Key Takeaways
- Litigation funding is non-recourse capital for legal claims: the funder pays costs and takes a share of any recovery, and loses its money if the case fails.
- Most capital now goes into portfolios rather than single cases; Westfleet reports 64% of 2025 US commitments were portfolio deals.
- Returns are measured as a multiple of invested capital, and they arrive late and unevenly, so headline IRRs can mislead.
- The main risks are binary outcomes, duration, enforcement, regulation and illiquidity; ATE insurance protects against adverse costs, not against losing the investment.
- Manager selection, diversification across cases and jurisdictions, and clear governance decide whether the asset class delivers.
A company has a strong claim against a larger opponent. The lawyers think it will win. The trouble is that winning will take four years and several million pounds in fees, and the other side knows it. Many good claims die there, settled cheaply or never brought at all.
Litigation funding exists to break that stand-off. A third-party funder pays the legal costs in exchange for a share of whatever the claim recovers. If the claim fails, the funder gets nothing back. Outcomes depend more on the merits of the case and less on which party can afford to keep going.
For investors, the appeal is a return stream driven by court decisions and settlements rather than by interest rates or equity markets. The catch is that it is one of the hardest asset classes to underwrite. This guide explains how litigation funding works, how returns are made, what can go wrong, and how allocators should approach it.
What is litigation funding?
Litigation funding, also called third-party litigation funding or litigation finance, is the provision of capital to a claimant or law firm to pay for legal proceedings, in return for a share of the proceeds if the claim succeeds. The funding is non-recourse: if the case is lost, the claimant does not repay the funder.
The capital usually covers lawyers' fees, expert witnesses, court fees and, where needed, insurance against paying the other side's costs. Funders also back arbitration claims and the enforcement of awards and judgments already won. The Association of Litigation Funders, the self-regulatory body for funders in England and Wales, describes the core proposition simply: access to justice for claimants who could not otherwise afford to pursue a meritorious claim.
The funder's return is typically the greater of a multiple of the capital deployed or a percentage of the damages recovered, and is paid out of the proceeds before the claimant receives the balance.
How does litigation funding work?
A funder's specialist legal team assesses each case against strict criteria: legal merits, likely damages, the defendant's ability to pay, the jurisdiction, how long the case will take, and whether a judgment can be enforced. Only a small share of the claims a funder reviews are funded.
Once a case is funded, the claimant and its lawyers keep control of the litigation. The funder monitors progress and budgets but should not direct strategy or settlement decisions; most industry codes require this independence. Capital is usually drawn in stages as the case moves forward, rather than all at once.
Types of litigation funding
Funders deploy capital through several structures, each with a different risk profile.
| Structure | What the funder provides | Main risk for investors |
|---|---|---|
| Single-case funding | Fees and costs for one claim, for a share of damages | Binary outcome on one case |
| Law firm portfolio | Capital against a basket of a firm's cases | Firm quality; cross-collateral terms |
| Claimant portfolio | Funding for a group of related claims | Concentration in one claimant or theme |
| Claim and award acquisition | Purchase of a claim or judgment outright | Enforcement and collection |
| Law firm working capital | Loans secured on future case fees | Credit risk on the firm |
| Insurance-linked funding | Adverse costs or disbursement cover | Policy terms and insurer strength |
The market has moved strongly towards portfolios. In the US, Westfleet Advisors reports $2.8bn of new commitments across 346 deals in 2025 by 39 active funders. Portfolio deals made up 64% of new commitments, with the average portfolio deal at around $19.6m against roughly $4.5m for a single matter. Portfolios spread the binary risk of any one case across many and allow cross-collateralisation, so a win on one claim helps cover a loss on another.
Litigation funding as an asset class
Two features draw investors to litigation funding.
- Low correlation: whether a court finds for a claimant has little to do with GDP, inflation or equity prices. A litigation book can add a return stream that behaves differently from the rest of a portfolio, which is why it sits alongside other diversifiers discussed in seeking diversification in private credit.
- Return potential: returns are measured as a multiple on invested capital (MOIC) rather than an annual yield, because the payoff comes in a lump when a case settles or a judgment is paid. Burford Capital, the largest listed funder, reports a cumulative return on invested capital of 83% and an IRR of 26% on its concluded assets since inception to the end of 2025.
