What is a better investment, Commercial or Consumer Legal Funding? (1 of2)

Executive Summary

  • Consumer legal funding is a much more consistent and predictable asset class
  • Headline risks, while real in the earlier days of the industry’s evolution, are now consistent with more mature consumer finance asset classes
  • Consumer legal funding has a strong ESG component through the social benefits provided to the segment of society that relies on it the most

Slingshot Insights:

  • On a risk-adjusted basis, factoring in volatility and predictability of returns, the pre-settlement advance industry outperforms the commercial legal finance industry
  • Duration predictability, return rates and loss rates are the main factors for out-performance
  • Investors would be mistaken to overlook the consumer legal finance market in assessing various non-correlated investment asset classes
  • As with any asset class, manager selection is critical to investment success

As an investor and institutional advisor in the legal finance market, I am always searching for the best risk-adjusted returns I can find, constantly weighing the pros and cons of each subsegment within the legal finance sector and comparing those to other investment markets (private equity, private credit, other liquid or private alternatives, public markets, etc.).  For the purpose of this article, I am mainly drawing comparisons between the commercial litigation finance market and the consumer legal funding market, but readers should be aware that there are a myriad of different sub-segments in both commercial and consumer legal finance markets, each of which have their own unique risk/reward characteristics. As such, the conclusions drawn herein may not be appropriate for other segments of the consumer or commercial legal funding markets and are mainly in relation to the US PSA market.

One of my earliest investments in the legal finance market was in consumer legal funding, specifically the Pre-Settlement Advance (“PSA”) or Pre-Settlement Loan (“PSL”) market, the difference being predicated on whether the investment is non-recourse or recourse, respectively.

The consumer legal funding market is actually broader than just the PSA market, as the graphic below depicts, but PSA continues to represent the lion’s share of the consumer segment.  The medical lien or receivable segment of consumer is closely associated with the PSA market as it is derived from the same accidents that give rise to many of the PSA claims, making both markets symbiotic, albeit very different in nature.  Many of the other consumer segments are much earlier-stage in their evolution and have not achieved nearly the same critical mass as PSA, nonetheless, it is important to keep an eye on these sectors.

Topology of Consumer Legal Finance

The reason I decided to invest in the PSA market was first and foremost because I found an operating business and management team that I thought had their ethical compass pointed to true north. Secondly, I was able to satisfy myself that the consumers and law firms who relied on this source of financing viewed the business as being a strong, well-respected operator, buttressed by the fact that the business was over five times the size of the next largest competitor, and had achieved its growth organically (i.e. no acquisitions). Their low loss rates (<2%) also signaled that management performed well as underwriters and active managers of the portfolio.

Despite the strength of the specific manager in which I ultimately invested, one of my hesitations to investing in the market was derived from some negative articles about competitors, and rumours of a number of nefarious players that were charging exorbitant rates of interest.  In addition, many of the institutions with which I interface were constantly referencing the headline risk of the market. Accordingly, before I invested, I took a deeper dive into the industry with a focus on the following risk factors to satisfy myself that there was nothing significant that would impact the outcome of my investment and my ability to exit my position when the time was right.

Headline Risk 

One of the first risks that comes up as you speak to institutions, which generally shy away from consumer legal finance, is the concept of “headline risk”. Headline risk is simply the risk associated with the investors’ brand being tarnished as a result of their portfolio companies’ names being involved in negative press associated either with the industry or the portfolio companies’ customers or regulators.  Institutional investors hate headline risk because it may reflect badly on their own brand, and can cause their investors to call into question their judgment, and taken to the extreme, it could end their investor relationships along with the associated fee revenue. Accordingly, in their minds, nothing good comes from headline risk and so they avoid it like the plague.

But every investment has some headline risk, so it becomes a question of severity. To understand the severity of headline risk in the PSA market, it is first important to understand how the market has evolved.  The PSA market really started in the 90s in reaction to a need in the marketplace for funding. The reality for many Americans (generally of a lower socio-economic status) at that time, and arguably today as well, is that if they are in a car accident (the typical scenario), they are left to their own devices to deal with the economic fallout and in collecting from insurance companies.  Insurance companies are generally not the best businesses to negotiate with due to their economic advantages.  In short, insurers have time, money and lawyers on their side. All of which the typical injured party does not have.  Without financial support, these injured parties were really at the mercy of the insurance industry.

