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Managing Duration Risk in Litigation Finance (Pt. 1 of 2)

January 10, 2024

Managing Duration Risk in Litigation Finance (Pt. 1 of 2)

The following is the first of a two-part series, contributed by Ed Truant, founder of Slingshot Capital, Executive Summary
  • Duration risk is one of the top risks in litigation finance
  • Duration is impossible to determine, even for litigation experts
  • Risk management tools are available and investors should make themselves aware of the tools and their costs prior to making their first investment
  • Diversification is critical in litigation finance
Slingshot Insights:
  • Duration management begins prior to making an investment by determining which areas of litigation finance have attractive duration risks
  • Avoidance can be more powerful than management when it comes to duration in litigation finance
  • There is likely a correlation between duration risk and binary risk (i.e. the longer a case proceeds, the higher the likelihood of binary risk associated with a judicial/arbitral outcome)
When you are speaking to an institutional investor about litigation, it doesn’t take long until the concept of “duration risk” enters the discussion.  Everyone seems to have a story about that one piece of patent litigation or commercial dispute that went on for over a decade that seems to have marked them for life even though they weren’t in any way involved. Yet, it’s a real risk.  Thankfully, it’s not a real risk for a well-constructed portfolio of different case types in different jurisdictions, which is one of the reasons that prompted me to raise a commercial litigation finance fund-of-funds in 2016 – it will ultimately serve as a very good proxy or index for how the industry performs. The whole concept of duration risk is critically important for investors in legal finance to understand, including ways in which duration risk can be managed in this specialized asset class. Private alternative asset classes, such as litigation finance, always need to deal with duration as part of their fundraising pitch to investors as the investments are inherently illiquid investments.  This means that in order for investors to obtain their liquidity, their needs to be a mechanism to allow for that to happen.  Within most private equity sub-classes (venture capital, growth equity, leveraged buy-out, real estate, etc.) the exit is typically a sale of the business.  An argument is often made that there is always a clearing price for any private company and the path to liquidity is generally through an investment bank or intermediary that canvasses the market to search for the best price for that asset at any given point in time.  However, with litigation finance, the pool of capital providers is relatively small, the complexity is very high and the nascency of the market means that beyond the settlement of the case (either through negotiation or a court/arbitral decision) there are not many options. But that is changing… Duration Risk Let’s start by defining duration risk for purposes of litigation finance investing, as the risk that the time horizon of a given investment is different than that which was originally underwritten without a commensurate increase in economics. Most Litigation Funding Agreements (or “LFA”s) have provisions to deal with duration risk such that the negotiated economics increase as time progresses, but often this ultimately gets capped as the claimant is concerned that the funder can end up with the lion’s share of the settlement amount.  Similarly, the funder does not want to put itself in a position where the claimant is not participating in the economic outcome of the claim, otherwise the claimant is wasting their time and effort (and stress). The two opposing forces work to keep each other “in check”. And while the LFA is typically structured to mitigate this risk, there is the potential that the case simply takes much longer than originally thought and investors want to get their money back to redeploy into another, perhaps slightly more liquid, investment.  And this is where many investors, individual and institutional, who poured into the space since 2015 find themselves today. Now, the duration risk inherent in commercial litigation is not to suggest they will rival Myra Clark Gaines (the longest-running civil lawsuit in the US at 57 years), but the difference between 5 years and 10 years can make a meaningful difference to an investor’s return profile if the economic benefits are not commensurate with the timeline extension.  While many funders quote an average hold period of 30+- months, one needs to be careful of the use of averages in litigation finance.  Many of those averages have been derived from the average length of settled cases only, which inherently ignore the duration of the unsettled cases, which is obviously not reflective of reality. Since there are very few fully realized funds in existence globally, it is difficult to determine an actual industry average for litigation finance but I would confidently say that the average will in fact be greater than the 30-month time period often quoted.  The other thing to consider is that any average should be weighted based on dollars invested to ensure that the early settlements, which by definition would likely have fewer invested dollars, do not contribute disproportionately to the average.  The reality is that funders rely on the relatively early case wins to produce strong IRRs (albeit lower MOICs) in order to offset the IRR drag of those cases that are not successful and that exceed the average duration. If we look at a case where the LFA calls for 3X multiple (200% return on investment) during the 3-year period and a 5X multiple (400% return on investment) thereafter, then the IRRs would look as follows for different durations:
Original InvestmentProceeds ReceivedDurationInternal Rate of Return
100300344%
100500538%
100500822%
1005001020%
