope for the long-term viability of this type of funding.[1] 

Litigation funding in India is self-regulatory, and the association wishes to disseminate information about it so that people can learn more about it. In India, this is the first step toward establishing a regulatory framework for litigation funding. 

How is Litigation Financing an Investment Avenue for Long-Term Investors?

There has been tremendous growth in litigation financing over the last few years, serving an industry worth $750 billion a year worldwide. The fact that litigation funding began as a niche industry and now shows huge capital inflows from hedge funds, banks, retail investors, etc., highlights the growth and potential of this asset class. 

Although it is an established asset class in foreign countries with many players, it is relatively new in India. But nevertheless, the exorbitant high returns that litigation funding provides are one of its most attractive characteristics. A number of foreign litigation financers like Burford Capital, AxiaFunder, etc., have provided annual returns of 31% [2], and 55% [3], and that too, despite being uncorrelated to economic distress or financial markets. With only a few litigation funders in India, a huge opportunity is present for funders to pick the best cases and maximize returns even more than industry standards, making it one of the best opportunities for alternative investments for long-term investors.  

Future: The road ahead for Litigation Funding

There is no doubt that this new wave will pave the way for the development and growth of litigation finance in India and make it prevalent, LegalPay comes into the picture as the pioneer of it, providing non-recourse litigation funding to businesses and making justice accessible for everyone. Furthermore, LegalPay is democratizing litigation funding as an asset class for investors by providing complete transparency to them in an attempt to establish it as a mature asset class in India. 

Over time, artificial intelligence and machine learning will improve the ability to predict legal outcomes. With advances in computational law and AI’s ability to learn from more data, predictions will be more accurate and actionable. 

Litigation finance’s growth and globalization are also likely to result in a convergence of regulatory efforts, as jurisdictions import laws and regulations from more established markets. Regardless of economic circumstances, litigation finance will continue to provide access to justice for all who deserve it.
 

References:

1 https://ibbi.gov.in/uploads/resources/7e99c866b866e02fa7b8549752e55914.pdf 

2 https://www.burfordcapital.com/media/1687/20200203-burford-capital-update-on-2019-trading-performance.pdf 

3 https://litigationfinanceinsider.com/axiafunder-general-update/ 

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