
Operating Costs inherent in the Commercial Litigation Finance Asset Class (Part 2 of 2)
The following article is part of an ongoing column titled ‘Investor Insights.’ Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance. EXECUTIVE SUMMARY
INVESTOR INSIGHTS
Investor Insights Any fund operating model needs to be designed taking into consideration all of the operating costs inherent in the manager’s operational model in the context of expected returns and timing thereof. Investors care about being treated fairly, sharing risk and sharing the upside performance in order to foster long-term relationships that reflect positively on their organizations’ ability to perpetuate returns. Professional investors rely on data to make decisions, and in the absence of data which might get them comfortable with a manager’s performance, they will default to mitigating risk. Tail risk in this asset class is not insignificant, which makes investing that much more difficult. A performing manager that does a good job of sharing risk and reward with investors will have created a sustainable fund management business that will ultimately create equity value for its shareholders beyond the gains inherent in its performance fees.
Edward Truant is the founder of Slingshot Capital Inc., and an investor in the litigation finance industry (consumer and commercial). Ed is currently designing a new fund focused on institutional investors who are seeking to make allocations to the commercial litigation finance asset class.
- Article draws comparisons between commercial litigation finance and private equity (leverage buy-out) asset classes
- Similarities and differences exist between private equity and litigation finance operating costs, but there are some significant jurisdictional differences to consider
- Value creation is front-end loaded in litigation finance vs. back-end loaded in private equity
- Litigation finance can be a difficult investment to scale while ensuring the benefits of portfolio theory

- The ‘2 and 20’ model is an appropriate baseline to apply to litigation finance, but investors need to understand the potential for misalignment of interests
- As with most asset classes, scale plays an important role in fund operating costs
- Deployment risk and tail risk are not insignificant in this asset class
- Investor should be aware of potential differences in the reconciliation of gross case returns to net fund returns
- Up-front management fees may have implications for long-term manager solvency