The first two data points illustrate that where the cap on the proceeds move in lock-step with timing, it has little effect on IRRs. However, the last three data points illustrate the punitive impact that duration has on internal rates of return. When duration moves from 5 to 10 years for a fixed outcome the internal rate of return decreases by approximately half. In addition to the duration necessary to get to a decision (after the potential for an appeal), you may then get caught up in additional enforcement and collection timelines which could add years and additional investment to the original investment proposition.  A good example of this is the “Petersen” & “Eton Park” claims that Burford invested in involving a claimant that is fighting Argentina & YPF over the privatization of energy assets without due compensation. The Implications of Time on the Value of Litigation  In a prior article written about the value of litigation, I describe how a piece of pre-settlement litigation starts off at the risky end of the spectrum due to a lack of information about the various parties’ positions, it then starts to de-risk as each side goes through discovery (approaching the optimal zone of resolution) and then the it starts to re-risk as each side becomes entrenched in their positions and pushes on to a third party decision.  This then leads to a bifurcation in value because the more the outcome of a case is dependent on the outcome of a disinterested third party (a judge, jury or arbitral panel) the more binary the outcome becomes as displayed in the chart below. This of course begs the question, if the timeline of a lawsuit extends beyond its original timeline, what does this say about the value of the case itself? Is it that the case is seen as a win by both sides and therefore each side ‘digs in’ to ensure the other side loses (hence a more binary outcome), or is this just a reflection of healthy sparring between parties to delay the inevitable and increase the friction costs to force the claimant to drop its case? Sadly, because every case has its idiosyncrasies and different personalities involved, we will never know the answer.  But what we do know is that any case that does get decided by a third party results in a binary outcome and as an investor “binary” doesn’t make for a good night’s sleep. I have written about this issue in an article about secondary investing, and in that article I make the argument that secondaries, if not valued properly, likely have a higher risk profile then the rest of the portfolio in which they reside because they are moving into the re-risk zone which inherently has a higher level of binary risk attached thereto.  I think this is important for investors to understand because it suggests that if you are concerned about duration in a litigation finance investment, it is probably (although not always) in your best interest to get out earlier than later.  Of course, the counter-argument is that the longer the case has elapsed the more you know about its merits and how the other side has conducted itself during the case and so your case may in fact be less risky than when it started. However, in these cases you are going to be asking the secondary investor for a premium to reflect that fact and that means you need to convince them of the merits, the likely duration and any credit/collection risks, which is a difficult task by any measure. We must also not lose sight of the fact that the longer a case proceeds, depending on the size and financial capacity of the defendant, the risk of collection may increase due to the financial condition of the defendant especially those with multiple lawsuits or those whose fortunes (profits and cashflow) are tied to more cyclical industries.  What looked like a good credit risk five years ago when the case commenced may look very different coming out of a recession or a commodity cycle.  Similarly, if the plaintiff is not of sound financial condition, the risk that the plaintiff runs out of money or interest in pursuing the case is also a risk that you are implicitly assuming. Given that the secondary industry is in its infancy and there is very little in terms of empirical results on secondaries, it remains to be seen how secondary portfolios will perform but if I were an investor in the sector I would go in with ‘eyes wide open’ and a deep value mindset.  The reality of most litigation finance is that the economic benefits tend to be somewhat capped, and so whatever premium is paid on a secondary, it means it reduces the overall economics available to the secondary investor. Dissimilar to private equity where a secondary investor can still benefit from growth in the value of the underlying company it acquires, the same does not generally hold for litigation finance investments and in fact the risk is to the downside with most LFAs. In the second article of this two-part series, we will look at the various ways in which investors can manage duration risk, both before they start investing and after they have invested. Slingshot Insights Duration management in litigation finance is almost as critical as manager selection and case selection.  I believe duration management starts prior to making any investments by pairing your investment strategy and its inherent duration expectations with the duration characteristics of your investments.  From there, you should ensure your portfolio is diversified and you should be actively assessing duration and liquidity throughout your hold period.  You should also assess the various tools available to you both on entry and along the hold period to determine your optimum exit point. As always, I welcome your comments and counterpoints to those raised in this article.  Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry.  Slingshot Capital inc. is involved in the origination and design of unique opportunities in legal finance markets, globally, advising and investing with and alongside institutional investors.

