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Key Takeaways from LFJs Special Event: How Investors Approach Litigation Finance

On Thursday, July 14th, Litigation Finance Journal hosted a digital event, “How Investors Approach Litigation Finance.” The event featured a unique cross-section of investor types, including David Gallagher, Co-Head of Litigation Investing at The D.E. Shaw Group, CJ Wei, Vice President of Private Credit at Northleaf Capital, Benjamin Blum, Managing Director at Flexpoint Ford, LLC, David Demeter, Director of Investment at Davidson College, and Kendra Corbett, Partner at Cloverlay. The event was moderated by Ed Truant, Founder of Slingshot Capital.

Below are some key highlights from the discussion:

ET: How did you start investing in Litigation Finance? What types of results did you focus on, and how has your strategy changed over time?

DG: It takes time to obtain a meaningful number of results from litigation finance investments, and you can learn a lot along the way, even before the results come in. And because you invest in such a small proportion of the opportunities you look at, you try to learn from the investments you don’t make, as well as the investments you do make. And one of the lessons I’ve learned as it relates to deployment strategy, is that good deals are so hard to come by, and are a product of so many variables outside of your control, that it’s better to be responsive to the opportunity set in front of you, than to be wedded to the abstract ideas of portfolio construction or deal structuring. I think adaptiveness is key.

KC: We’ve been active in deploying capital in litigation finance for over six years now, and I wouldn’t say our approach has changed dramatically. We’ve been laser-focused on maintaining diversification across cases to avoid binary risks, and finding alignment across all of the involved parties.

I think we’ve looked for market specialists, and we haven’t necessarily tried to find litigation finance beta, and instead we’ve looked for partners with a demonstrable value-add and strategic advantage.

ET:  For those panelists more interested in credit opportunities in the legal finance space, why did you decide to focus on credit?

DG: At the D.E. Shaw Group, the litigation investing team works closely with the Private Credit group, which I like to think broadens the types of deals we do. So, in addition to investing in litigation finance deals with a more typical risk/reward profile, we also invest in less volatile opportunities that are less about litigation risk, and more about timing risk and basic credit risk.

BB: There are a few ways to create a credit-like opportunity in litigation finance. In addition, the way David was describing, the other way is to create a credit-like product by lending against a diverse portfolio of individual case fundings. So the asset is a little bit less credit-like, but the investment structure creates a credit-like investment. Both areas are of interest to us, especially when there is strong alignment with the borrower and downside protection through underwriting, to justify accepting a return profile that is either capped or has limited upside.

CW: At Northleaf, we have many different funds with many different return hurdles, so we view ourselves as a capital solutions provider to litigation finance businesses. That being said, our thesis around the asset class is akin to a type of Private Credit approach strategy. Principal protection is our priority. We not only have asset coverage of the legal assets, but additional covenants and protections, and bespoke structures where we have guardrails against any downside scenario.

ET: From an equity perspective, how is litigation finance the same as, or different from, other equity assets in which you invest?

DD: If you suspend disbelief a bit, I would equate it with early venture investing. Liquidity cycles tend to be uncorrelated in the long run, you’re generally creating milestones for capital, outcomes can be pretty skewed, where large winners make up the majority of profit (although it’s certainly more skewed in venture than in litigation finance), and the investment strategy isn’t all that scalable—managers have to be cognizant of all that they’re trying to deploy.

DG: I’ll focus on some of the differences. First, a litigation finance investor has no control over the litigation, while an equity investor or investors that own the majority of the company—they do control the company. So the closest analogy is to a class of shares that has no voting rights. Second, LitFin investments are typically illiquid. Equity investments are typically liquid. Another difference is that case outcomes are typically more binary than business outcomes.  And one last difference is that a company you might invest in can pivot and respond as needed to market opportunities, a case you invest in—it pretty much is what it is, and there’s only so much that even the most talented lawyers can do, with the facts and the law involved.

ET: One of the common criticisms I hear from fund managers, at least early on in the life cycle, is that investors are not willing to pay management fees to fund their operations. How does the panel respond to this criticism, given that the average litigation finance claim is small—around $3-5MM—and there is a lot of relatively sophisticated operations needed to be conducted by investment managers?  

DD: I think there are ways of paying someone a full fee and making sure deployment is there. And that is my primary concern, and I think most LPs primary concern, when it comes to paying a management fee. We’re also concerned about misalignment. At the fund level, people should really be making a large amount of their compensation from performance fees, not salary.

KC: It’s definitely a difficult issue. The fee drag that comes with charging investors on committed capital becomes pretty untenable when you’re comparing gross returns to net returns. So from our perspective, at a minimum, fees need to be on an as-committed basis. We’ve also seen scenarios where there is a lower management fee on committed capital that steps up once it’s drawn. It’s just really difficult with some of the commercial litigation strategies to have a full freight fee—2%–committed from investors.

