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What is a better investment, Commercial or Consumer Legal Funding? (2 of 2)

By John Freund |

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

In part 1 of this article, I provided some background on the consumer litigation finance market, with a focus on the pre-settlement advances sub-sector which is the largest segment of the consumer legal finance market.  Part I also discussed how the market has regulated, evolved and bifurcated.

In the second part of this two part series, I 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.

Underlying Economics

One of the first research reports that attracted me to the PSA market was a 2018 study that was undertaken by Professors Ronen Avraham and Anthony Sebok entitled “An Empirical Investigation of Third Party Consumer Litigant Funding”.  It was the first large scale empirical study of consumer legal funding in the United States which analyzed over 100,000 funding requests over a 12-year period provided by one of the largest consumer legal funders in the US.  While the analysis was inherently skewed because it came from a single funder, the large size of the data set is likely representative of the broader market, and hence many of the insights highlighted by the authors are likely true of the broader market to one degree or another, with certain insights being specific to the funder and its approach.

Without going into the details of the report (see highlights below), suffice it to say the report demystified much of the industry and debunked many of the criticisms that were levelled at the industry by naysayers and those with an economic incentive to ensure the industry was not successful. Perhaps “lying” is a bit harsh, but there were certainly many distortions being promulgated about the industry that were neither present in the data nor a reflection of the specific funder’s business.


On the plus side, the research discovered that while loss rates were relatively high at 12% (again, possibly a consequence of the risk & return threshold of this particular funder) there were numerous instances of the funder taking “hair cuts” (i.e. reducing their accepted returns to below contracted levels) for the benefit of the consumer.  In other words, the funders ‘have a heart’ and will proactively reduce their return expectations to leave the injured party in a position that is more equitable than if they stuck to their contracted terms.  On the negative side, the net return profile was 44% per annum, which suggests that even after losses and “hair cuts” this is an expensive form of financing. Keep in mind, this study was over a 12-year period prior to 2018, and the rates today are likely not as high as they were in the beginning of the industry due to competition and regulation.

A second explanation for the relatively high rates is that depending on the funder’s risk profile, the funder may be willing to take on more risk (i.e. accept more losses) than another funder in return for a higher rate of interest. Whereas another funder may be more conservative and have stricter underwriting standards, accepting fewer cases and lower loss rates, but also charging lower rates of return. Also keep in mind that given how litigious a society the US has become, we must appreciate that inherent in the personal injury system is a higher level of frivolous claims than you might fund in other jurisdictions which could also explain a higher loss rate.

For me, this report legitimized (i) the need for, and societal benefits of, this form of financing, (ii) the size of the total addressable market, and (iii) that the competitors in this market (while likely earning an oversized return in the early days of the industry) were flexible with consumers and willing to forego returns to make the outcome fair for all interested parties.

In other words, it appeared the market was functioning similar to other consumer-facing finance markets.

Benefits of Diversification, Loss Rates & Durational Certainty

As I looked at the PSA market, I looked at it through the lens of both the private equity market and the commercial legal finance (CLF) market, and there a few notable differences that make this a more attractive market than commercial legal finance.  First, the portfolios inherent in many funders’ businesses are highly diversified.  With an average financing size of $3,000, there are hundreds to thousands of claims in any given portfolio.  With diversification comes stability, and with the inherent low overall loss rates comes a predictability of returns – all music to the ears of an investor.

The one significant problem that appears to be persistent in the commercial legal finance market is the prevalence of overly concentrated portfolios and high concentration limits within fund documents. The consequence of high concentration is high volatility, and that is exactly what is present in most CLF portfolios, hence the increasing need to apply expensive insurance.  The other issue for most CLF investments is uncertainty about duration. The personal injury legal market is fairly predictable from a timing perspective, and because the financing is interest rate based (as opposed to tied to a fixed multiple of capital), time is not your enemy (with some exceptions) from an investor’s perspective. CLF on the other hand is very unpredictable from a duration perspective, varying from months to several years. As many commercial funding contracts cap returns to a multiple of drawn capital, time is initially your friend but ultimately your enemy.

The unpredictable nature is the bane of the existence for publicly listed commercial legal finance firms, as their shareholders want predictable case outcomes generating predictable returns and cashflows, but the portfolios are inherently unpredictable, and so many times the public shareholders are disappointed. Accordingly, their inherent cashflow volatility prevents their stock prices from reflecting true value (said another way, their stock prices reflect the true value of their businesses after adjusting for the unpredictability of their cashflows).

