Investing in litigation claims, often referred to as third-party funding or litigation funding, has rapidly become a popular and lucrative opportunity for UK investors. As legal disputes continue to grow in complexity and cost, both businesses and individuals increasingly seek financial support to pursue their claims. This has created an attractive market for investors looking to diversify their portfolio with a unique asset class that behaves differently from traditional investments.

At its core, third-party funding involves an investor or specialist funder providing financial support for a legal dispute. In return, the funder receives an agreed share of the proceeds if the case is successful. If the case is unsuccessful, the funder typically loses their investment entirely, which is why this model is known as a non-recourse arrangement. The risk-reward balance, combined with the potential for high returns, has contributed to the rapid expansion of the litigation finance industry.

Today, hedge funds, institutional investors, law firms, high-net-worth individuals, and specialist litigation funders all participate in this growing market. Many investors are drawn to the fact that litigation outcomes are largely uncorrelated with traditional financial markets, offering a valuable form of diversification. Whether dealing with commercial litigation, international arbitration, class actions, or intellectual property disputes, third-party funding provides a new way for investors to back strong legal claims and share in the financial outcome of the cases.

What is Litigation Funding?

Litigation funding, also known as third-party funding, legal finance, or litigation finance, occurs when a funder provides capital to a claimant in exchange for a portion of any recovered damages or settlement. This funding can be used for:

• Legal fees
• Court and tribunal fees
• Expert evidence
• Counsel fees
• Disbursements
• Arbitration costs

Litigation funding is commonly used in:

• Commercial litigation
• International arbitration
• Class actions
• Group litigation
• Intellectual property enforcement
• Contractual disputes

These cases are often expensive and require substantial resources. Many claimants cannot afford to take on well-funded defendants who have deep pockets and sophisticated legal teams. Litigation funding levels the playing field by removing the most significant barriers: legal costs and financial risk.

Importantly, because the investment is non-recourse, the funding does not sit on the claimant’s balance sheet as debt. This means the claimant only repays the funder if they win or reach a favourable settlement.

Why Investors Are Interested: Benefits of Investing in Litigation Claims

For investors, litigation funding offers several advantages.

High potential returns

The most attractive feature is the potential for substantial financial returns. If a funded case succeeds, the resulting damages or settlement may be significant. Investors typically receive a pre-agreed percentage, which can translate into impressive profits.

A unique and uncorrelated asset class

Litigation funding is increasingly being recognised as an alternative asset class, entirely separate from traditional equity or bond markets. The outcome of a legal dispute does not correlate with market performance, meaning investors can strengthen diversification within their portfolios.

Risk management and portfolio spreading

Although individual cases carry risk, funders often invest across a large number of cases. By spreading the risk across multiple disputes, they improve their chances of overall profitability even if some claims fail.

Growing demand and market expansion

The litigation finance market is expanding rapidly across the UK, Europe, the US, and internationally. Legal disputes continue to increase in size and complexity, creating more opportunities for investment. With commercial litigation and international arbitration on the rise, demand for funding is stronger than ever.

Investor control and strategic involvement

While funders do not control the legal strategy, they do typically conduct extensive due diligence before agreeing to support a claim. This ensures investors only become involved in strong cases with realistic prospects of recovery.

The Risks: What Investors Must Consider

Despite the advantages, investing in litigation funding comes with notable risks.

Case uncertainty

The legal system can be unpredictable. Even a strong case can fail due to unforeseen issues, changes in law, procedural mistakes, or unfavourable judicial decisions. If the case is unsuccessful, the investor loses the entire investment.

High legal costs

Legal disputes often require large upfront capital injections. Funders must be prepared to commit significant resources throughout the duration of the case.

Long timelines

Commercial litigation and international arbitration proceedings can take years before reaching a settlement or judgment. Investors should be prepared for long-term capital engagement.

Adverse costs

In some jurisdictions, the losing party may be ordered to pay the opposing side’s legal costs. For this reason, many funded cases are accompanied by ATE insurance, which protects claimants from adverse costs risk.

How Litigation Funding Benefits Claimants

For individuals and businesses pursuing legal action, funding agreements offer enormous advantages.

Improved access to justice

Third-party funding makes it possible for financially stretched claimants to pursue valid claims. They can focus on the case rather than worrying about paying ongoing legal costs.

Reduced financial risk

Because the funding is non-recourse, claimants do not repay the funder if they lose. This dramatically reduces personal and commercial financial risk.

Better case preparation

With full financial support, claimants can instruct the best legal teams, gather strong evidence, and hire expert witnesses. This increases the likelihood of a successful outcome.

Cash flow protection

Businesses can avoid draining working capital or jeopardising financial stability. Litigation funding ensures that legal disputes do not impact day-to-day operations.

Professional case assessment

Funders conduct rigorous due diligence. This provides claimants with confidence that their case has real merit.

However, claimants must also recognise potential downsides:

• A portion of any recovered damages is paid to the funder.
• Funders sometimes require consultation over settlement proposals.
• Not all costs incurred before funding approval will be covered.

Alternative Funding Options

Litigation funding is not the only way to manage legal costs. Other methods include:

Damages-Based Agreements (DBAs)

Under a DBA, the solicitor shares the risk. Their fee is a percentage of the recovered damages. If the case is unsuccessful, the solicitor is generally not paid for their work, although some disbursements may still apply.

Conditional Fee Agreements (CFAs)

Often known as “no win, no fee” agreements, CFAs mean the solicitor’s fee is only payable if the claim succeeds. Success fees may apply, and ATE insurance is commonly used alongside CFAs.

ATE Insurance

After-the-event insurance protects claimants against adverse costs. It is often used alongside DBAs, CFAs, and litigation funding. This insurance effectively swaps the risk: instead of paying the defendant’s costs if the case is lost, the claimant pays the insurer a premium if the case is won.

How Annecto Legal Supports Businesses and Claimants

Annecto Legal works closely with litigation funders, insurers, and law firms to help clients secure the right legal finance solution. They assist with:

• Locating suitable funders
• Structuring funding agreements
• Accessing ATE insurance
• Reducing litigation costs
• Managing financial risk
• Navigating complex commercial litigation

If your business is facing a dispute or you’re considering pursuing a claim, obtaining funding early can streamline the process and improve your chances of success.

FAQs About Litigation Funding and Investing in Legal Claims

1. Is investing in litigation claims safe?

All litigation investments carry risk. If the case is unsuccessful, investors may lose their entire investment. This market is best suited to experienced or well-advised investors comfortable with high-risk, high-reward opportunities.

2. What types of cases can be funded?

Funding is commonly used for commercial litigation, intellectual property disputes, international arbitration, class actions, shareholder disputes, professional negligence claims, and complex contractual disputes.

3. How does the funder get paid?

The funder typically receives an agreed share of the damages or settlement once the case is concluded successfully. If the claim fails, the funder receives nothing.

4. Does litigation funding affect control of the case?

The claimant and legal team retain control over litigation strategy. However, funders may require consultation regarding major decisions such as settlement.

5. Is litigation funding suitable for small claims?

Generally, funders prefer higher-value claims due to the costs and risks involved. Many funders set minimum claim thresholds, often between £250,000 and £1 million.

6. Do claimants need ATE insurance?

ATE insurance is strongly recommended when pursuing funded litigation, as it protects against adverse costs if the case is unsuccessful.

7. Can litigation funding be used for defence cases?

Yes. While most funding is used for claimants, some funders also support defendants, particularly in commercial disputes or arbitration matters.