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Commercial

Third-Party Funding Reshapes Post-M&A Arbitration in Spain

By John Freund |

Third-party funding is increasingly shaping the strategic landscape of post-M&A arbitration, according to discussions at the OPEN de Arbitraje 2026 conference held in Madrid. Practitioners and arbitrators examined how external capital is altering the calculus for claimants pursuing disputes that arise from share purchase agreements, earn-out clauses, and post-closing indemnity claims.

As reported by Iberian Lawyer, panelists framed third-party funding as a viable alternative for parties navigating the often-protracted and capital-intensive nature of M&A arbitrations. The discussion emphasized that funding agreements are no longer reserved for distressed claimants but are increasingly deployed by well-capitalized parties seeking to manage risk, free up balance sheet capacity, or align outside investors with the success of a claim.

Spain has emerged as one of Europe's more receptive jurisdictions for funded arbitration, with both the Spanish Court of Arbitration and the Madrid International Arbitration Center requiring disclosure of third-party funding arrangements. That regulatory clarity has helped institutional funders deepen their involvement in the Iberian market while giving counterparties greater visibility into the financing of claims.

The panel highlighted that post-M&A arbitration presents particular structural features that make funding attractive: claims tend to be discrete, liability-driven, and supported by extensive transactional documentation, all of which improve underwriting predictability. As funders refine their models for valuing M&A disputes, the conference signaled that capital is poised to play a more visible role in shaping which claims are pursued and how they are resolved.

Commercial

Funded Class Action Delivers NZ$125 Million Win Against ANZ in New Zealand High Court

By John Freund |

Litigation funding played a decisive role in a landmark New Zealand High Court ruling that has left ANZ Bank New Zealand facing potential liability of up to NZ$125 million. The class action, brought on behalf of approximately 17,000 borrowers, would not have been viable without backing from funders LPF Group and CASL, which financed the proceedings against the country's largest bank.

As reported by LawFuel, Justice Geoffrey Venning delivered summary judgment against ANZ on May 4, 2026, finding the bank in breach of disclosure obligations under the Credit Contracts and Consumer Finance Act 2003 (CCCFA). The case turned on a coding error in ANZ's loan systems that affected variation letters issued between June 2015 and May 2016. Although the bank argued the underpayments averaged just NZ$2 per customer per month, the court held that "technical errors in disclosure, no matter how small the financial impact, trigger automatic statutory penalties."

ANZ was ordered to refund the lead plaintiffs NZ$32,728.42, establishing a benchmark that, when extrapolated across the class, produces the NZ$125 million exposure figure. The judgment rejected ANZ's "no harm" defense, confirming that Section 22 of the CCCFA imposes strict liability regardless of actual financial harm.

ANZ chief executive Antonia Watson described the consequences as "disproportionate." The bank reported after-tax New Zealand profit of roughly NZ$1.4 billion last year. The decision underscores how funded class actions are reshaping consumer redress in jurisdictions where individual claims would be uneconomic to pursue.

Commercial

EU Court of Justice to Weigh Litigation Funding’s Impact on Antitrust Enforcement

By John Freund |

The Court of Justice of the European Union is set to examine whether certain forms of litigation financing risk undermining the effectiveness of the bloc's antitrust laws, in a referral that could reshape the funding landscape for cross-border consumer class actions. The case originates from Portugal and centers on the funding arrangements supporting Ius Omnibus, a non-profit consumer protection association that has emerged as a prominent claimant in European competition litigation.

As reported by MLex, the CJEU will determine whether class actions backed by particular funding structures pose a risk to the public-interest objectives of EU antitrust enforcement. The referral asks the court to assess whether economic incentives embedded in third-party funding can coexist with the bloc's competition rules or whether they create conflicts that compromise enforcement quality.

The decision is expected to carry significant implications for consumer associations and class representatives across Europe, many of which rely on outside capital to pursue mass claims against companies accused of anticompetitive conduct. A ruling that restricts certain funding models could narrow the financial pathways available to non-profit claimants, while a ruling that affirms flexible structures would reinforce that alternative finance is compatible with robust enforcement.

The case arrives as European policymakers continue to debate the boundaries of permissible litigation funding under the Representative Actions Directive and as national courts in Germany, the Netherlands, and Portugal develop divergent approaches to funder disclosure and control. The CJEU's eventual judgment is poised to set a binding precedent across all 27 member states.