The PSA market, on the other hand, is very predictable, which is why it has been able to obtain risk ratings and thereby attract conservative institutional capital at a relatively low cost of capital.  As an investor, I would take a stable 10-15% return all day along in the face of a volatile return profile in the CLF market that can vary from -10% to +30%. They may (emphasis on “may”) both average out to the same return over the long run, one just allows you to sleep much better at night. Similarly, from a business owner’s perspective, stable and predictable returns will always be more highly valued than volatile returns, and so as a business owner, you are significantly better off aiming for predictability for a given return profile.  In addition, this will allow business owners to create equity value that they can later monetize through the sale of their business, which is something CLF managers will have difficulty doing due to the volatility of their portfolios.


Another aspect of an industry’s underlying economics is the consistency of the regulatory regime and the potential impact changes in regulations could have on the industry and its economics. On this item, there was less certainty at the time I made my first investment, but as time has progressed, it is clear that more and more states are considering or implementing new regulations for the PSA industry. Legal doctrines of champerty and maintenance are generally being set aside, but not always. Some states view PSA as loans, and hence subject to usury limitations, whereas other states have determined they are not loans because they are non-recourse other than to the outcome of the case, which precludes them from the definition of loans.

Some states, like West Virginia, have placed onerous interest rate limitations which have essentially decimated the industry, whereas others have put in place more reasonable limitations.  Some states have come out against PSA and others believe it is a necessary part of a functioning economy and supportive of individual rights (Minnesota is still ruling on whether funding is a loan). The Consumer Finance Protection Bureau (CFPB) has been monitoring the PSA market since 2011, but it is not quite clear whether they have the authority to regulate the industry and attempts by the CFPB to do so have been rebuffed for the most part – the key distinction seems to be whether these are recourse loans or non-recourse advances. The first is a loan product arguably under the purview of the CFPB, and the second is not contemplated under the CFPB’s mandate. It appears to date the CFBP has only pursued post-settlement lenders and structured settlement providers, which are a different part of the consumer market.

Today, regulatory risk remains in the market as most states have not contemplated or implemented regulations, but no different than the payday loan market, done properly and without undue influence from interested parties but in the context of the market’s economic reality and keeping consumer rights in mind, a regulated marketplace brings stability to the market and standards that are ultimately beneficial for consumer and market participants who rely on stability.

A ’Feel Good’ Asset Class

Beyond the hard numbers, the risk profile and the cash-on-cash returns, lies the “feel good” nature of this asset class, which is what attracted me to the commercial legal finance market.  For all of the headline risk and the early profiteering that happens in every industry, PSA is a necessity in the market and becomes increasingly important as our societies become further economically stratified and the middle class continues to thin.

Despite its costs, and there are good economic reasons for its cost (within reason), it provides a strong societal benefit to allow those whose lives have been turned upside down as a result of an accident that has had health (mental & physical), financial and personal costs that most of us cannot imagine. The industry represents a ‘ray of hope’ for someone who may have lost hope due to their circumstances.  I would posit that the industry itself is not predatory (although I will admit there are profiteers), but in fact is a tool to be used against the predatory insurance companies who are not being held accountable by state regulators because it is impossible for the regulators to respond to every single personal injury claim.  If nothing else, insurance is designed to help the injured and the remediation should be swift and commensurate with the financial damage.  Having to wait 3-4 years for a settlement outcome and pay out of pocket for hospital bills is anything but swift or commensurate, and is merely a tactic by insurance companies to benefit from the time value of money (i.e. a dollar today is worth less in a year’s time).  Investors can take comfort in the fact that funders do not pursue frivolous claims because the risk/reward of doing so upsets the predictability of the industry’s cashflows.

Then there are Environmental, Social & Governance (ESG) considerations…. 

In a world full of ‘ESG washing’, legal finance is perhaps one of the most ESG compliant asset classes that exist.  The underlying nature of the claim is rooted in justice, and pre-settlement advances allow for justice to prevail by leveling the playing field between the impecunious injured party and the wealthy insurer with time, money and lawyers at their disposal.

The social benefits of litigation are clearly in good alignment with investing in those activities that have a positive impact on society, even if imperfect.  As strong as the ESG characteristics are in the commercial legal finance markets, they are even stronger in the PSA market because the impact is measurable and directly impacts an individual’s life.  All one has to do is review some of the industry testimonials to understand the impact this form of financing can have on one’s life, and there are tens of thousands of examples of this impact occurring on a yearly basis.