The thing about the insurance industry is that they have a strong economic motivation to deny claims and settle for as little as possible, which is the polar opposite to the underlying purpose of insurance.  To offset this strong economic motivation, insurers are also motivated by being compliant with their state regulators and they are ultimately reliant on recurring revenue through their brand and their reputations in the market. Unfortunately, not many consumers actually diligence their insurance companies when they buy insurance; they simply go for the ‘best price’. The consequence of selecting ‘best price’ is that this leaves the insurance company with less return with which to settle your claim, which ultimately damages the consumer’s ability to collect on their insurance.  So, without the ability to have proper legal representation and recognizing that the accident may have compromised the injured party’s livelihood (health, income, medical expenses, etc.), the injured party is left in a position to accept whatever the insurance company offered and move on with their lives regardless of how painful that was.

Enter the funders….

Many of the funders became aware of this inherent inequity in the market through the legions of personal injury lawyers that operate in the US.  These lawyers have a front row seat to exactly what is happening in the personal injury market and the extent to which the injured party is taken advantage of by the insurer, or the extent to which the injured party is settling prematurely due to their economic circumstances.  The entire funder market really started with lawyers providing these loans to other lawyers’ clients, and then evolved into a business as entrepreneurs recognized the total addressable market and the opportunity set …. and this is when the problems started.

In the early days of any industry, the opportunity looks so promising that it attracts those that are myopic in their perspective, and they want to make as much profit as they can in as little time as they can.  This is especially true for financial markets that interface with the consumer – payday loans, subprime auto, second and third mortgages, etc.  PSA is no different in that it is a financing solution that pertains to the consumer, although it has a distinct difference from most other financing solutions in that it is non-recourse in nature.  In the case of the PSA market, the consumer is typically in a difficult situation and traditional lenders will not provide financing because of the poor risk of the plaintiff (other than perhaps credit cards, if available), whether due to their past credit history or due to the economic consequences of the injury they sustained.

Where you have a financing solution facing a consumer that usually has no other alternatives, you will tend to find abuse, and this is exactly what happened in the early days of the industry.  Many studies have been undertaken that showed effective internal rates of returns, between interest rates and fees, of 40-80% and sometimes even higher.  In essence, this was a consequence of a relatively small number of highly entrepreneurial funders that were trying to maximize their returns while providing a service to the market.  The problem with this is threefold: (i) it leaves a ‘bad taste in the mouths’ of consumers because they feel they are not being treated fairly and that they have been abused no worse than the abuse they are trying to avoid from the insurance companies, (ii)  these same consumers that feel they have been abused will run to their local newspapers (or online outlets) to ‘out’ the bad behaviour of the funder, and hence create the dreaded ‘headline risk’, and (iii) the same consumers may start to approach their elected representatives about their bad experiences which gives rise to regulatory risk. And this is exactly what happened.

Here comes regulation … and the market starts to bifurcate….

Recognizing that the behaviour described above is not good for business and is not good for the reputation of the industry, certain individuals in the industry decided to organize and ultimately created two associations, (i) the Alliance for Responsible Consumer Legal Funding (ARC) and (ii) the American Legal Finance Association (ALFA).  The genesis of these associations was to protect the consumer from nefarious funders through education, to protect the industry through self-regulation and to protect the industry from the opposition (mainly the insurance companies who stood to lose from the solutions provided by the PSA).  Accordingly, over the course of the following years, lobby efforts were organized, educational materials were provided to the consumer, consumer testimonials were created, and standards were created for the benefit of the consumer and thereby for the benefit of the industry.

The industry itself is not opposed to regulation, per se; in fact, regulation could be the best thing that ever happened to the industry, if implemented correctly. The industry needed a voice in the conversation to ensure regulation was not driven solely by insurance lobbyists, which are very active in the PSA regulatory conversation, but intended for the protection of consumers and for the protection of the industry – the two parties who stand to benefit the most from a healthy industry.

