A downturn in the litigation finance sector is creating opportunities for hedge funds and special situations investors including Davison Kempner and Attestor to acquire legal-claim assets at sharply discounted valuations, according to a report by Bloomberg.
The report cites unnamed people familiar with the market as revealing that the firms are exploring purchases of litigation finance portfolios at prices as low as 10 cents on the dollar. In some transactions, buyers are reportedly assuming ownership of distressed claims at no upfront cost, with sellers retaining only a contingent payout if the underlying cases ultimately succeed.
The litigation finance industry – which has expanded to roughly $20bn over the past decade – has historically attracted capital by offering returns largely uncorrelated to broader financial markets. Investors fund legal claims in exchange for a share of future settlements or court awards, backing cases ranging from corporate disputes to bankruptcy proceedings.
However, the sector has come under pressure from a combination of regulatory scrutiny, extended case timelines and reduced investor appetite, leaving some traditional litigation funders facing liquidity challenges.
NorthWall Capital managing director Zachary Krug said prolonged legal proceedings have undermined the economics of many investments, creating a growing supply of distressed assets coming to market as early-stage investors pull back.
Other alternative investment firms are also actively assessing opportunities. Fortress Investment Group is understood to be among the managers reviewing litigation-related assets, while Bench Walk Advisors has been acquiring distressed legal claims in Italy and the Netherlands and is seeking additional opportunities in Germany and Spain.
The pressure on the sector is expected to intensify as regulators in jurisdictions including the UK consider tighter oversight of litigation funding arrangements. UK justice minister Sarah Sackman said late last year that reforms were intended to improve fairness and transparency while introducing what she described as “proportionate regulation” for the industry.
Market participants say the shift in sentiment has become increasingly visible at industry conferences, where hedge funds and distressed specialists are now appearing alongside traditional litigation funders in search of discounted deals.
The challenges facing the sector were amplified in March after a US appeals court overturned a $16.1bn judgment linked to investors in Argentine energy company YPF. Burford Capital, which financed the case, saw its share price fall sharply following the decision and remains significantly lower year-to-date.
Despite the turbulence, distressed investors appear attracted by the asymmetric nature of the opportunity. With assets trading at steep discounts and insurance available to mitigate downside risk in some cases, buyers see potential for outsized returns independent of broader market conditions.