As investors consider the headline risk, they should also give weight to the ESG benefits of the asset class.

PSA Today

While many facets of the PSA market look similar today to what they were at inception, underneath the exterior is a tale of two worlds. From a competitive perspective, there is a segment of the market that has clearly positioned themselves as market leaders and have achieved a level of scale and efficiency that has allowed them to tap into the most conservative and sophisticated levels of capital, in part due to an overall low risk profile and in part due to being strong operators.

From a regulatory perspective, this industry will likely be regulated at the state level and that regulation is well underway. I would expect by the end of this decade a majority of states will have some form of regulation or guidance in place and by the end of next decade most, if not all, will.

From a competitive perspective, we are now seeing some level of consolidation as some of the larger players are starting to acquire competitors either to bulk up their own operations or to expand into adjacent markets like medical receivables/liens.  Regulatory standards will force all market participants to behave appropriately and will generally raise the standards in the market for the benefit of funders and consumers.

From a funding perspective, we will continue to see larger funders tap the securitization market for relatively inexpensive financing, or to align themselves with captive sources of financing from institutional investors.  In other words, as much as the industry has changed in the last two decades, we should expect to see a similar level of change going forward, but we should never lose sight of the end consumer and the benefits it brings to their lives. After all, someone needs to counter the vast resources of the insurance companies, which left unchecked, will silently inflict damage upon individuals and their families.

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 Lawsuit Funding Announces Increased Commitment to Product Liability Funding

By John Freund |

Legal-Bay LLC, The Lawsuit Pre Settlement Funding Company, announced today their newfound focus on product liability claims for plaintiffs and lawyers involved in ongoing mass tort litigations. Due to increasing product liability lawsuit loan requests, Legal-Bay has committed more capital to secure even more specialized lawsuit funding for the law firms and plaintiffs out there with product liability cases due to their complex and time-consuming nature.

Legal-Bay's knowledge of product liability lawsuits and experience with mass tort litigations for various products and defective products makes them the leading lawsuit funding firm to call for a complex product defect case involving defective products or product rejection. This experience, as well as Legal-Bay's overall capital, gives them the reputation of the best lawsuit funding firm that exists today.

The lawsuit loan company's team of experts studies each national litigation, often leading the legal funding industry on which cases to begin funding. Many other lawsuit loan companies and lawsuit cash advance places and loan companies do not fund these types of cases due to the complex and time-consuming nature. However, this is just part of why Legal-Bay remains so committed to helping people who have suffered as a result of a defective surgical product or medical device gone wrong, including those that migrate in the body or cause other long-term damage.

If you are wondering what to do when a large corporation will fight your case or if a large corporation or company is fighting your claim, don't hesitate to contact Legal-Bay today. To learn more about product liability lawsuit funding, product liability lawsuit claim loans, product liability lawsuit money, or defective product settlement funding amounts, please visit our new product liability funding site, at: 

Currently, Legal-Bay is expanding their product liability wing as they review various product liability cases and product liability class action suits with national law firms for legal funding options.

Below is a list of just some of the product liability mass tort cases that Legal-Bay's team is actively monitoring or has funded in the past:

  • IVC Filter
  • Hernia Mesh
  • Exactech Implant Recall
  • Hip Implants
  • Knee Implants
  • CPAP Recall
  • Birth Control
  • JUUL E-Cigarettes
  • J&J Talc Products
  • Round Up Weed Killer
  • Medical Devices
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  • Permanent Makeup Claim
  • Eyebrow Tint Claim
  • Essure Birth Control IUD
  • Allergen or Saline or Silicone Breast Implants

Legal-Bay is currently reviewing and assessing case worth or proposed settlement amounts for many other bad products or defective products not listed above.

Chris Janish, CEO commented on today's announcement, "Legal-Bay has been built on product liability funding.  We are the leading and best mass tort funding company in the country, in my sincere opinion.  We work with the top lawyers on each specific litigation, and see cases and litigations from start to finish.  We are a guiding light for many victims who may need guidance on a product liability attorney to choose, and funding for surgical needs due to defective product or legal funding just to pay bills.  We do it all and take substantial risk—unlike most other litigation finance companies—to help our clients and law firms alike." 