In some cases this has worked out well and in some case regulation has served to effectively destroy the industry in specific states, because the regulations made it uneconomic to run businesses profitably and in a way that provides an appropriate risk adjusted return for investors. The hyperlinked article above relates to regulation passed in the state of West Virginia that capped the rates of interest at 18% (no compounding allowed), which are below typical credit card rates of interest.  Arkansas has similarly capped rates at 17%.  This was done under the guise of protecting the consumer, but the PSA market no longer exists in the state of West Virginia, and so I am left scratching my head as to how regulation has helped protect the consumer when it has destroyed the economics of the industry which represents the sole solution to the problem.  In fact, what it does is protect the insurance industry, and I’m willing to bet the insurance lobby was hard at work behind the scenes crafting the bill.  The article references that 10% of all funding investments result in a nil outcome for the funder as the cases are either dismissed or lost at trial. While 10% strikes me as being quite high (although the extensive study cited below references a 12% default rate for one funder), it may result from frivolous cases being brought in the first place, something funding underwriters strive to avoid because it impacts their returns. In addition, there is anecdotal evidence that funders get less than contracted amounts in 30-40% of cases, similar to what was found in the Avraham/Sebok study referenced below.

Even at half the default rates, a 5% loss of principal (not including the associated lost accumulated interest) off of an 18% return profile results in a 13% gross return after losses, factor in a conservative 10% cost of capital (15% is not out of norms for smaller funders with less diversified portfolios) and the funder has 3% to both run their business and produce a profit for shareholders. Needless to say, the funding market did not find that attractive and left both the market and the consumer ‘high and dry’ which then allows the insurers to swoop in and keep abusing the consumer by delaying and denying payments. Not exactly what we pay our (handsomely, taxpayer compensated) elected representatives to do, is it?

As the industry started to self-regulate and individual states started to proactively regulate, the early movers in the industry began to find that the easy money was slowly disappearing, and either exited the industry or had tarnished their own brands’ reputations. In essence, the industry bifurcated into what I will refer to as the “Professionals” and the “Entrepreneurs”, like many industries before it.  The Entrepreneurs went on with a ‘business as usual’ attitude and likely were unable to significantly scale their businesses due to reputational issues, but were still able to provide sufficient returns to merit continuing their businesses, along with the occasional headline.

The Professionals embraced and pushed for self-regulation and a seat at the table where individual states were considering regulation. They further started to professionalize their own organizations by embracing industry standards from the associations, embracing best practices and policies to govern their own operations, and by increasing the level of transparency with consumers.

Having built a reputable organization with a strong foundation, these businesses then started focusing on scaling to attract a lower cost of capital where they can then re-invest the incremental profits into their businesses and lower costs to the consumer, either as a result of the benefits of economies of scale, competition or regulation, and thereby become more competitive.  Today, some of the larger competitors in the industry have portfolios of hundreds of million of dollars of fundings outstanding, they are attracting private equity capital, and they are raising capital from the securitization markets, which are typically the domain of very conservative institutional investors.

These efforts to become more institutional have served them well in terms of increasing their scale, and hence increasing their marginal profitability, lowering their cost of funds to benefit both their operating margins and the cost to the consumer.  In doing so, they have effectively broadened the investor base for their operating platforms and the value of their enterprises because they have shed the negative stigma associated with the early days of the industry. Today, these enterprises are highly sophisticated organizations that understand at a deep level how to effectively & efficiently originate, underwrite and finance their businesses to provide a competitive product in the face of a regulating industry. This positions them well long-term, while the Entrepreneurial operators become more marginalized, from a consumer perspective, a commercial perspective and a capital perspective.

In part 2 of this article, I will discuss the underlying economics of the pre-settlement advance subsegment, the status of regulation and some thoughts on how the market continues to evolve and why institutional investors are increasingly getting involved.

Slingshot Insights 

I have often wondered why institutional investors quickly dismissed the consumer legal finance asset class solely due to headline and regulatory risk.  I came to the conclusion that the benefits of diversification are significant in legal finance, and so this factor alone makes consumer legal finance very attractive.  Digging beneath the surface you will find an industry that is predicated on social justice (hence, strong ESG characteristics), and while there has and continues to be some bad actors in the industry, there has been a clear bifurcation in the market with the ‘best-in-class’ performers having achieved a level of sophistication and size that has garnered interest from institutional capital as evidenced by the large number of securitizations that have taken place over the last few years (7 by US Claims alone).  This market has yet to experience significant consolidation, and recent interest rate increases have likely had a negative impact on smaller funders’ earnings and cashflow, which may present an impetus to accelerate consolidation in the sector.

