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Litigation Finance is Cheaper Than You Might Think!

The following was contributed by Matthew Pitchers, Head of Investment Valuation at Augusta Ventures. 

I was in conversation the other day with a prospective user of our finance – a law firm who will remain nameless. The conversation was going well, very well in fact, until those seven words came up: “what is it going to cost me?”. I replied that our fee would be based on the higher of a multiple on the funds deployed or a set percentage of damages awarded. After a few seconds of silence which felt like an eternity, the response I got back was “that is very expensive, and I don’t think my client will go for it”.

This left me bemused because whilst there is a general misconception that litigation funding is expensive, when compared to other sources of secured and unsecured funding available on the market, it is in fact very competitive and sometimes even cheap. This left me thinking about how best to explain this to the enquirer at the other end of the phone who would be left explaining all available options to his client.

What is litigation funding?

What I wanted to say was:

Sir, in considering how expensive litigation funding is, one needs to first analyse what litigation funding is. This is easier to think about when considering what litigation isn’t.

It isn’t a traditional debt product. There are no guaranteed cash flows. There is no obligation on the user of the debt to repay it. Any returns that the funder makes are payable from what the defendant pays if the claim is successful, not from the finance user. Furthermore, the entire financial risk of the case is transferred to the funder, and if a case loses, the risk of adverse costs falls to the funder and not the claimant. Therefore, an amount invested upfront in a legal case in order to share in the same risks and rewards as the claimant, feels more akin to a purchase of an equity participation in a start-up than a one-step-removed loan.

To put it another way: If you were going on Dragon’s Den and your great idea was to ask the Dragons for an upfront investment in a legal case for a future share of any available returns which may or may not occur, how much of the case do you think the Dragons would want?

What the market says

In haggling over the value of your idea, the Dragons would probably consider the availability of unsecured loans, and the returns expected from venture capital start-up funding.

If you, as an individual, were to go into the market today and look for an unsecured loan you might find APR’s that range from 10.3% per annum, for those people with excellent credit scores, up to 32.0% per annum for those with poor credit scores, and that is only on amounts up to £25,000.

A good benchmark for the percentage of cases a litigation fund might win, despite all the due diligence that is performed, is around 70%. Loaning out money with only a 70% chance of getting any of it back is not similar to loaning money to a person with an excellent credit score, so litigation funders are firmly in poor credit score territory, where an APR could typically be between 28.5% and 32.0%. And remember, that is only on amounts up to £25,000, an investment in a legal case more-often-than-not, is many multiples of this size.

A such, the IRR that the funder aims for is more akin to those expected by venture capitalists, who might typically look for 30-40% annual returns on a start-up investment.

The tenor of investments

A classical case tenor for litigation funding is usually two to four years. In the interim period the funder will have not received any payments. Their risk exposure goes up over time as more money is deployed as the legal case progresses, and there is limited availability to claw back any investment if the case looks like it isn’t going to win. It is, to all intents and purposes, an investment with a binary outcome and once invested there is no going back.

An investment with an annualised return of 40% over three years would expect to achieve a 2.74X money multiple for the investor at the end of the life of the investment. Over four years the money multiple would be expected to be 3.84X. This would be at the upper end of what a litigation funder might achieve. A normal equity investment in a company has fewer downsides regarding the capital locked up, as covenants would be in place to claw back any investments if the company were mismanaged in the interim period.

Summary

In short, litigation funders are able to make worthwhile returns through rigorous diligence, investing in  cases that they expect to win and which meet their internal criteria, whilst building up a large enough portfolio that the effect of the unsystematic binary risk of losing an individual case is diluted. In return, a competent litigation funder should expect to achieve on their portfolio a rate of return that is better than a correlated investment, but lower than that achieved in the start-up markets.

A claimant, in using litigation finance, should expect all their costs to be covered, and any risk of adverse costs to be transferred to the funder. In effect it becomes a risk-free investment for the claimant, whilst they still take the larger share of any return. This would be the dream scenario for any owner of a start-up company, selling a small stake in the company and removing all future down-side risk to themselves, whilst removing the burden of future costs.

In summary Sir, this is a great opportunity for your client and it is highly competitive.

Instead, I said to the man on the other end of the phone: ‘I’m sorry yes, it does sound expensive, let me see what we can do’.

Commercial

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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.