To learn more, or to receive a free case evaluation on your bad product claim or defective product suit claim, or if you are looking for a product liability lawyer or product liability law firm please visit Legal-Bay's new website built for these types of claims at: 

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Level Acquires Tower Street Finance to Target Probate Lending Sector

By John Freund |

An article in ETF Express covers the announcement from Level, a family law and private client lender, that it has acquired Tower Street Finance in order to expand its presence in the probate lending sector. Level’s acquisition strategy is reportedly being guided by the growth in activity around probate lending, which is being fuelled by processing delays and individuals’ demand for third-party capital amid a difficult economic climate.

Commenting on the acquisition, Level’s founder and CEO, George Williamson said: “Tower Street Finance have been the standout market leader since pioneering the probate market in 2020, while Level has done the same in the family law market.  By combining Tower Street Finance’s unparalleled expertise and network in the probate market with our platform and trusted reputation, we have a significant advantage over our competitors.”

Jim Sission, co-founder of Tower Street Finance, will be joining Level alongside two of his employees. Sission said that the acquisition by Level brings together the two company’s expertise across family law and probate lending, and will create “a best-in-class platform for legal funding.”

In addition to the acquisition, Level also announced that it had secured another £10 million in outside investment, comprised of a £5 million equity capital investment from Kendal Capital and £5 million debt investment from Correlation Risk Partners. Kendal Capital’s CEO and co-founder, Grant Kurland will be joining Level’s board of advisers, which already includes notable industry names such as Neil Purslow, CIO of Therium Capital. Kurland said that “the combination of Level & TSF is well placed to capitalise on their respective market leading positions in the family and probate sectors.”

Legal-Bay Legal Funding Announces Dedication to Focus on Securities Fraud and FINRA Arbitrations

By John Freund |

Legal-Bay LLC, The Lawsuit Pre Settlement Funding Company, announced today its focus on funding Securities Fraud and FINRA Arbitration cases for the remainder of 2024 and beyond. The legal funding firm has noticed a major deficiency in the legal funding sphere for specialized funding options for Securities Fraud cases and FINRA arbitrations, as these are some of the toughest cases to approve and understand within legal funding.

However, with two decades of experience in funding complex cases of all natures with creative yet straightforward funding solutions, Legal-Bay is widely recognized throughout the lawsuit funding industry as one of the "best lawsuit loan companies" or "go-to funder" for securities fraud cases and FINRA arbitrations against major brokerage firms.

Whether you are a plaintiff that lost a good majority of assets or a law firm looking for case costs to fight a large brokerage firm, or someone who lost assets due to fraud and needs money now, Legal-Bay can help you. Please visit our website geared specifically toward these types of cases, at: 

Legal-Bay's team of experts and underwriting department can quickly evaluate the validity of your claim(s) and potential case value and provide you with the capital you need to see your case through. Too often, plaintiffs or lawyers simply cannot wait all the years these complex fraud cases can drag out without obtaining some sort of large cash advance in the meantime.

It is for this reason that Legal-Bay has committed extensive capital to funding plaintiffs and law firms that find themselves in dire financial situations due to instances of securities fraud. To learn more, feel free to call Legal-Bay today to speak with one of our courteous and knowledgeable staff, at: 877.571.0405.

Chris Janish, CEO, commented, "Securities or stock brokerage fraud cases are some of the most difficult in the legal finance industry to evaluate and fund. It is without question that our firm is one of the few niche funders in this space that has the expertise to evaluate your FINRA arbitration case quickly and accurately for settlement value and for needed cash advance approval."

To apply right now for your Securities Fraud pre-settlement cash advance or FINRA arbitration settlement cash advance, please visit Legal-Bay's page dedicated solely to these types of cases, at: 

You don't have to wait for the money you deserve. Clients only have to pay back the Securities Fraud advance or FINRA Arbitration case loan if and when they win their case, meaning the money is risk-free. All you need in order to apply for the quick and immediate cash relief—typically provided within 24-48 hours following approval—is a lawyer. Even if you don't yet have a lawyer, Legal-Bay can help you with that too, as Legal-Bay works with the country's top Securities Fraud attorneys who will fight for you to ensure you receive the compensation you deserve.

Legal-Bay is a leader in personal injury lawsuit loans or commercial litigation settlement loans, as commonly referred to by plaintiffs. Although referred to as loans for settlements, the legal funding advances are not pre settlement loans at all, as they only need to be paid back if your case is won. FINRA arbitrations are considered commercial settlement funding and most typical litigation funding firms do not even consider these cases, however, Legal-Bay is happy to freely evaluate your case for funding. Funds can be used for personal use or for paying for expert witnesses or trial costs prior to an arbitration hearing.

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