As always, I welcome your comments and counter-points to those raised in this article.

 Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial legal finance industry.  Slingshot Capital inc. is involved in the origination and design of unique opportunities in legal finance markets, globally, investing with and alongside institutional investors.

Disclosure: An entity controlled by the author is an investor in the consumer legal finance sector.

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Legal-Bay Launches INSTALL Funding: Monthly Financial Relief for Plaintiffs Awaiting Settlement

By Harry Moran |

Legal-Bay, a leading pre-settlement funding company, has introduced a game-changing financial solution for plaintiffs embroiled in active litigation. Their newly launched INSTALL funding contract offers clients the ability to receive structured monthly payments instead of a traditional one-time advance, easing the burden of everyday living expenses during the often lengthy legal process.

This innovative funding option addresses a growing need among plaintiffs who face significant financial strain while their cases are pending. With INSTALL funding, individuals can rely on predictable monthly disbursements designed to cover essential costs such as legal fees, medical bills, and everyday housing expenses, allowing them to focus on their case without the added pressure of missed bills or mounting debt.

Chris Janish, CEO of Legal-Bay, says, "Legal battles can be incredibly stressful, especially when they drag on for months or even years. We created INSTALL funding to provide ongoing financial stability for our customers when they need it the most, when they are stuck at home and can't work, but still need to have their bills paid on the first of the month."

INSTALL funding is one of Legal-Bay's most popular products, because lawyers know their clients cannot fight a case without cash flow coming in each month.

So, if you are a lawyer and have a client—or If you're a plaintiff yourself—in an existing lawsuit who needs an immediate INSTALL funding contract against an anticipated cash settlement award, you can apply HERE or call: 877.571.0405

Unlike standard bank loans which often involve large lump sums and steep repayment terms, INSTALL funding is tailored to meet real-life needs. Clients only draw what they require each month, which can significantly lower the total repayment after a case is settled. This targeted approach helps prevent excessive borrowing and encourages responsible financial planning throughout the litigation process.

By providing installation-based funding with client-friendly terms, Legal-Bay offers clear, flexible solutions to their customers' financial needs. The program is ideal for individuals involved in personal injury, slip and fall, medical malpractice, motor vehicle accident, Workers Comp. or 3rd party workers comp. claims or work injury claims, and many other types of cases.

Legal-Bay is one of the best legal funding companies in the industry, known for their helpful staff and quick turnaround. While sometimes pre-settlement funds are referred to as loans on lawsuit or lawsuit loans, there are no credit checks or collateral required for legal funding. The money is an immediate cash advance against a plaintiff's anticipated settlement award, not a conventional loan. The non-recourse lawsuit funding is risk-free, as the money doesn't need to be repaid should the recipient lose their case.

To apply right now, please visit the company's website HERE or call toll-free at: 877.571.0405 where agents are standing by to answer your questions.

Consumer Pre-Settlement Litigation Funding: An Emerging Asset Class 

By Joel Magerman |

The following was contributed by Joel Magerman, Managing Partner of Bryant Park Capital, a leading investment bank specializing in litigation finance, with over 35 completed transactions totaling more than $2.4 billion in this sector alone.

Executive Summary: 

  • Third-party funding for consumer litigants has been a growing industry in the U.S. since the 1980s.  
  • The need for third-party litigation funding emerged because banks do not typically provide advances to litigants whose only collateral is potential proceeds from lawsuits. 
  • Today, there are over two hundred companies providing pre-settlement and medical lien litigation funding to individual claimants. 
  • Over the past 25 years, consumer litigation finance has matured into an investment grade asset, with over 25 separate securitizations representing over $2.7 billion of invested capital since 2018. 

