The litigation finance market is poised for significant activity in 2026 after a period of uncertainty in 2025. A recent JD Supra analysis outlines key challenges that can derail deals in this evolving space and offers guidance on how industry participants can navigate them effectively.

The article explains that litigation finance sits at the intersection of law and finance and presents unique deal complexities that differ from other private credit or investment structures. While these transactions can deliver attractive returns for capital providers, they also carry risks that often cause deals to collapse if not properly managed.

A central theme in the analysis is that many deals fail for three primary reasons: a lack of trust between the parties, misunderstandings around deal terms, and the impact of time. Term sheets typically outline economic and non-economic terms but may omit finer details, leading to confusion if not addressed early. As the diligence and documentation process unfolds, delays and surprises can erode confidence and derail negotiations.

To counter these pitfalls, the piece stresses the importance of building trust from the outset. Transparent communication and good-faith behavior by both the financed party and the funder help foster long-term goodwill. The financed party is encouraged to disclose known weaknesses in the claim early, while funders are urged to present clear economic models and highlight potential sticking points so that expectations align.

Another key recommendation is ensuring all parties fully understand deal terms. Because litigation funding recipients may not regularly engage in such transactions, well-developed term sheets and upfront discussions about obligations like reporting, reimbursements, and cooperation in the underlying litigation can prevent later misunderstandings.

The analysis also underscores that time kills deals. Prolonged negotiations or sluggish responses during diligence can sap momentum and lead parties to lose interest. Setting realistic timelines and communicating clearly about responsibilities and deadlines can keep transactions on track.

Litigation funding has become a fixture in modern civil justice systems, designed to open the courts to claimants who lack the means to pursue meritorious claims. But a recent opinion piece by Labour MP Oliver Ryan argues that in the UK, the industry is increasingly drifting from that core purpose and instead serving the financial interests of investors and funders at the expense of real victims.

An article in City A.M. states that while third-party litigation funding has a legitimate role in enabling access to justice, market incentives are now skewing the system. Ryan highlights examples including the UK government’s move to “protect litigation funding” and reverse the Paccar ruling—a Supreme Court decision that had cast doubt on traditional fee structures—arguing that policy solutions must reflect how the market actually operates on the ground, not just how policymakers hope it will.

Ryan points to the handling of the Post Office scandal as a stark case in point. Despite grievous harms suffered by sub-postmasters, he notes that approximately 80 percent of damages paid eventually flowed to funders and lawyers rather than victims—an outcome he says “cannot be right.” He also cites the collapse of a cavity insulation claim and management upheavals in a multi-billion-pound class action against BHP as examples of how funder-centric incentives can undermine claimant outcomes and system integrity.

Rather than calling for an end to litigation funding, Ryan urges reforms centered on capping excessive funder returns, enforcing capital adequacy protections for claimants, tightening marketing oversight, and rebalancing incentives so victims—not investors—are the primary beneficiaries of successful claims.