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Case Developments Commercial

Sony and Apple Challenge Enforceability of Litigation Funding Models

By John Freund |

A pivotal UK court case could reshape the future of litigation finance agreements, as Sony and Apple reignite legal challenges to widely used third-party funding models in large-scale commercial disputes.

An article in Law360 reports that the two tech giants are questioning the validity of litigation funding arrangements tied to multibillion-pound cartel claims brought against them. Their core argument: that certain litigation funding agreements may run afoul of UK laws governing damages-based agreements (DBAs), which restrict the share of damages a representative may take as remuneration. A previous Court of Appeal decision in PACCAR Inc. v. Competition Appeal Tribunal held that some funding models might qualify as DBAs, rendering them unenforceable if they fail to comply with statutory rules.

This resurrected dispute centers on claims brought by class representatives against Apple and Sony over alleged anti-competitive behavior. The companies argue that if the funding arrangements breach DBA regulations, the entire claims may be invalidated. For the litigation funding industry, the outcome could severely curtail access to justice mechanisms in the UK—especially for collective actions in competition law, where third-party financing is often essential.

The UK’s Competition Appeal Tribunal previously stayed the proceedings pending clarity on the legal standing of such funding arrangements. With the dispute now heading back to court, all eyes will be on whether the judiciary draws a clear line around the enforceability of funder agreements under current law.

The decision could force funders to rework deal structures or risk losing enforceability altogether. As UK courts revisit the DBA implications for litigation finance, the sector faces heightened uncertainty over regulatory compliance, enforceability, and long-term viability in complex group litigation. Will this lead to a redefinition of permissible funding models—or to a call for legislative reform to protect access to collective redress?

Case Developments Commercial

Funder’s Interference in Texas Fee Dispute Rejected by Appeals Court

By Harry Moran |

A Texas appeals court has ruled that a litigation funder cannot block attorneys from pursuing a fee dispute following a remand order, reinforcing the limited standing of funders in fee-shifting battles. In a 2-1 decision, the First Court of Appeals found that the funder’s interest in the outcome, while financial, did not confer the legal authority necessary to participate in the dispute or enforce a side agreement aimed at halting the proceedings.

An article in Law360 details the underlying case, which stems from a contentious attorney fee battle following a remand to state court. The litigation funder, asserting contractual rights tied to a funding agreement, attempted to intervene and stop the fee litigation between plaintiffs' and defense counsel. But the appellate court sided with the trial court’s decision to proceed, emphasizing that only parties directly involved in the underlying legal work—and not third-party financiers—are entitled to challenge or control post-remand fee determinations. The majority opinion concluded that the funder’s contract could not supersede procedural law governing who may participate in such disputes.

In dissent, one justice argued that the funder’s financial interest merited consideration, suggesting that a more expansive view of standing could be warranted. But the majority held firm, stating that expanding standing would invite unwanted complexity and undermine judicial efficiency.

This decision sends a strong signal to funders operating in Texas: fee rights must be contractually precise and procedurally valid. As more funders build fee recovery provisions into their agreements, questions linger about how far those rights can extend—especially in jurisdictions hesitant to allow funders a seat at the litigation table.

Commercial Regulatory Issues

Oklahoma Moves to Restrict Foreign Litigation Funding, Cap Damages

By John Freund |

In a significant policy shift, Oklahoma has enacted legislation targeting foreign influence in its judicial system through third-party litigation funding. Signed into law by Governor Kevin Stitt, the two-pronged legislation not only prohibits foreign entities from funding lawsuits in the state but also imposes a $500,000 cap on non-economic damages in civil cases—excluding exceptions such as wrongful death. The new laws take effect November 1, 2025.

An article in The Journal Record notes that proponents of the legislation, including the Oklahoma Civil Justice Council and key Republican lawmakers, argue these measures are necessary to preserve the integrity of the state's courts and protect domestic businesses from what they view as undue interference. The foreign funding restriction applies to entities from countries identified as foreign adversaries by federal standards, including China and Russia.

Critics, however, contend that the laws may undermine access to justice, especially in complex or high-cost litigation where third-party funding can serve as a vital resource. The cap on non-economic damages, in particular, has drawn concern from trial lawyers who argue it may disproportionately impact vulnerable plaintiffs without sufficient financial means.

Oklahoma’s move aligns with a broader national trend of state-level scrutiny over third-party litigation funding. Lawmakers in several states have introduced or passed legislation to increase transparency, impose registration requirements, or limit funding sources.

For the legal funding industry, the Oklahoma law raises pressing questions about how funders will adapt to an increasingly fragmented regulatory landscape. It also underscores the growing political sensitivity around foreign capital in civil litigation—a trend that could prompt further regulatory action across other jurisdictions.