Why the need for litigation funding? Insurance companies have found that a plaintiff’s need for a financial settlement is often a driving force in settling a case for a lower amount than if the case runs its course to a hearing. Litigation financing provides equal footing to a plaintiff to pursue claims due to an injury they have incurred due to another party’s actions or negligence.

A recipient of litigation funding benefits from certainty and speed of funding, and the fact that the funding is non-recourse. For the attorney representing the client, litigation funding allows the legal process to play out and maximize the plaintiff’s settlement while providing some financial relief until a settlement is finalized. At the same time, third-party litigation funders see the potential upside in underwriting pending lawsuits and earning a return on non-recourse advances. Generally, third-party litigation funders have no control over the litigation they fund, allowing the plaintiff and their legal counsel to decide their legal strategy. 

Medical lien funding, which is closely related to consumer pre-settlement funding, provides funding to providers of medical services (imaging, doctors visits, physical therapy, surgery, etc.) to these same plaintiffs who cannot pay the medical provider until a claim is adjudicated and paid. Funding these liens is effectuated by buying the lien or the LOP (Letter of Protection) from the medical provider, depending upon state statutes.  

General Industry Data (Pre-Settlement Litigation Funding) 

  • Funding amount as percentage of expected case value: ~10-15% 
  • Typical funding size: $1,000-$50,000 
  • Asset-level IRR for the funder: typically 25-35%  
  • Multiple on invested capital: 1.4-2.0x 
  • Weighted average life: 1-3 years 
  • Application time to funding: typically a couple of days 
  • Number of market funders: 200+ 
  • Non-recourse to the plaintiff  

An Emerging Asset Class 

In recent years, consumer litigation financing has become more attractive to investors due to rising inflation, increasing interest rates, and volatility of many other classes of investments. The consistent robust returns that are uncorrelated with the economy make litigation funding attractive. Alternative lenders and multi-strategy funds have invested in litigation finance, with U.S. funders categorized into dedicated funders (specialize in litigation finance), multi-strategy funders (entities that have established a dedicated litigation finance strategy), and ad hoc funders (occasional participants in litigation finance). These investors have increasingly diversified their investments, by allocating funds to multi-claim portfolios and making fewer single-case investments. 

 Institutional investors have continued to enter the litigation funding industry, both through directly funding litigation and through providing billions of dollars of financing to litigation funding companies. There have been approximately $2.7 billion of securitizations of consumer pre-settlement assets since 2018, plus billions of dollars of advances to market participants from credit opportunity and hedge funds, as well as private equity firms such as Blackstone, Parthenon, Further Global, Edmond De Rothschild, and UBS. We expect that the investor sentiment of diversifying into litigation finance will continue in coming years. 

Learn More 

To uncover additional industry and investment insights, download the full BPC Litigation Finance Industry Primer. 

Florida Funder Targeted by Class Action over Data Breach

By Harry Moran |

Whilst funders are often eager to support class actions on behalf of customers who have been harmed by cybersecurity attacks on other companies, a new complaint filed in Florida seeks to represent individuals who suffered losses because of a funder’s own data breach.

Reporting by Insurance Journal covers a class action that has been filed targeting litigation funder US Claims Capital over allegations that it failed to protect its clients’ personal data. The filing of the claim in the U.S. District Court in Miami follows a data breach in January of this year, with the plaintiff alleging that the funder had not implemented sufficient cybersecurity measures and therefore had not properly secured the personal data of the plaintiffs it had provided funding to.

The lead plaintiff in the lawsuit is a Kansas resident named as Timothy Vactor, with the complaint looking to represent other plaintiffs and clients of US Claims whose personal data was exposed as part of the cyberattack. The filing argued that due to the breach, the plaintiffs’ “private information is forever exposed and unsecure”, and that the “exposure of one’s private information to cybercriminals is a bell that cannot be un-rung”.

The funder had reportedly informed plaintiffs it had worked with of the data breach in a letter sent on April 11, over three months after the cyberattack on January 7. The letter informed US Claims’ clients that “certain information related to you may have been acquired by an unauthorized individual as part of the event”. The funder subsequently provided these individuals with an insurance policy in case they had suffered financial losses, as well as some assistance around identity theft protection and cyber monitoring.

At the time of reporting, US Claims has not filed a response to the complaint.