Those figures come from one of the most established managers, after losses, and over more than a decade. They are not a guide to what a new fund will earn. Dispersion between managers is wide, and the gap between a strong and a weak funder is larger than in most credit strategies.
Access is the other constraint. Direct investment requires legal due diligence that few allocators can do in-house, so most investors reach the asset class through specialist funds, listed funders or co-investment alongside a manager.
Key risks of litigation funding
Litigation funding carries risks unlike those of a loan or a bond.
- Case risk: even strong cases lose. Judges, juries and tribunals are unpredictable, and a single adverse ruling can wipe out an investment.
- Duration risk: cases often take years, and appeals extend them further. A longer case lowers the IRR even when the multiple holds, and some contracts step up the funder's share over time to compensate.
- Enforcement risk: winning a judgment is different from collecting it. Sovereign defendants and companies with assets offshore can take years to pay, if they pay at all.
- Liquidity: there is a small secondary market for funded claims, but investors should assume capital is locked up until cases conclude. The trade-off is the subject of our guide to the illiquidity premium.
- Regulatory risk: the rules are still moving. In England and Wales, the Supreme Court's 2023 PACCAR ruling put many funding agreements at risk of being unenforceable. The Civil Justice Council recommended reversing it in June 2025 and the government said in December 2025 it would legislate "when parliamentary time allows", but the May 2026 King's Speech included no bill. In the US, a proposed tax on funders' proceeds was dropped from the 2025 budget package, but disclosure and tax proposals continue to circulate.
- Concentration: heavy exposure to one case type, law firm, defendant or jurisdiction magnifies all of the above, the same lesson investors learn in mid-market private credit.
What ATE insurance does and does not cover
After the Event (ATE) insurance is often cited as a safety net. It protects the claimant against having to pay the other side's legal costs if the case is lost, which matters in "loser pays" jurisdictions such as England and Wales. It does not, as a rule, return the funder's invested capital. Some funders buy separate capital protection or judgment preservation insurance, at a cost that reduces returns. Investors should be clear about exactly which protections exist and who benefits from them.
Litigation funding in the UAE
Litigation funding is established in the UAE's common law financial free zones. The DIFC Courts issued a practice direction on third-party funding in 2017 and the ADGM Courts adopted Litigation Funding Rules in 2019, both centred on disclosure of the funder's involvement. The Dubai International Arbitration Centre's 2022 rules also address third-party funding. Funding in the onshore courts is less settled, so investors should check how a manager's book is spread across forums.
What this means for investors
Litigation funding can add a return stream that does not depend on the economic cycle. That diversification is real, but it comes with binary outcomes, long and uncertain durations, enforcement risk and a regulatory backdrop that is still changing.
For family offices, wealth managers and private clients, the sensible approach is to treat it as a small satellite allocation, accessed through managers with long, audited track records across many concluded cases. The questions to ask are the same ones that apply across private markets: how is each case underwritten, how diversified is the book, how are cases valued before they conclude, how are fees aligned, and what independent oversight exists. Our articles on governance in private credit and risk-adjusted returns set out a framework that applies here too.
The return is paid for patience and for judgement. Investors need to be sure they are backing the judgement as well as the patience.
Frequently Asked Questions
What is litigation funding in simple terms?
It is when a third party pays the costs of a lawsuit or arbitration in return for a share of any money recovered. If the case is lost, the funder loses its investment and the claimant owes nothing.
Who pays the litigation funder?
The funder is paid out of the damages or settlement, usually before the claimant receives the rest. If there is no recovery, the funder is not paid.
How much do litigation funders charge?
Terms vary by case, but funders commonly take the greater of a multiple of the capital deployed, often two to four times, or a percentage of the recovery, often 20% to 40%, with the share sometimes rising the longer the case runs.
Is litigation funding legal in the UK?
Yes. Third-party funding is lawful in England and Wales, and funders follow a voluntary code through the Association of Litigation Funders. The 2023 PACCAR ruling raised enforceability questions for funding agreements based on a share of damages, and legislation to reverse it is still awaited.
Is litigation funding a good investment?
It can diversify a portfolio because outcomes are largely unrelated to markets, but returns are lumpy, capital is locked up for years, and manager quality varies widely. It suits patient investors who can diversify across many cases.
Does ATE insurance protect investors in litigation funding?
Not directly. ATE insurance covers the other side's legal costs if a case is lost; it does not usually return the funder's capital.
